<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______________ to _______________
Commission File Number 0-12969
TouchStone Software Corporation
-------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 95-3778226
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2124 Main Street, Huntington Beach, California 92648
- ---------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number including Area Code): (714) 969-7746
--------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
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 period 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 2, 1999 was $5,433,155.
----------
The issuer's revenues for the year ended December 31, 1998 were $4,835,823.
The number of shares outstanding of the registrant's classes of common stock as
of March 2, 1999 was 7,963,060.
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
This Annual Report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties. TouchStone Software Corporation's actual
future results could differ materially from those statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those factors discussed in Item 1, "Business", Item 6, "Management's Discussion
and Analysis or Plan of Operations", and elsewhere in this Annual Report on Form
10-KSB.
Item 1. Business
- -----------------
General
TouchStone Software Corporation (the "Company" or "TouchStone") is a
developer and publisher of utility software used to set up, maintain, and manage
personal computers and networks. The Company's utility software can be
classified into three areas: diagnostic software, Internet optimization
software, and file transfer software. The CheckIt product line, a family of
system diagnostics, is designed to meet the needs of consumers and service
technicians. The CheckIt products, utilizing the Company's core technology,
have continued to evolve since they were first introduced in 1988, as new
versions are released periodically to provide updated hardware tests for the
latest technology. The CheckIt products are sold worldwide through the retail
channels with some penetration into the enterprise and OEM market.
The newest additions to the Company's diagnostic product line are CheckIt
98 for Windows 98 and CheckIt 98 Diagnostic Suite. CheckIt 98 uses 32-bit
technology to provide in-depth hardware testing, system crash recovery, and
accurate system information, as well as a new Y2K test and fix feature. CheckIt
98 Diagnostic Suite is a bundle of CheckIt v.5, CheckIt for DOS, FastMove!, loop
back plugs, a screwdriver, and a PC technicians' pocket guide to repairing
computers. The bundle combines the high-end diagnostic and analysis features of
CheckIt, the file transfer capabilities of FastMove! and a set of tools
including a Y2K test and fix into one package, designed for PC service
technicians.
TouchStone introduced CheckIt NetOptimizer in June of 1998 to address the
growing need for enhanced Internet performance of everyday modem users. The
product optimizes Internet settings in Windows and on the user's modem to
increase throughput and download speeds. CheckIt NetOptimizer has been
recognized by nationally known publications such as PC Magazine and Windows
Magazine as a product that is differentiated from web-caching programs.
The Company's file transfer utility, marketed under the name of FastMove!,
is primarily a retail product.
During the first six months of 1998, the Company distributed an anti-virus
product, PC-cillin, which was licensed from Trend Micro, Inc. As sales of
utility software in general, and anti-virus software in particular, declined
during the first half of 1998, the Company found it increasingly difficult to
profitably distribute PC-cillin in the retail channel. As a result, the Company
no longer publishes or distributes this product.
On March 8, 1999, the Company acquired Unicore Software, Inc., a
Massachusetts corporation ("Unicore"). The acquisition of Unicore was
accomplished through the merger of Unicore with and into a newly formed and
wholly owned subsidiary of the Company. Immediately prior to the acquisition,
the Company contributed all of the assets, products and operations of its
personal computer diagnostic software business to this newly formed corporation.
As a consequence, since the closing of the Unicore acquisition the Company has
served as a holding company, with a single, wholly-owned subsidiary that
currently conducts the business and activities that previously were separately
conducted by both the Company and Unicore. For additional information regarding
Unicore and the terms and conditions upon which the Company acquired it, see
Item 1, "Acquisition of Unicore" below.
2
<PAGE>
Organized in 1982 as a California corporation, the Company reincorporated
in Delaware in January 1997. The Company's executive offices are located at
2124 Main Street, Huntington Beach, California, 92648, and its telephone number
is (714) 969-7746.
Industry Overview
During the last decade, the personal computer industry has grown rapidly.
The Company believes that the market will continue to expand in the future as
technological advances and increased functionality, combined with lower pricing,
will increasingly make personal computers common for use in both homes and
businesses. Future changes in the operating systems that run personal computers
may contain some of the functionality of certain utility software of the kind
marketed by the Company. The software industry, including the utility market,
is increasingly being dominated by a few very large competitors. However, the
Company believes that the complexities created by multimedia systems utilizing
CD-ROM drives and enhanced video, storage, animation, and sound capability will
continue to drive the demand for new, sophisticated, separately installed
utility software.
Products
The following table sets forth the TouchStone products currently marketed by the
Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial Release
Product Title Description Date
- ------------------------------------------------------------------------------------------------ ---------------
CheckIt CheckIt 98 for Windows 95 collects detailed system information, tests August 1998
system components, pinpoints problems, locates hidden conflicts, and
restores critical system files for fast and easy PC troubleshooting.
CheckIt automatically detects problems, identifies exactly what isn't
working, and guides the user directly to the information and tests needed
to fix it. CheckIt also tests and fixes Y2K hardware problems.
CheckIt The CheckIt 98 Diagnostic Suite features the portable, self-booting August 1998
Diagnostic diagnostics of CheckIt for DOS, new CheckIt 98 for Windows 95, FastMove!
Suite file transfer utility and Bigelow's PC Technician's Troubleshooting Pocket
Reference. Professional technicians use this product to troubleshoot PC
problems, test hardware components, diagnose setup conflicts, optimize
modem configuration, calibrate video components, benchmark PC performance,
and conduct burn-in and certification tests. The CheckIt Diagnostic Suite
also includes a Y2K hardware test and fix feature.
CheckIt CheckIt NetOptimizer gives Internet users a safe way to fine-tune their May 1998
NetOptimizer Internet connection through an automatic or manual tune-up selection. In
addition, NetOptimizer performs a complete set of diagnostic tests and
corrects some common port and modem problems. It includes a detailed
troubleshooter's guide with suggestions on how to fix problems the test
detects. In addition to the tests a complete list of details and
specifications about the consumer's modem and the current driver in use is
available at the touch of a button. NetOptmimizer's benchmark utility
provides the means for the Internet user to evaluate the current and past
performance of their ISP connections.
FastMove! A file synchronization and transfer program with ZIPSync that keeps the March 1995
files and directories on desktop PCs, laptops, networks and Zip drives, (last update
synchronized and up-to-date with the click of a button. ZIPSync is the October 1996)
first utility of its kind to synchronize and catalog files on a Zip
</TABLE>
3
<PAGE>
drive. FastMove! Includes an Ultra Flex Parallel Transfer
Cable.
BIOS Upgrade Unicore provides BIOS upgrade solutions for PCs, allowing
Solutions the end-users to extend the useful life of their PC
systems without replacing them entirely.
PC Unicore's POSTcard offers hardware diagnostic solutions
Diagnostics allowing MIS personnel and PC end-users alike to quickly
Software determine the causes of their system failures.
Year 2000 Unicore's Millenium/Pro is a cost-effective solution
Solutions enabling PCs without Year 2000 BIOS compliance the ability
to provide accurate and uninterrupted operation.
PC Card Unicore's CardWare enables PCs and other electronic
Software devices to recognize, install, configure and operate
peripheral devices that comply with PCMCIA standards.
CardWare provides a number of benefits over traditional PC
Card software, including the efficient use of system
memory, greater portability, ease of maintenance and a
more modular design.
4
<PAGE>
Product Development
The Company believes that significant investment in research and
development is required in order to remain competitive, accelerate the rate of
product introductions, incorporate new technologies, and sustain the quality of
its products. In addition to engineering and quality assurance, the Company's
research and development activities include the identification and validation of
a product's potential commercial success, as well as the incorporation of new
technologies in new products. The Company works closely with hardware and
software manufacturers to anticipate user problems with new products. These
efforts and the resulting "core" technology are critical in enabling the Company
to be competitive, improve quality and consistency, and quickly bring products
to market.
The product planning and development process begins with research and
analysis by both the marketing and development groups. The Company's products
require varying degrees of development time, which frequently depends on the
general complexity of the product. The typical length of research and
development time ranges from six to 18 months. Prior to release, each product
undergoes careful quality assurance testing that involves usability testing with
external evaluators and a technical review of each component of the final
product and testing on various hardware platforms. The Company endeavors, with
the assistance of personal computer hardware, software, and peripheral
suppliers, to identify potential conflicts and other factors that could lead to
problems with personal computers due to incompatibility with evolving
technology. The Company then adapts its "core" technology to develop products,
or enhances existing ones, designed to assist the user in resolving problems or
adapting to new technological environments.
The utility software business is part of a fast changing industry and the
ability of the Company to grow or to achieve reliable sources of cash flow is
dependent to a large extent on the ability of the Company to develop new
products and new versions of existing products. Given the results of the last
three years, and the competitive factors affecting the software industry, as
discussed elsewhere in this report, management is unable to predict at this time
whether the Company can be successful at designing and developing products that
can compete profitably in this industry. Furthermore, several of the products
currently under consideration involve complicated diagnostic technologies which
are significantly more complex than those previously encountered in the
development of the Company's products. This may result in significant delays
and greater expense than normally encountered by the Company in the development
of its products.
The Company has worked with other companies to develop software that can be
marketed and sold by the Company. These arrangements have permitted the Company
to expand its product offerings without incurring all of the risks and costs of
new product development. Typically, the agreements between the Company and
these third parties provide that the Company pays the developer royalties as
products are sold. The Company also seeks to identify products developed by
others that can be published by the Company, for marketing and sale under the
Company's name and trademarks and through the Company's established channels of
distribution. FastMove! and the PC-cillin products were originally developed by
Trend Micro Incorporated, and were subsequently modified by the Company.
During 1998 and 1997, royalty expenses were approximately $117,000 and
$1,082,000, respectively. The decline in royalty expense from 1997 to 1998 is
attributable to two primary factors. First, sales of PC-cillin, on which the
Company incurred royalty rates from 15% to 23%, declined from $4,787,000 in 1997
to $1,202,000 in 1998. Second, during 1998, the Company reached agreement with
Trend Micro to substantially reduce the rates of royalty payments because sales
of PC-cillin were declining. Research and development expenses during 1998 and
1997 were approximately $1,722,000 and $2,146,000, respectively. The Company did
not capitalize any software development costs in 1998 or 1997.
Part of the Company's strategy is to develop products based on the Windows
98, Windows 95 and Windows NT operating systems. Release of these products
immediately prior to or at the time of Microsoft's release of Windows products
depends on the Company's ability to gain pre-release access to, and to develop
expertise in, current and future versions of Windows operating systems. In
order to provide products compatible with future Windows releases, the Company
depends on the cooperation of Microsoft.
5
<PAGE>
Distribution, Sales, and Marketing
The Company markets its products domestically through software distributors
for resale to the retail sales channel. In 1998, Ingram Micro and Tech Data
accounted for approximately 35% and 17% of product sales, respectively. These
same distributors accounted for approximately 32% and 20% of 1997 product sales.
The loss of or reduction in orders from either of these distributors would have
a material adverse effect on the Company's revenues and profitability. The
Company depends upon the continued viability and financial stability of these
resellers. The Company's resellers generally offer products of several different
companies, including products that compete with those of the Company.
Accordingly, there is a risk that these resellers may give higher priority to
products of other suppliers and reduce their efforts to sell the Company's
products. In addition, any special distribution arrangements and product pricing
arrangements that the Company may implement in one or more distribution channels
for strategic purposes could adversely affect gross profit margins for its
products. The Company's operations are subject to substantial risk of product
returns from distributors and retailers either through the exercise by the
Company's customers of contractual return rights or as a result of the Company's
policy of assisting customers in balancing and updating inventories. Although
the Company attempts to monitor and manage the volume of sales to its customers,
large shipments in anticipation of demand, which is subsequently unrealized, can
lead to overstocking by the distributors and substantial product returns.
The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, an increasing number
of companies compete for access to these channels. Retailers of the Company's
products typically have a limited amount of shelf space and promotional
resources, and there is intense competition for high quality and adequate levels
of shelf space and promotional support from the retailers. As the number of
software products available in the marketplace increases, competition for shelf
space also increases. Since utility software typically constitutes a relatively
small percentage of a retailer's sales volume, there can be no assurance that
retailers will continue to purchase the Company's products or provide the
Company's products with high quality and adequate levels of shelf space and
promotional support.
The Company's primary marketing and sales efforts in 1998 were directed at
increasing demand for products at the retail sales level, and strengthening its
relationship with the major computer retailers. A key component of this
strategy, which was implemented in 1994, includes using outside representatives
to present the Company's products to store employees in such retail stores as
CompUSA, Computer City, and Best Buy. During 1998, the Company changed its
outside representative firm in order to re-invigorate this effort. In addition,
the Company engaged in a variety of merchandising promotions, such as end-caps,
shelf-talkers, in-store posters, contests, and rebate coupons in order to
increase sales. The Company has also improved its product packaging to better
attract the attention of retail consumers. Licensed end-users of the Company's
products include individual personal computer owners, government agencies,
utilities, educational institutions, software development companies, and
computer product manufacturers.
In November 1995, TouchStone established an enterprise sales group.
Although this group has had limited success, the primary focus is to promote
TouchStone's products directly to enterprise and small to medium-sized business
customers, and the technical marketplace. In January of 1998, the Company
entered into an agreement with an independent manufacturer's representative
firm, Technology Associates Marketing Company (TAMCO). Although the Company
believed that the use of TAMCO was an important leverage point to expand its
product line into the corporate sector, the decline in the overall utility
category during the spring and summer of 1998 made it difficult to provide the
volume of transactions to support the relationship. Consequently, the
relationship with TAMCO was terminated in October 1998.
The Company also uses online advertising (Internet), print media
advertising, direct mail, attendance at industry trade shows such as Comdex,
Retail Vision, and Retail Exchange; press releases, and direct contacts through
its marketing and sales force as other means of generating new sales. The
Company participates in retail promotions to obtain sales and marketing
advantages at the retail level by providing allowances to certain distributors,
which are passed through to the retailer. These activities
6
<PAGE>
include end caps, in-store advertising, promotions, brochures, catalog
advertising, and software detailing to increase the effectiveness of the sales
activities.
The Company's e.Support product was developed to address problems faced by
the service-management market. This product has not achieved any marketplace
acceptance, and the Company has ceased its sales activity for this product.
Internationally, the Company markets its products through distributors.
The Company has an independent sales representative in Australia and, in 1997,
TouchStone appointed an individual located in Austria to serve as Managing
Director of TouchStone in Europe, in order to expand and improve existing
channels of product distribution. Subsequent to that appointment, in November,
1998, the Company terminated the relationship with its Managing Director in
Europe. In January, 1999, the Company appointed a new representative in Germany
to handle European sales operations.
The Company's sales force at March 2, 1999 consisted of one person based in
the Company's office, who receives salary, commission, and incentive bonus
compensation. In addition, the Company's marketing efforts, including design
and development of product packaging, advertisements, and promotional items, are
mostly handled by outside consultants.
Duplication and Packaging
Third-party suppliers provide the Company's packaging material, manuals,
and software duplication services. Management believes that relations with
these suppliers are good, that alternative sources exist and, if necessary, can
be obtained with minimal disruption of the Company's operations. The Company has
attempted to mitigate the risk of any such disruption by maintaining certain
levels of "safety stock" inventories and the limited use of "second source"
vendors.
Competition
The utility software industry is intensely competitive. The increasing
number of competitive products may adversely affect consumer demand for
particular software products. The Company is aware of other companies which have
developed or are in the process of developing products which may compete in
whole or in part with the Company's products, including Microsoft, IBM,
Symantec, Network Associates, and others. Each of these firms has substantially
greater financial, technical, personnel, and marketing resources than the
Company. Moreover, there are no proprietary barriers to entry into the
utilities market that could keep competitors from developing and selling
products, which compete with those marketed by the Company. Increased
competition may result in loss of shelf space and reduction in consumer demand
or sell-through of the Company's products, any of which could have a material
adverse effect on the Company's operating results.
The Company faces increasing pricing pressures from competitors and,
accordingly, competitive pressures may require the Company to reduce its prices.
In addition, to the extent that Microsoft or other companies incorporate
applications comparable or superior (either in perception or reality) to those
offered by the Company into Windows 95, Windows 98, Windows NT, or other
products (or separately offer such products), sales of the Company's products
could be materially adversely affected. As a result, the Company's Windows 95,
Windows 98 or Windows NT-based products could be rendered noncompetitive or
obsolete.
The Company is in the process of developing products while possessing
considerably less financial and human resources than other companies who are
already leaders in the software industry.
Proprietary Rights
The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements, and other methods of protection common in the industry. Despite
these precautions, it may be possible for an unauthorized third party to copy or
reverse-engineer certain
7
<PAGE>
portions of the Company's products or to obtain and use information that the
Company regards as proprietary.
Under existing law, software products have been difficult to patent, and
copyright laws offer limited protection. The Company routinely applies for
federal trademark registrations for its products. Although the Company may file
copyright applications with respect to programs developed for the Company's
software products, there can be no assurance that any such copyrights will
provide meaningful protection to the Company. Furthermore, the Company may not
be able to afford the expense of any litigation, which might be necessary to
enforce its rights. The Company licenses its products primarily under "shrink
wrap" license agreements that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. The laws of some
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States.
The Company is aware that unauthorized copying by end-users affects many
companies within the software industry and, if a significantly greater amount of
unauthorized copying were to occur, the Company's operating results could be
adversely affected. However, policing unauthorized use of the Company's
products is difficult. While the Company is unable to determine the extent to
which software piracy of its products exists, software piracy can be expected to
be a persistent problem.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. As the
number of software products in the industry increases and the functionality of
these products further overlaps, software developers may become increasingly
subject to infringement claims. There can be no assurances that third parties
will not assert infringement claims against the Company in the future with
respect to current or future products or that any such assertion may not require
the Company to enter into royalty arrangements or result in costly litigation.
Employees
On March 10, 1999, the Company, after its acquisition of Unicore Software,
Inc. (as discussed below) had 26 full-time employees and two part-time
employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be good.
Acquisition of Unicore Software, Inc.
On March 8, 1999, the Company acquired Unicore Software, Inc. ("Unicore")
from Pierre A. Narath, the Company's President and Chief Executive Officer and a
member of the Company's Board of Directors, and Jason K. Raza, who became a Vice
President of the Company in connection with the acquisition. The original
Unicore was founded by Mr. Narath in 1989, incorporated in 1991, and sold to
Award Software International, Inc. ("Award") in 1997. On October 27, 1998,
following the merger of Award with Phoenix Technologies Ltd. ("Phoenix"),
Messrs. Narath and Raza formed Unicore as a new Massachusetts corporation and
used it to purchase all of the assets of the original Unicore from
Phoenix/Award. The acquisition of Unicore by the Company was publicly announced
on March 10, 1999, and reported in the Company's Current Report on Form 8-K,
which the Company filed with the Securities and Exchange Commission on March 22,
1999.
Pursuant to the terms and conditions of a definitive Agreement and Plan of
Acquisition ("Acquisition Agreement") dated as of March 5, 1999, the acquisition
of Unicore was accomplished through the merger of Unicore with and into a newly-
formed and wholly-owned subsidiary of the Company. Immediately prior to the
acquisition, the Company contributed all of the assets, products and operations
of its personal computer diagnostic software business to this newly-formed
corporation. After the closing of the Unicore acquisition, the Company became a
holding company with a single, wholly-owned subsidiary that currently conducts
the business and activities that previously were separately conducted by both
the Company and Unicore. The acquisition will be accounted for as a purchase by
the Company.
Unicore is a provider of system management software which includes basic
input/output ("BIOS") software upgrades, Personal Computer ("PC") Diagnostics
and Year 2000 Solutions for personal computers and embedded systems. System
management software is one of the fundamental layers in
8
<PAGE>
any microprocessor-based system (including PCs) architecture and provides an
essential interface between the system's operating system software and hardware.
Unicore was founded in 1989 and supplied primarily BIOS software upgrades.
The BIOS, which is the software initially executed after the system is turned
on, tests and initializes hardware components, initiates the operating system
and then provides advanced interface functions. BIOS software upgrades allow
end-users of desktop PCs to extend the life of their systems without replacing
them entirely.
During the past several years, Unicore has grown into a full-service
engineering company supplying not only BIOS software upgrades, but also PC
diagnostics software, Year 2000 solutions, PC Card software and custom
engineering services. As the evolution of software and hardware has become more
complex, the need for compatibility has increased in importance. Unicore
believes that its experience and customer focus allow it to quickly identify
solutions and market products compatible with the array of operating systems,
application programs, utilities and hardware products.
Unicore's customers include primarily end-users, enterprises such as a
majority of Fortune 500 corporations, government agencies and major educational
and financial institutions, and designers and manufacturers of motherboards, PC
systems and other microprocessor-based or embedded devices. Unicore markets and
licenses its products and services worldwide and has established itself as a
leading provider of BIOS software upgrade solutions.
The Company acquired Unicore for an aggregate purchase price of $4,555,000,
with $1,205,000 of this sum paid in cash at the closing. As provided in the
Agreement and Plan of Acquisition dated as of March 5, 1999 (the "Acquisition
Agreement"), the $3,350,000 balance of the purchase price is to be paid
immediately following the 1999 Annual Meeting of the Company's stockholders (the
"1999 Annual Meeting") as described in more detail below. At the time of the
acquisition, the Company pledged to and deposited the sum of $620,000 in cash in
an interest-bearing account with Lawrence Savings Bank of Massachusetts, in
order to obtain the release of Messrs. Narath and Raza from their personal
guarantees of approximately $620,000 of indebtedness owed by Unicore to Lawrence
Savings Bank that was incurred in connection with the purchase of Unicore from
Phoenix/Award. The agreement regarding the purchase of Unicore from
Phoenix/Award is attached hereto as Exhibit 10.8 hereto. The documents to
secure the $620,000 loan and Lawrence Savings Bank's consent to TouchStone's
acquisition of Unicore are attached hereto as Exhibits 10.9 and 10.10,
respectively.
In connection with the acquisition, each of Messrs. Narath and Raza entered
into a three-year employment agreement with the Company. The terms of these
employment agreements are described in the Proxy Statement and are incorporated
herein by reference.
At the closing of the acquisition of Unicore by the Company, the former
shareholders of Unicore, Messrs. Narath and Raza, received an aggregate of
$1,205,000 in cash and became entitled to receive an additional $3,350,000 as
the balance of the purchase price. It was and continues to be the intention of
all parties that the balance of the purchase price for Unicore be paid through
the issuance and delivery of an aggregate of 3,350,000 shares of the Company's
Common Stock, with each share valued for this purpose at $1.00. However,
because of the number of shares to be issued and the fact that the primary
recipient thereof, Mr. Narath, is a director and the President and Chief
Executive Officer of the Company, the corporate governance rules for continued
listing of the Company's Common Stock on The Nasdaq National Market require that
the Company obtain stockholder approval of the issuance of these shares.
Consequently, the Acquisition Agreement provides that the payment of the balance
of the purchase price be deferred until after the Annual Meeting, in order to
afford the stockholders of the Company with the opportunity to consider and vote
upon a proposal to approve the issuance of shares of the Company's Common Stock
in payment therefor.
At the 1999 Annual Meeting, which is to be held on or before July 29, 1999,
the Company's stockholders will be asked to approve the issuance of 3,350,000
shares of the authorized but previously unissued shares of the Company's Common
Stock, which would be delivered to the former shareholders of Unicore in
payment, at the rate of $1.00 per share, of the $3,350,000 remaining to be paid
to them as the balance of the purchase price for Unicore. On March 8, 1999, the
effective date of the acquisition, the
9
<PAGE>
closing price for a share of the Company's Common Stock on The Nasdaq National
Market was $0.69. Approval of the proposal to issue these 3,350,000 shares of
the Company's Common Stock in payment of the balance of the Unicore purchase
price will require the affirmative vote of the holders of a majority of the
issued and outstanding Common Stock of the Company. Each of the executive
officers and directors of the Company, including Mr. Narath, has indicated the
intention to vote all of such shares over which such individual has voting
control in favor of the issuance of these shares.
In the event that the stockholders of the Company do not approve the
issuance of these 3,350,000 shares of Common Stock at the 1999 Annual Meeting,
it would be the intention of the Company's management to pay the balance of the
purchase price for Unicore with $3,350,000 in cash. In order to secure, in
part, the obligation of the Company to pay the balance of the purchase price,
the Company deposited the sum of $2,000,000 in cash into an interest-bearing
escrow at the time of closing of the Unicore acquisition. As of March 15, 1999,
after payment of the $1,205,000 cash portion of the Unicore purchase price and
the deposit of this additional $2,000,000, the Company had additional cash and
cash investments totaling $6,396,000. Included in this sum is the $620,000,
which was pledged to and deposited in an interest-bearing account at Lawrence
Savings Bank as described above.
Approval of the issuance of 3,350,000 shares of the Company's Common Stock
in payment of the balance of the Unicore purchase price is not required by
Delaware law. Consequently, the Company would have the corporate power and
authority to issue and deliver these shares to the former shareholders of
Unicore even if the Company's stockholders declined to approve the issuance
thereof at the 1999 Annual Meeting. Under certain circumstances specified in
the Acquisition Agreement, the former shareholders of Unicore would have the
right to insist that the balance of the purchase price be paid through issuance
and delivery of 3,350,000 shares of the Company's Common Stock, rather than in
cash, even if the issuance of these shares is not approved by the Company's
stockholders at the 1999 Annual Meeting. This right would arise in the event
that the closing price for a share of the Company's Common Stock on The Nasdaq
National Market has exceeded $1.00 at any time following the effective date of
the Acquisition Agreement and the date of the 1999 Annual Meeting. Should the
former shareholders of Unicore exercise their right to receive shares of the
Company's Common Stock in lieu of cash under these circumstances, the continued
listing of the Company's Common Stock on The Nasdaq National Market could be
jeopardized since the shares would be issued without stockholder approval.
Item 2. Description of Properties
- ----------------------------------
The Company has a five-year lease for approximately 15,700 square feet of
office space in Huntington Beach, California, expiring on March 31, 2000. The
annual rent payments under this lease are currently $211,000. However, due to
the Company's restructuring efforts and the resulting decline in the number of
employees located at its Huntington Beach facility, the Company has excess
space, a portion of which it has subleased. As of February 28, 1999, the
Company has sublet approximately 1/3 of its office space. The Company receives
approximately $6,400 monthly from its subtenants.
Item 3. Legal Proceedings
- -------- -----------------
On October 9, 1996, an entity known as Intervention, Incorporated
("Intervention") filed an action against the Company in the Superior Court of
the State of California, Contra Costa County (C 96-04476). Intervention claims
that it is a non-profit corporation bringing an action for the interests of the
general public. In essence, Intervention claims that the Company is engaged in
unfair competition and is violating California's Fair Packaging and Labeling Act
by filling the Software packages to "substantially less than their capacities."
Intervention seeks injunctive relief, unspecified attorneys' fees and damages of
$1,000,000. Eight other software companies have been named as defendants in
identical lawsuits in three different counties; all of the actions have been
coordinated in the San Francisco Superior Court (No. 4006). The Court
sustained the Company's demurrer to the complaint without leave to amend on
January 23, 1998. Intervention appealed the decision and the Company will
continue to defend itself vigorously. Based on its current knowledge, the
Company does not believe that this matter will have a material adverse effect on
the financial condition or results of operations of the Company.
On March 23, 1999, the Company was in receipt of a Complaint and Summons
("Complaint") filed against the Company by Otto Legerer and GSV Immobilien
Ges.m.b.H. Mr. Legerer formerly served as
10
<PAGE>
the Company's Managing Director of European Operations. The Complaint alleges,
among other items, breach of contract in regards to his termination. The
Complaint indicates that Mr. Legerer is seeking compensatory and certain other
damages. The Company believes that the Complaint is without merit and will
defend itself vigorously.
The Company is also subject to other legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the quarter ended December 31, 1998, the Company solicited votes by
proxy for the election of five directors at the Company's 1998 Annual Meeting of
Stockholders which was held on December 3, 1998. Set forth below are the
results of the votes cast at the 1998 Annual Meeting of Stockholders:
<TABLE>
<CAPTION>
Proposal #1 Election of Directors For Withheld
- ----------- --------------------- --- --------
<S> <C> <C> <C>
Larry W. Dingus 6,479,893 402,660
Ronald R. Maas 6,510,693 371,860
Kenneth C. Welch, III 6,743,126 139,427
Pierre A. Narath 6,755,293 127,260
Kenneth S. Forbes, III 6,779,190 103,394
</TABLE>
Subsequent to the 1998 Annual Meeting of Stockholders, on December 31,
1998, Mr. Forbes resigned from the Company's Board of Directors and from all
offices of and employment with the Company. The Board of Directors has taken
action to reduce the number of Board positions to four and there are currently
four directors in office.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock has been traded on The Nasdaq National Market
since May 19, 1995, under the symbol "TSSW." The high and low closing sale
prices for a share of the Company's Common Stock set forth below for the periods
indicated are as reported on The Nasdaq National Market:
<TABLE>
<CAPTION>
1999 - Quarter ended Low High
- -------------------- --- ----
<S> <C> <C>
March 31, 1999 0.69 1.44
1998 - Quarter ended
- --------------------
December 31, 1998 0.56 1.25
September 30, 1998 0.88 2.06
June 30, 1998 1.50 4.19
March 31, 1998 1.69 4.00
1997 - Quarter ended
- --------------------
December 31, 1997 $1.81 $4.75
September 30, 1997 1.44 3.13
June 30, 1997 1.81 2.50
March 31, 1997 2.44 3.25
</TABLE>
The stock markets have experienced extreme price and volume fluctuations
during certain periods. These broad market fluctuations, and other factors, may
adversely affect the market price of the Company's common stock. Any shortfall
in revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. Finally, because the Company participates in a
highly dynamic industry, there is often significant volatility of the Company's
common stock price.
As of December 31, 1998, there were approximately 3,100 holders of record
of TouchStone's common stock, including stock held by affiliates and excluding
an undetermined number of shareholders whose shares are held in "street" or
"nominee" names.
TouchStone has not paid cash dividends on its common stock since its
inception. TouchStone intends to employ all available funds for the development
of its business, and, accordingly, does not intend to declare or pay any cash
dividends in the foreseeable future. Additionally, the Company's line of credit
prohibits the payment of dividends without prior approval of the bank.
Item 6. Selected Financial Data
- --------------------------------
Not applicable.
Item 7. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
This report on Form 10-KSB contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements. Factors that
might cause such differences include, but are not limited to, those discussed
under the caption "Business Risks" contained herein.
General
During 1998, the Company continued to experience declining revenues and
operating losses. This situation has been caused primarily by the difficulty of
competing in the retail marketplace. In part to remedy this situation, the
Company has acquired Unicore. With this acquisition, the Company intends to
increase its product line and its channels of distribution. Integral to this
strategy is the combination of Unicore's direct sales experience with the
Company's retail-oriented products and the combination of the
12
<PAGE>
Company's retail sales experience with Unicore's BIOS and Y2K products.
The Company's revenues consist of product sales and royalty income.
Royalty income is derived from international sales of the Company's products
under agreements with co-publishers, and OEM customers in the U.S.
Product revenues are recorded at the time products are shipped, but the
Company records a reserve for product returns at each period-end which covers
100% of inventory in the sales channel. The reserves for such inventory are
classified as deferred revenue on the Company's balance sheet. The Company's
operations are subject to substantial and unpredictable risk of product returns
from distributors and retailers either through the exercise by the Company's
customers of contractual return rights or as a result of the Company's policy of
assisting customers in balancing and updating inventories. Although the Company
attempts to monitor and manage the volume of its sales to its customers, large
shipments in anticipation of demand, which is subsequently unrealized, can lead
to overstocking by the distributors and substantial product returns. Certain of
the Company's customer agreements also provide for rebates to customers should
the price of the Company's products decline subsequent to shipment.
Cost of sales includes the cost of blank diskettes, compact disks, software
duplication, packaging materials and user manuals, in addition to royalties paid
to other software development companies under various agreements, and inventory
obsolescence reserves. Sales and marketing expense consists primarily of
salaries and commissions paid to the Company's sales, customer service and
technical support personnel and expenditures for retail product merchandising
and promotions. The Company's products can be expected to have short product
life cycles, characterized by decreases in retail prices as a given product's
life cycle advances.
In order for the Company to achieve satisfactory gross margins, the Company
will need to introduce new products to offset declining margins associated with
older products. Research and development expense consists primarily of salaries
and related benefits paid to computer programmers to research and design new
software products.
The Company's quarterly operating results may fluctuate significantly due
to a variety of factors, including changes in the Company's product and customer
mix, the number and timing of new product introductions by the Company or its
competitors, pricing pressures, general economic conditions, and other factors.
Products are generally shipped as orders are received and, accordingly, the
Company has historically operated with relatively little backlog. As a result,
quarterly revenue will depend on the volume and timing of orders received during
a particular quarter, both of which are difficult to forecast. In addition, the
Company will continue to incur product development, marketing, and promotional
expenses based upon management's expectations as to future sales. Many of these
expenses are committed in advance. Consequently, the Company has difficulty in
adjusting spending in a timely manner to compensate for any unexpected shortfall
in sales.
From 1996 through 1998, the Company spent considerable resources on the
development, marketing, and sales of PC-cillin, a retail anti-virus product. In
addition, sales of PC-cillin required a large commitment to customer technical
support in relation to that required by the Company's other products. In the
early part of 1998 sales of anti-virus products were negatively impacted by a
strategy implemented by the Company's competitors to gain market share. The
strategy involved giving customers a mail-in rebate equivalent to 100% of their
purchase price. Because of this severe price erosion, the Company found it
increasingly difficult to compete and revenues from PC-cillin dropped
dramatically.
In order to avoid spending more resources on PC-cillin, the Company decided
to discontinue all activities related to the product and to terminate its
associated licensing agreement with Trend Micro, from whom the Company licensed
PC-cillin. In so doing, the Company has decided to forego revenue opportunities
associated with the sales of anti-virus products. There can be no assurances
that the Company will be able to develop products that will sufficiently make up
for the shortfall in anti-virus sales.
13
<PAGE>
The following information should be read in conjunction with the audited
consolidated financial statements included herein. All dollar amounts presented
have been rounded to the nearest thousand and all percentages are approximate.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Product sales 97.8% 96.5%
Royalty income 2.2 3.5
---- -----
Total revenues 100.0 100.0
Cost of revenue 28.3 36.0
----- -----
Gross profit 71.7 64.0
Sales and marketing 49.2 55.2
General and administrative 40.5 16.3
Research and development 35.6 27.1
Restructuring Costs 22.2 _
----- -----
Loss from operations (75.8) (34.6)
Other income, net 11.8 8.6
----- -----
Loss before taxes (64.0) (26.0)
Provision for income taxes - -
----- -----
Net loss (64.0)% (26.0)%
===== =====
</TABLE>
Comparison of Years Ended December 31, 1998 and 1997
Revenues. Total product sales decreased almost 40% from $7,637,000 in 1997
to $4,729,000 in 1998 due to a number of factors. First, the overall utility
market experienced a slowdown in sales in the first half of 1998, as consumers
postponed purchases while waiting for the release of Windows 98. Second, the
Company, as part of an overall restructuring of its operations, decided to
discontinue selling the PC-cillin anti-virus product, which represented
approximately 60% of sales in 1997. PC-cillin sales decreased from $4,787,000
in 1997 to $1,202,000 in 1998. Royalty income decreased from $279,000 in 1997 to
$107,000 in 1998 as the product mix changed from royalty-based sales to direct
sales.
The Company determined that certain reserves, primarily related to rebates
and price protection, for recent sales activities and inventory in the channel,
were no longer required to be at their previous levels. Consequently during the
fourth quarter, the Company reduced reserves by approximately $750,000.
Gross Profit. Gross profit as a percentage of total revenues improved from
64.0% in 1997 to 71.7% in 1998 because of lower royalty expense associated with
PC-cillin, and an increase in the sales of the Company's higher-priced, high-
gross margin products. Royalty expense decreased from $1,082,000 in 1997 to
$117,000 in 1998 due to lower sales of PC-cillin products and due to the
reductions in the royalty rates ranging from 15% to 20% in 1997 to a fixed
amount in 1998.
Sales and Marketing Expenses. Sales and marketing expense decreased
approximately 45% from $4,368,000 in 1997 to $2,381,000 in 1998, primarily due
to reduced sales and marketing staff as part of the Company's restructuring
efforts, lower commissions because of reduced sales and sales staff, and lower
promotional costs. Because of these reductions, sales and marketing expenses
also decreased as a percentage of total revenues from 55.2% in 1997 to 49.2% in
1998.
General and Administrative Expenses. The increase in general and
administrative expense for 1998 was attributable to several factors. First, the
Company spent more for executive and administrative management than in 1997.
Second, the Company was forced to increase spending for legal matters,
particularly trademark issues. Third, the Company wrote off bad debt of
$159,000 related to its European subsidiary. General and administrative expenses
increased from $1,290,000, or 16.3% of revenues, in 1997 to $1,957,000, or 40.5%
of revenues, in 1998.
14
<PAGE>
Research and Development Expenses. The decrease in research and
development expense from $2,146,000 in 1997 to $1,722,000 in 1998 is
attributable to decreased staff, outside consultants and overhead as part of the
Company's restructuring efforts. Research and development expense increased as
a percentage of total revenues from 27.1% in 1997 to 35.6% in 1998 due to the
Company's decline in sales from year to year.
Restructuring Costs. During 1998 the Company experienced a significant
decline in its retail products business. This decline in revenues caused the
Company to experience significant operating losses during its fiscal second and
third quarters. As part of its strategy to curtail these losses, the Company
restructured its operations. The restructuring consisted primarily of a
reduction in the Company's workforce from approximately 50 to 12. The reduction
in headcount resulted in a charge for severance payments. In addition, the
Company took a charge for the write-off of certain fixed assets and leasehold
improvements. The restructuring also included the resignation of Larry Jordan
as Chief Executive Officer. Ken Forbes succeeded Mr. Jordan in August. Mr.
Forbes embarked on a business strategy involving the Internet, which was a
drastic change from the Company's recent business strategy. At the end of 1998,
the Company's Board of Directors elected to discontinue the Internet strategy
and Mr. Forbes resigned from the Company. Much of the Company's restructuring
costs related to severance packages for Messrs. Jordan and Forbes. Total
restructuring costs of $1,075,000 included approximately $837,000 related to
severance expense for termination of approximately 35 employees, $182,000
related to the write-down of property and equipment, and $56,000 related to the
accrual of lease expenses on vacated facilities. Severance expenses include
salaries and benefits related to all employees terminated as a result of the
acquisition and cost reduction efforts. The Company wrote down its inventories
to their salvage value of the assets. In addition, the Company wrote down its
facilities expense to the net realizable value. These write-downs are
attributable to the Company's intention to dispose of the assets based on its
decision to relocate its facilities and its decision to reduce headcount.
Other Income. Other income decreased from approximately $685,000 in 1997
to approximately $570,000 in 1998, as interest-bearing investments decreased.
Comparison of Years Ended December 31, 1997 and 1996
Revenues. Total product sales increased slightly from 1996 to 1997 as
sales of PC-cillin and CheckIt products increased. Royalty income decreased in
1997 as the product mix changed from royalty-based sales to direct sales.
Gross Profit. Gross profit as a percentage of total revenues improved from
54.2% in 1996 to 64.0% in 1997 because of lower royalty expense, lower inventory
reserve expense, and there was no amortization of capitalized software costs in
1997.
Sales and Marketing Expenses. The decrease in sales and marketing expense
was primarily attributable to a decrease in direct mail campaigns, lower
commissions and salary, and lower advertising costs. Due to these reductions,
sales and marketing expenses decreased as a percentage of total revenues from
61.8% in 1996 to 55.2% in 1997.
General and Administrative Expenses. The decrease in general and
administrative expense for 1997 was attributable to reductions in public
relations expense and reduction in headcount. Certain overhead reductions were
offset by an increase in legal expense pertaining to a terminated acquisition
and for a legal action filed by Intervention, Incorporated. As a percentage of
total revenues, general and administrative expenses decreased from 18.9% in 1996
to 16.3% in 1997.
Research and Development Expenses. The increase in research and
development expense was attributable to increased staff and overhead, which was,
offset somewhat by a reduction in consultant expense. Additionally, the expense
was higher in 1997 because of a direct write off of $162,000 in software
development costs. Research and development expense also increased as a
percentage of total revenues from 19.2% in 1996 to 27.1% in 1997.
Other Income. Interest income exceeded interest expense by approximately
$789,000 in 1996
15
<PAGE>
and by approximately $685,000 in 1997 as interest-bearing
investments decreased.
16
<PAGE>
Liquidity and Capital Resources
During the year ended December 31, 1998, the Company used cash resources of
$3,054,000 for operating activities, and purchased equipment totaling $84,000.
The Company received proceeds from the exercise of stock options aggregating
$71,000. The Company also had net investment sales of $2,455,000.
The Company's cash and cash equivalents, restricted cash, and investments
totaled $8,587,000 at December 31, 1998. Working capital decreased from
$8,401,000 at December 31, 1997 to $5,644,000 at December 31, 1998. Cash and
cash equivalents decreased from $1,434,000 at December 31, 1997 to $825,000 at
December 31, 1998. The decrease in working capital and cash and cash
equivalents was due primarily to decreased holdings of short-term investments,
the addition of accrued restructuring liabilities, and the net loss incurred by
the Company in the year ended December 31, 1998.
In September 1997, the Company negotiated a bank line of credit, which
allows for borrowings up to $500,000. The Company renewed the line of credit in
September 1998 and it now expires in September 1999. Borrowings will bear
interest at the bank prime rate, and are collateralized by a $500,000
certificate of deposit, included as restricted cash on the accompanying balance
sheet. The bank prime rate at December 31, 1998 was 7.75%. There were no
borrowings outstanding under the bank line of credit at March 2, 1999. This
borrowing facility requires the prior approval of the bank for any merger or
acquisition, and restricts the payments of cash dividends.
Management believes that the Company's existing cash and periodic
borrowings under the line of credit will be sufficient to fund the Company's
operations at currently anticipated levels through December 31, 1999. The
Company plans to use its cash resources to finance new product development and
existing product enhancements, expand internationally, and expand the direct
sales force for corporate customers. The execution of such plans may include
strategic acquisitions of, or investments in, businesses, products or
technologies.
As a result of the acquisition of Unicore Software, Inc., the Company's
cash and investments during the 1st quarter of 1999 will be depleted by
approximately $1,205,000, excluding impacts to cash from other events and the
normal operations of the Company. Because of the structure of the acquisition,
it is possible that the Company's cash and investments will be reduced by an
additional $3,350,000, depending upon the vote of the Company's stockholders at
the 1999 Annual Meeting. See Item 1, "Acquisition of Unicore." If the
remaining obligation of this acquisition is paid in common stock, as is proposed
within the Agreement and Plan of Merger, there will be no direct impact to the
Company's cash and investments.
Subsequent Events
On November 6, 1998, Unicore and Phoenix, through its subsidiary Award,
entered into a Software License Agreement ("License Agreement") for the
licensing of certain Award Software by Unicore and the licensing of certain
Unicore Software by Phoenix (both as defined in the License Agreement).
On March 5, 1999, Unicore and Phoenix entered into an Agreement Regarding
Change in Control pursuant to which Phoenix gave its consent to the merger of
Unicore with and into a wholly-owned subsidiary of the Company, and Unicore
agreed to incorporate certain additional events into the License Agreement, each
of which is a material breach giving Phoenix the right to terminate the licenses
granted by Phoenix thereunder.
On March 5, 1999, an Addendum "A" to the License Agreement ("Addendum")
between Unicore and Phoenix was signed and made effective as of October 1, 1998.
The Addendum adds the Phoenix CardWare product to the list of products Unicore
is licensed to market and sell. The Addendum specifies that Unicore shall pay
Phoenix a prepayment on future royalties and a percentage royalty rate based on
net revenues generated by sales of the CardWare product. In addition, the
Addendum specifies that the royalty rate paid by Unicore as defined in the
License Agreement will be lowered in exchange for cash consideration paid to
Phoenix.
On March 31, 1999, the Company signed a Software Purchase Agreement with
Phoenix under the terms of which the Company acquired all title, rights and
obligations relating to the CardWare product for cash consideration and the
termination of the Addendum as to CardWare.
Business Risks
This report on Form 10-KSB contains forward-looking statements that involve
risks and uncertainties. The actual future results of the Company could differ
materially from those statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below and
elsewhere in this report
These risk factors include the risk that products under development prove
more difficult to develop than currently anticipated resulting in delays in
reaching the market, significantly greater development costs, or even in planned
products having to be abandoned. Moreover, with or without delays in bringing
new products to market, it is possible that the Company's competitors will bring
to market successful competing products which reduce the size of, or eliminate
altogether, the market for the Company's planned products. In addition, rapid
change and technological advancement characterize the software industry,
including a trend by hardware manufacturers to feature pre-loaded software
packages in computers. This could reduce demand for the Company's products, if
such pre-loaded software performs many of the same functions as the Company's
currently marketed product or technology currently under development.
17
<PAGE>
Industry Risks
- --------------
The utility software business is part of a fast-changing industry and the
ability of the Company to grow or to predict future revenue is dependent to a
large extent on the ability of the Company to develop new products and new
versions of existing products. Given the results of the last two years, and the
competitive factors affecting this industry, as discussed elsewhere in this
report, management is unable to predict at this time whether the Company can be
successful at designing and developing products that can compete profitably in
this industry. Furthermore, some of the products currently under consideration
involve complicated diagnostic technologies, which are more complex than those
previously encountered in the development of the Company's products. This may
result in significant delays and greater expense than normally encountered by
the Company in the development of its products.
As a result of the acquisition of Unicore, the Company will be challenged
with integrating the operations of two companies with different characteristics.
In addition, the operations and physical assets of the Company will be relocated
to North Andover, Massachusetts. There is a risk that the Company will have
difficulty integrating the operations of the two companies and will experience
significant costs in so doing. In addition, there is a risk that the Company
will not be able to successfully co-manage the sales operations that were in
existence prior to the merger, which could result in sales falling below
expectations. With regard to the planned expansion of the Company's presence at
retail chains, the Company competes against many other software vendors both
directly, in the form of competing products, and indirectly, with even non-
competing products for limited shelf space at retailers and distributors. To a
large extent, the Company's success in this regard will be a function of the
Company's ability to develop new products or new versions of existing products,
along with market acceptance of the Company's products currently being sold at
retail.
The Company has made significant commitments of time, effort, and expense
in its efforts to develop and bring to market the e.Support product. As of
December 31, 1998, TouchStone had not realized any revenue from the e.Support
product and is not engaging in efforts to market the product.
Year 2000 Risks
- ---------------
Overview. The Company is in the process of analyzing and addressing what is
known as the Year 2000 Issue. The Year 2000 Issue has arisen because many
existing computer programs use only two digits to identify a year in the data
field. These programs were designed and developed without considering the impact
of the upcoming change in the century and, accordingly, could misconstrue dates
such as "00" as the year 1900 rather than 2000. The failure of computer programs
and systems to properly recognize dates beginning in the year 2000 could
adversely affect the Company's business activities.
The Company's Year 2000 Compliance Program. The Company has initiated its
Year 2000 Compliance Program. The purpose of the program is: to identify
important systems that are not yet Year 2000 compliant; to initiate replacement
or remedial action to assure that key systems will continue to operate in the
Year 2000 and to test the replaced or remediated systems. The Company expects to
substantially complete its Year 2000 Compliance Program activities before the
end of 1999.
Information Technology Systems. The Company's critical internal information
technology ("IT") systems consist of its electronic mail system, internal
financial systems, corporate communications system, desktop and file management
systems, software development tools and I/S management tools. The Company is
contacting the vendors of these systems and obtaining assurances that these IT
systems are currently in material Year 2000 compliance. To the extent that some
employees may be using older versions of these systems that may not be
compliant, the Company intends to upgrade such systems to achieve material Year
2000 compliance. The Company is still in the process of evaluating other areas
of its existing internal IT systems at this time and will seek further
assurances from its vendors as necessary. The Company plans to test its critical
IT systems during 1999. The Company intends to evaluate the need for contingency
plans for these internal IT systems given the assurances of compliance the
Company has received for these systems. While the Company will work diligently
with all of its IT system providers, there is no guarantee that these IT systems
providers will meet Year 2000 compliance. The failure of any such IT system to
be Year 2000 compliant could have a negative effect on the business activities
of the Company.
18
<PAGE>
Non-Information Technology Systems. The Company is conducting an assessment
of its non-information technology systems (such as voice mail, telephone and
other systems containing embedded microprocessors) and is in the process of
determining the nature and extent of any work that may be required to make any
non-IT systems Year 2000 compliant.
Third-Party Suppliers, Vendors and Customers. The Company's Year 2000
Compliance Program also includes an investigation of the Year 2000 compliance of
its major suppliers, vendors, customers and business partners. For example,
where the Company's products and services incorporate third-party software the
Company will be verifying these third-party suppliers' Year 2000 compliance. If
cases occur where the non-compliance of third-party components does affect
features or functions used by the Company in its products, the Company intends
to install upgrades (most of which are currently available) to achieve material
compliance. In addition, the Company is in the process of testing its
application software. To date, the Company has found its application software to
be Year 2000 compliant. Given the number of components and the complexity of the
software incorporated in the Company's products and services, the Company
believes that in the course of conducting its Year 2000 Compliance Program, it
could reasonably discover that the Year 2000 problem may affect its software or
components. However, the Company regularly develops software updates to its
product offerings as a natural course of business and the Company does not
expect that these Year 2000 updates will be excessively complex or expensive to
implement.
Year 2000 Costs and Expenses. To date, the costs associated with the Year
2000 Issue and the Company's Year 2000 Compliance Program have not been
material. The Company will incur costs that include internal resources, software
and equipment upgrades and replacement. Based on currently available
information, the Company believes that the expense associated with its ongoing
efforts will not be material and will be funded through operations.
Contingency Plans. At the present time, the Company has not yet formulated
contingency plans for addressing problems due to the Year 2000 Issue. The
Company has been assured that its critical internal IT systems are compliant by
the vendors of those systems and the Company will evaluate the need for
contingency plans for internal IT systems given those assurances. The Company is
currently in the process of evaluating the Year 2000 Issue with respect to its
non-IT systems and with respect to its major suppliers, vendors, customers and
business partners. As this evaluation process proceeds, the Company will
formulate appropriate contingency plans. The Company expects that any required
contingency planning will be completed no later than the end of 1999.
Various statements in this discussion of Year 2000 are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 as discussed above under "Factors That May Affect Future Results." These
statements include statements of the Company's expectations, statements with
regard to schedules and expected completion dates and statements regarding
expected Year 2000 compliance. These forward-looking statements are subject to
various risk factors, which may materially affect the Company's efforts to
achieve Year 2000 compliance. These risk factors include the inability of the
Company to complete the plans and modifications that it has identified, the
failure of software vendors to deliver the upgrades and repairs to which they
have committed, the wide variety of information technology systems and
components, both hardware and software, that must be evaluated and the large
number of vendors and customers with which the Company interacts. The Company's
assessments of the effects of Year 2000 on the Company are based, in part, upon
information received from third parties and the Company's reasonable reliance on
that information. Therefore, the risk that inaccurate information is supplied by
third parties upon which the Company reasonably relied must be considered as a
risk factor that might affect the Company's Year 2000 efforts. The Company is
attempting to reduce the risks by utilizing an organized approach, extensive
testing, and allowance of ample contingency time to address issues identified by
tests.
19
<PAGE>
Item 8. Financial Statements Page
- ------------------------------ ----
Index to Financial Statements:
1. Independent Auditors' Report 20
2. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998
and 1997 21
Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997 22
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998 and 1997 23
Consolidated Statements of Cash Flows for
the years ended December 31, 1998 and 1997 24
Notes to Consolidated Financial Statements 25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
TouchStone Software Corporation:
We have audited the accompanying consolidated balance sheets of TouchStone
Software Corporation and subsidiary (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of TouchStone Software
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 9, 1999
<PAGE>
TouchStone Software Corporation
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 825,255 $ 1,433,861
Investments 5,897,469 8,410,133
Restricted cash 500,000 500,000
Accounts receivable, net 1,193,528 2,687,278
Inventories, net 185,287 283,141
Prepaid expenses and other current assets 166,987 263,202
------------ -----------
Total current assets 8,768,526 13,577,615
Investments 1,364,797 1,306,860
Property, net 134,888 420,033
Other assets 58,458 31,171
------------ -----------
$ 10,326,669 $15,335,679
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 631,646 $ 633,548
Accrued payroll and related expenses 152,336 273,628
Accrued cooperative advertising expense 413,002 854,134
Accrued restructuring expense 380,128
Deferred revenue 1,243,034 2,403,797
Other accrued liabilities 304,411 1,011,559
------------ -----------
Total current liabilities 3,124,557 5,176,666
Other liabilities 189,893 130,792
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares
authorized, none issued or outstanding
Common stock, $.001 par value, 20,000,000
shares authorized; issued and outstanding,
7,963,060 (1998)
7,883,085 (1997) 7,963 7,883
Additional paid-in capital 18,754,516 18,673,682
Accumulated deficit (11,750,260) (8,653,344)
------------ -----------
Total shareholders' equity 7,012,219 10,028,221
------------ -----------
$ 10,326,669 $15,335,679
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TouchStone Software Corporation
Consolidated Statements of Operations
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Revenues:
<S> <C> <C>
Product sales $ 4,729,240 $ 7,636,714
Royalty income 106,583 278,651
Total revenues 4,835,823 7,915,365
Cost of revenues 1,367,196 2,853,044
Gross profit 3,468,627 5,062,321
Operating expenses:
Sales and marketing 2,380,787 4,367,892
General and administrative 1,956,603 1,289,715
Research and development 1,721,716 2,145,766
Restructuring costs 1,075,253
Total operating expenses 7,134,359 7,803,373
Loss from operations (3,665,732) (2,741,052)
Other income, net 569,616 684,970
----------- -----------
Loss before provision
for income taxes (3,096,116) (2,056,082)
Provision for income taxes 800 800
Net loss $(3,096,916) $(2,056,882)
=========== ===========
Loss per share, basic and diluted $(0.39) $(0.26)
=========== ===========
Weighted average shares outstanding, basic 7,930,000 7,840,000
and diluted =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TouchStone Software Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Notes
receivable Total
Common stock Additional from sale share-
------------ Paid-in Accumulated of common holders'
Shares Amount capital deficit stock equity
------ ------ ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1997 7,772,735 $7,773 $18,595,990 $ (6,596,462) $(24,089) $11,983,212
Stock options exercised 110,350 110 63,856 63,966
Collections of notes receivable 24,089 24,089
Stock options issued for
consulting services 13,836 13,836
Net loss (2,056,882) (2,056,882)
---------- ------ ----------- ------------ --------- -----------
Balances at
December 31, 1997 7,883,085 7,883 18,673,682 (8,653,344) 10,028,221
Stock options exercised 79,975 80 70,663 70,743
Stock options issued for
consulting services 10,171 10,171
Net loss (3,096,916) (3,096,916)
---------- ------ ----------- ------------ --------- -----------
Balances at
December 31, 1998 7,963,060 $7,963 $18,754,516 $(11,750,260) $ - $ 7,012,219
========== ====== =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TouchStone Software Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,096,916) $ (2,056,882)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization 180,876 246,266
Stock options issued for consulting services 10,171 13,836
Provision for doubtful accounts 350,409 44,817
Provision for obsolete inventories 79,794 239,530
Write-off of software development costs and fixed assets 183,881 162,842
Change in deferred lease obligation 59,101 6,648
Changes in operating assets and liabilities:
Accounts receivable 1,143,341 (49,223)
Inventories 18,060 204,783
Prepaid expenses and other current assets 96,215 88,772
Other assets (27,287) (994)
Accounts payable (1,902) (1,355,394)
Deferred revenue (1,160,763)
Accrued and other liabilities (889,444) (152,690)
------------ ------------
Net cash used in operating activities (3,054,464) (2,607,689)
Cash flows from investing activities:
Purchases of investments (41,036,995) (31,377,389)
Sales of investments 43,491,722 32,633,603
Purchases of property (83,668) (226,545)
Cash received on sale of property 4,056 30,350
------------ ------------
Net cash provided by investing activities 2,375,115 1,060,019
Cash flows from financing activities:
Proceeds from exercise of stock warrants and options 70,743 63,966
Cash received on repayment of notes receivable 24,089
------------ ------------
Net cash provided by financing activities 70,743 88,055
Net decrease in cash and cash equivalents (608,606) (1,459,615)
Cash and cash equivalents, beginning of period 1,433,861 2,893,476
------------ ------------
Cash and cash equivalents, end of period $ 825,255 $ 1,433,861
============ ============
Supplemental cash flow information:
Interest paid $ 923 $ 1,577
============ ============
Income taxes paid $ 800 $ 800
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
1. Summary of Significant Accounting Policies
Nature of Operations. TouchStone Software Corporation ("TouchStone" or the
"Company") designs, develops, markets, and supports a line of computer problem-
solving utility software and supporting products which simplify personal
computer (PC) installation, support, and maintenance. The Company markets its
products domestically through software distributors for resale through the
retail channel, which includes approximately 4,000 resellers worldwide. Ongoing
customer evaluations are performed with respect to the Company's receivables,
and collateral is generally not required.
Consolidation. The consolidated financial statements of the Company
include the financial statements of the Company's wholly owned subsidiary,
TouchStone Europe Ltd. All intercompany transactions and balances have been
eliminated.
Translation of Foreign Currencies. Foreign subsidiary financial statements
are translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, Foreign Currency Translations. The
functional currency of the Company's European subsidiary is the U.S. dollar,
therefore, translation gains and losses are included in results of operations.
Transaction and translation gains and losses were not significant in 1998 or
1997.
Cash Equivalents. Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Investments. Investments at December 31, 1998 consist of investments in
certificates of deposit, commercial paper, and debt securities, and are
classified as held-to-maturity. Such investments are recorded at cost.
Inventories. Inventories are stated at the lower of first-in, first-out
cost, or market, and consist mainly of finished goods, media, and packaging
supplies.
Property. Property is stated at cost and depreciated using the straight-
line method based on the estimated useful lives of the assets (two to five
years). Leasehold improvements are amortized over the shorter of the useful
life or the life of the related lease.
Restructuring. The primary components of the Company's restructuring
expense include severance for terminated employees, the write-down of property
and equipment and the write-down of facilities expense. Severance expenses
include salaries and benefits related to all employees terminated as a result of
the acquisition and cost reduction efforts. The Company wrote down its property
and equipment to the salvage value of the assets. In addition, the Company
accrued lease expenses related to facilities it vacated. These write-downs are
attributable to the Company's intention to dispose of the assets based on its
decision to relocate its facilities and its decision to reduce headcount.
26
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
1. Summary of Significant Accounting Policies (continued)
Software Development Costs. Research and development expenses resulting
from the design, development, and testing of new software and software
maintenance and enhancement costs are expensed as incurred, until technological
feasibility has been established and costs are considered recoverable.
Thereafter, certain costs such as coding and testing are capitalized in
accordance with SFAS No. 86, Accounting for Costs of Computer Software to be
Sold, Leased or Otherwise Marketed, until the product is available for sale.
During 1998 and 1997, software has been substantially completed concurrently
with the establishment of technological feasibility; and, accordingly, no costs
have been capitalized.
Long-Lived Assets. The Company evaluates long-lived assets under SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement requires impairment losses to be
recognized for long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets' carrying amount. The statement also requires that assets to
be disposed of should be written down to fair value less selling costs. The
Company evaluated its property and equipment and the Company has recorded
$182,000 of write-down in property and equipment to be disposed and a $56,000
accrual of lease expenses on vacated facilities, as part of restructuring costs.
(see Note 4)
Revenue Recognition. Product revenues are recorded at the time products
are shipped, but the Company records a reserve for product returns at each
period-end which covers 100% of inventory in the sales channel. The reserves
for such inventory are classified as deferred revenue on the Company's balance
sheet. The Company's operations are subject to substantial and unpredictable
risk of product returns from distributors and retailers either through the
exercise by the Company's customers of contractual return rights or as a result
of the Company's policy of assisting customers in balancing and updating
inventories. Although the Company attempts to monitor and manage the volume of
its sales to its customers, large shipments in anticipation of demand which is
subsequently unrealized, can lead to overstocking by the distributors and
substantial product returns. Certain of the Company's customer agreements also
provide for rebates to customers should the price of the Company's products
decline subsequent to shipment. The Company accrues for such rebates when such
price declines are known or become anticipated.
Income Taxes. The Company accounts for income taxes under SFAS No. 109,
Accounting for Income Taxes.
Accounting for Stock-Based Compensation. The Company accounts for stock-
based awards to employees using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees. (See Note 4)
Earnings per Share. Pursuant to SFAS No. 128, Earnings Per Share, ("SFAS
No. 128"), the Company provides dual presentation of "Basic" and "Diluted" EPS,
replacing "Primary" and "Fully diluted" EPS formerly under APB Opinion No. 15.
27
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
1. Summary of Significant Accounting Policies (continued)
Basic EPS excludes dilution from common stock equivalents 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 common stock equivalents, similar to fully diluted EPS,
but uses only the average stock price during the period as part of the
computation. Common stock equivalents consisted of outstanding stock options
and warrants for the years ended December 31, 1998 and 1997, but have not been
included in the calculation of diluted EPS as their effect would have been
antidilutive on both periods. At December 31, 1998 and 1997, the number of
outstanding stock options and warrants were 1,834,808 and 1,907,518,
respectively.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires TouchStone management to
make estimates and assumptions. Such estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the periods then ended. Actual results, including
those related to sales returns, could differ from those estimates.
Fair Value of Financial Instruments. The Company's balance sheet includes
the following financial instruments: cash and cash equivalents, investments,
accounts receivable, and accounts payable. The Company considers the carrying
amounts in the financial statements to approximate fair value for the financial
instruments because of the relatively short period of time between origination
of the instruments and their expected realization.
Recently Issued Accounting Standards. In 1998, the Company adopted SFAS No.
130, Reporting Comprehensive Income. This statement establishes standards for
the reporting of comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income, as defined, includes all changes in equity
(net assets) during a period from non-owner sources. Examples of items to be
included in comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gain/loss on available-
for-sale securities. The disclosures prescribed by SFAS No. 130 were effective
beginning with the first quarter of calendar 1998. There was no difference
between the Company's comprehensive loss and the net loss reported on the
statements of operations.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information,
("SFAS No. 131"). This statement establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosure about products and services,
geographic areas and major customers. See Note 9.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for fiscal
years beginning after June 15, 1999. The Company is currently evaluating the
impact of SFAS No. 133, which it is required to adopt for the fiscal year ended
December 1999.
28
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
2. Balance Sheet Detail
Current investments consist of the following, which are classified as held
to maturity at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cost of Investments:
Certificates of deposit $ 1,639,002 $ 2,307,000
Commercial paper 1,678,557 3,119,075
Corporate bonds 1,084,917 498,672
Government notes 1,494,993 2,485,386
----------- -----------
$ 5,897,469 $ 8,410,133
=========== ===========
Fair Market Value of Investments:
Certificates of deposit $ 1,638,590 $ 2,307,000
Commercial paper 1,691,653 3,125,761
Corporate bonds 1,086,086 501,385
Government notes 1,509,158 2,494,636
----------- -----------
$ 5,925,487 $ 8,428,782
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Non-current investments consist of the following, which are classified as held-
to-maturity at December 31:
1998 1997
---- ----
<S> <C> <C>
Cost of Investments:
Certificates of deposit
Commercial paper $ 291,000 $ 974,000
Government notes 260,360
Other 999,297
74,500 72,500
----------- -----------
$ 1,364,797 $ 1,306,860
=========== ===========
Fair Market Value of Investments:
Certificates of deposit
Commercial paper $ 290,243 $ 968,876
Government notes 259,687
Other 1,015,119
111,847 97,460
----------- -----------
$ 1,417,209 $ 1,326,023
=========== ===========
</TABLE>
All of the Company's long-term investments at December 31, 1998 are
scheduled to mature in 1999 and 2000.
29
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
2. Balance Sheet Detail (Continued)
Property. Property consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Office equipment and furniture $ 389,209 $ 804,392
Leasehold improvements 17,519 43,224
--------- ---------
406,728 847,616
Less accumulated depreciation and amortization (271,840) (427,583)
--------- ---------
$ 134,888 $ 420,033
========= =========
</TABLE>
3. Reclassifications
Certain items previously reported in specific financial captions have been
reclassified to conform with the 1998 presentation.
4. Restructuring
During 1998 the Company experienced a significant decline in its retail
products business. This decline in revenues caused the Company to experience
significant operating losses during its fiscal second and third quarters. As
part of its strategy to curtail these losses, the Company restructured its
operations. The restructuring consisted primarily of a reduction in the
Company's workforce from approximately 50 to 12. The reduction in headcount
resulted in a charge for severance payments. In addition, the Company took a
charge for the write-off of certain fixed assets and leasehold improvements.
The restructuring also included the resignation of Larry Jordan as Chief
Executive Officer. Ken Forbes succeeded Mr. Jordan in August. Mr. Forbes
embarked on a business strategy involving the Internet, which was a drastic
change from the Company's recent business strategy. At the end of 1998, the
Company's Board of Directors elected to discontinue the Internet strategy and
Mr. Forbes resigned from the Company. Much of the Company's restructuring costs
related to severance packages for Messrs. Jordan and Forbes. Total
restructuring costs of $1,075,000 included approximately $837,000 related to
severance expense for termination of approximately 35 employees, $182,000
related to the write-down of property and equipment, and $56,000 related to the
accrual of lease expenses on vacated facilities. Severance expenses include
salaries and benefits related to all employees terminated as a result of the
acquisition and cost reduction efforts. The Company wrote down its inventories
to their salvage value of the assets. In addition, the Company wrote down its
facilities expense to the net realizable value. These write-downs are
attributable to the Company's intention to dispose of the assets based on its
decision to relocate its facilities and its decision to reduce headcount.
5. Financing Arrangements
The Company has a bank line of credit, which provides for borrowings up to
$500,000 and bears interest at the bank's prime rate (7.75% at December 31,
1998). The line of credit expires in September 1999. Borrowings are
collateralized by a $500,000 certificate of deposit, which is recorded as
restricted cash on the accompanying consolidated balance sheet. There were no
borrowings outstanding under this line of credit at December 31, 1998. The terms
of this borrowing facility prohibits acquisitions of other entities without the
prior approval of the bank and restricts the payment of cash dividends. The
Company was in compliance with these covenants at December 31, 1998.
6. Shareholders' Equity
30
<PAGE>
Stock Option Plans. The Company has various stock option plans for
directors, officers, employees and certain consultants, which provide for non-
qualified and incentive stock options. The Board of Directors determines the
option price (not to be less than fair market value for incentive options) at
the date of grant. Options granted prior to 1996 generally vest over periods
ranging from one to two years and expire ten years from the date of grant.
Options granted after 1995 vest over four years and expire ten years from date
of grant. On July 24, 1997, the Company reduced the exercise price of 712,300
stock options to $1.50 per share, which was the fair market value on that date.
These stock options had been exercisable at prices ranging from $1.85 to $3.00
per share. At December 31, 1998, options for 362,900 shares were available for
future grants under the plans.
31
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
6. Shareholders' Equity (continued)
All options granted under these plans were granted at fair market value at
date of issuance. In August 1995, the Company granted its underwriter warrants
to purchase 230,000 shares of the Company's common stock for $21.60 per share,
which exceeded the fair market value of the Company's common stock at that date.
A summary of the status of the Company's stock option plans and stock warrants
as of December 31, 1998 and 1997, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------------------ ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------- -----
<S> <C> <C> <C> <C>
Options and warrants
outstanding, beginning of
year 1,907,518 $3.68 1,193,734 $5.23
Granted 684,700 $0.97 1,087,050 $1.57
Exercised (79,975) $0.88 (110,350) $0.58
Canceled (677,435) $1.55 (262,916) $1.91
--------- ---------
Options and warrants
outstanding,
end of year 1,834,808 $3.57 1,907,518 $3.68
========= =========
Options and warrants
exercisable at year-end 978,802 $5.72 790,758 $6.70
========= =========
</TABLE>
The following table summarizes other information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price 12/31/98 Life Price 12/31/98 Price
- -------------- -------- ---- ----- ------- -----
$0.22-$1.00 927,683 8.0 $ 0.59 472,183 $ 0.45
$1.44-$3.56 677,125 8.3 $1.54 276,619 $ 1.51
$21.60 230,000 1.5 $21.60 230,000 $21.60
--------- -------
1,834,808 7.2 $ 3.57 978,802 $ 5.72
========= =======
</TABLE>
32
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
6. Shareholders' Equity (continued)
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method. Under SFAS No. 123, the fair value of stock-
based awards to employees is calculated through the use of option-pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. If the
fair values of the awards had been amortized to expense over the vesting period
of the awards, results would have been as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Net loss: As reported $(3,096,916) $(2,056,882)
Pro forma $(3,316,334) $(2,301,894)
Basic and diluted loss per share: As reported $ (0.39) (0.26)
Pro forma $ (0.42) (0.29)
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1998 and 1997 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 88% in 1998 and 48% in 1997, risk-free
interest rate of 5.00% in 1998 and 6.25% in 1997, and expected lives of four
years in both 1998 and 1997. The Company's calculations are based on a single-
option valuation approach and forfeitures are recognized as they occur. The
computed weighted average fair values for options awards in 1998 and 1997 were
$0.66 and $0.65 per share, respectively.
Shareholder Rights Plan. In September 1996, the Board of Directors
approved the adoption of a Shareholder Rights Plan. The Rights Plan provides for
the distribution to TouchStone Software Corporation's shareholders of one
preferred stock purchase "Right" for each outstanding share of TouchStone common
stock. The Rights have an exercise price of $15 per Right, subject to subsequent
adjustment. Initially, the Rights will trade with the Company's common stock,
and will not be exercisable until the occurrence of certain takeover-related
events.
The Rights Plan provides that if a person or group acquires 15 percent or
more of the Company's common stock without the approval of the Board of
Directors, the holders of the Rights, other than the acquiring person or group,
would, under certain circumstances, have the right to purchase additional shares
of the Company's common stock having a market value equal to two times the
exercise price of the Right. In addition, if the Company is thereafter merged
into another entity, or if 50% or more of the Company's consolidated assets or
earning power are sold, then the Right will entitle its holder, other than the
acquiring person or group, to buy common shares of the acquiring entity having a
market value equal to two times the exercise price of the Right.
The Rights were distributed to holders of the Company's common stock of
record on October 4, 1996, as a dividend, and will expire, unless earlier
redeemed, on September 26, 2006.
33
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
7. Income Taxes
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Current:
Federal $ -- $ --
State 800 800
------------- -------------
800 800
Deferred:
Federal (892,100) (462,800)
State (152,800) (158,200)
------------- -------------
(1,044,900) (621,000)
Valuation allowance 1,044,900 621,000
------------- -------------
Total provision $ 800 $ 800
============= =============
</TABLE>
A reconciliation of the Company's effective tax benefit compared to the
U.S. statutory rate of 35% is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Income taxes at statutory rates (35.0%) (35.0%)
State benefits, net of federal benefit (5.7%) (5.1%)
Change in valuation allowance 33.7% 30.2%
Other 7.0% 9.9%
------------- ------------
Provision for income taxes 0.0% 0.0%
============= ============
</TABLE>
Deferred tax assets (liabilities) consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carry-forwards $ 4,899,000 $ 3,889,300
Sales returns reserves 59,700 120,800
Other reserves and accruals 411,000 262,800
------------- -------------
5,369,700 4,272,900
Deferred tax liabilities:
State Income Taxes (250,400) (198,500)
------------- -------------
Valuation allowance (5,119,300) (4,074,400)
------------- -------------
Net deferred tax asset (liability) $ -- $ --
============= =============
</TABLE>
34
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
Based on the Company's assessment of future realization of its net deferred
tax asset, a valuation allowance has been provided, primarily related to net
operating loss carry-forwards, as it is more likely than not that sufficient
taxable income will not be generated to realize these temporary differences.
Additionally, at December 31, 1998 and 1997, approximately $780,000 and
$705,000, respectively, of the valuation allowance was attributable to the
potential tax benefit of stock option transactions, which will be credited
directly to stockholders' equity, if realized.
At December 31, 1998, the Company had federal and state net operating loss
carry-forwards of approximately $12,100,000 and $6,200,000, respectively, which
will begin expiring in the years 2011 and 2001, respectively. At December 31,
1998, the Company had general business credit carry-forwards for federal and
state purposes of $132,852 and $87,623, respectively, which will begin expiring
in the years 1999 and 2008, respectively.
8. Commitments and Contingencies
At December 31, 1998, the Company is obligated under non-cancelable
operating leases for its office facility and office equipment. As part of its
restructuring, the Company has subleased a portion of its office facility.
Future minimum rents, net of sublease income, are as follows:
Years ending
December 31,
- ------------
1999 $ 137,000
2000 33,000
---------
$ 170,000
=========
Rent expense totaled approximately $217,000 and $286,000 for the years
ended December 31, 1998 and 1997, respectively. Sublease income totaled
approximately $14,000 for the year ended December 31, 1998.
The Company has entered into various agreements with outside consulting
firms for the development of specialized applications utilized in the Company's
software products. Generally, the Company agrees to pay the software developers
a percentage royalty based on actual product sales. The Company recorded total
royalty expense of approximately $117,000 and $1,082,000 for the years ended
December 31, 1998 and 1997, respectively.
On October 9, 1996 an entity known as Intervention, Incorporated
("Intervention") filed an action against the Company in the Superior Court of
the State of California, Contra Costa County (C 96-04476). Intervention claims
that it is a non-profit corporation bringing an action for the interests of the
general public. In essence, Intervention claims that the Company is engaged in
unfair competition and is violating California's Fair Packaging and Labeling Act
by filling the software packages to "substantially less than their capacities."
Intervention seeks injunctive relief, unspecified attorneys' fees and damages of
$1,000,000. Eight other software companies have been named as defendants in
identical lawsuits in three different counties; all of the actions have been
coordinated in the San Francisco Superior Court (No. 4006). The Court
sustained the Company's demurrer to the complaint without leave to amend on
January 23, 1998 and is in the process of filing an order to this effect.
Intervention has appealed this ruling and the Company will continue to defend
itself vigorously. Based on its current knowledge, the Company does not believe
that this matter will have a material adverse effect on the financial condition
or results of operations of the Company.
The Company is also subject to other legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, the Company
35
<PAGE>
believes that the final disposition of such matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
9. Segment Information
The Company engages in business activity in only one operating segment,
which entails the development, manufacture and sale of utility and diagnostic
software for personal computers. While the Company offers multiple products for
sale, they are manufactured at one production facility. In addition, the
Company's products are marketed through a common sales organization and are sold
primarily to individual end-users through common distributors and retail
channels.
The Company sells its products primarily through distributors. Sales to
the Company's two largest distributors accounted for 35% and 17% of net product
sales in 1998 and 32% and 20% in 1997, respectively. A decision by a
significant customer to substantially decrease or delay purchases from the
Company or the Company's inability to collect receivables from these customers
could have a material adverse effect on the Company's financial condition and
results of operations.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Geographical Information
1998 % 1997 %
- -----------------------------------------------------------------------------------------------------------------------------------
North America $4,114,988 85% $7,162,050 90%
- -----------------------------------------------------------------------------------------------------------------------------------
Europe 538,870 11% 501,320 6%
- -----------------------------------------------------------------------------------------------------------------------------------
Other 181,965 4% 251,995 2%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues $4,835,823 100% $7,915,365 100%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Product information is presented in categories. All versions of CheckIt,
including professional and diagnostic versions are included. Similarly, all
versions of PC-cillin and FastMove are included in the respective categories.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Product Information 1998 % 1997 %
- ------------------------------------------------------------------------------------------------------------------------------------
CheckIt $2,501,537 52% $2,171,956 27%
- ------------------------------------------------------------------------------------------------------------------------------------
PC-cillin 1,202,025 25% 4,786,866 60%
- ------------------------------------------------------------------------------------------------------------------------------------
FastMove 305,573 6% 452,329 6%
- ------------------------------------------------------------------------------------------------------------------------------------
CheckIt NetOptimizer 542,217 11% 0 0%
- ------------------------------------------------------------------------------------------------------------------------------------
Other 284,471 6% 504,214 7%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenues $4,835,823 100% $7,915,365 100%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
10. Subsequent Events (Unaudited)
Pursuant to the terms of an Agreement and Plan of Acquisition, dated March
5, 1999, by and among the Company, Pierre A. Narath and Jason K. Raza, the
Company acquired Unicore Software, Inc. ("Unicore"), through the merger of
Unicore with and into a wholly-owned subsidiary of the Company with the wholly-
owned subsidiary as the survivor (the "Unicore Merger"). The aggregate purchase
price was approximately $4,555,000 and the transaction will be accounted for as
a purchase. Mr. Narath is the President, Chief Executive Officer and a member
of the Company's Board of Directors and Mr. Raza is a Vice President of the
Company.
The original Unicore was founded by Mr. Narath in 1989, incorporated in
1991 ("Old Unicore"), and sold to Award Software International, Inc. ("Award")
in 1997. Effective October 1, 1998, Messrs. Narath and Raza, through Unicore,
purchased substantially all of the assets of Old Unicore pursuant to an Asset
Purchase Agreement by and among Old Unicore, Unicore, Award, and Phoenix
Technologies Ltd. ("Phoenix"), the parent company of Award.
In November 1998, Unicore and Phoenix, through its subsidiary Award,
entered into a Software License Agreement ("License Agreement") for the
licensing of certain Award Software by Unicore and the licensing of certain
Unicore Software by Phoenix (both as defined in the License Agreement).
In March 1999, Unicore and Phoenix entered into an Agreement Regarding
Change in Control pursuant to which Phoenix gave its consent to the Unicore
Merger and Unicore agreed to incorporate certain additional events into the
License Agreement, each of which is a material breach giving Phoenix the right
to terminate the licenses granted by Phoenix thereunder.
In March 1999, an Addendum "A" to the License Agreement ("Addendum")
between Unicore and Phoenix was signed and made effective as of October 1, 1998.
The Addendum adds the Phoenix CardWare product to the list of products Unicore
is licensed to market and sell. The Addendum specifies that Unicore shall pay
Phoenix a prepayment on future royalties and a percentage royalty rate based on
net revenues generated by sales of the CardWare product. In addition, the
Addendum specifies that the royalty rate paid by Unicore as defined in the
License Agreement will be lowered in exchange for cash consideration paid to
Phoenix.
In March 1999, the Company signed a Software Purchase Agreement with
Phoenix under the terms of which the Company acquired all title, rights and
obligations relating to the CardWare product for cash consideration and the
termination of the Addendum as to CardWare.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. Although adverse decisions (or settlements)
may occur occasionally, the Company believes that the final disposition of such
matters will not have a materially adverse effect on the financial position, or
results of operations, of the Company.
37
<PAGE>
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
Item 10. Directors, Executive Officers, and Key Employees
- ----------------------------------------------------------
The directors and executive officers of the Company at March 24, 1999 are
as follows:
<TABLE>
<CAPTION>
Name Age Title Since
- ------------------------- -------- --------------------------------------- ------------
<S> <C> <C> <C>
Larry W. Dingus ......... 55 Chairman of the Board of Directors 1982
Pierre A. Narath......... 35 President, Chief Executive Officer and 1998
Director
Ronald R. Maas........... 53 Executive Vice President and Secretary 1993
Kenneth C. Welch III..... 41 Independent Software Consultant 1993
</TABLE>
Business Experience of Directors
Larry W. Dingus served as Chairman of the Company's Board of Directors from
1982 to June 1998, as Secretary of the Company from 1989 to 1995, and as Chief
Executive Officer of the Company from 1982 to 1989.
Pierre Narath has served as President and Chief Executive Officer since
January 1999 and as a Director since July 1998. Mr. Narath served as Vice
President of Award Software International, Inc. and President of Unicore
Software, Inc. ("Unicore") since May 1997. From 1989 to May 1991, he founded
and was the sole proprietor of Unicore. From May 1991 to May 1997, Mr. Narath
was President of Unicore.
Ronald R. Maas has served as Chief Financial Officer of the Company since
1991, and has served as Executive Vice President and as a director of the
Company since 1993. Mr. Maas has also served as the Corporate Secretary since
1995.
Kenneth C. Welch III has served as a director of the Company since 1993.
From 1985 to the present, he has worked as an independent software consultant in
the Washington DC area. From 1982 to 1985 he served as the Company's Vice
President of Development and served as a director of the Company from 1982 to
1986.
38
<PAGE>
Executive Officers
The following table sets forth the name, age and position with the Company
of each of the executive officers of the Company. The executive officers serve
at the pleasure of the Board of Directors of the Company, subject to the terms
of employment agreements with said officers. Biographical information with
respect to Messrs. Narath and Maas is set forth under the caption "Business
Experience of Directors" above.
Name Age Position
- ---------------------- --------- ---------------------------------------
Pierre A. Narath 35 President and Chief Executive Officer
Ronald R. Maas 52 Executive Vice President and Secretary
Calvin G. Leong 39 Chief Financial Officer
Jason K. Raza 37 Vice President
Jason Raza has served as Vice President of Unicore since May 1997, and has
served as Vice President of the Company since March 11, 1999. Calvin Leong was
elected as the Chief Financial Officer on March 31, 1999.
Item 11. Executive Compensation
- --------------------------------
The following table sets forth information regarding compensation for
services in all capacities paid or accrued for the fiscal years indicated by the
Company to each of the officers identified above.
<TABLE>
<CAPTION>
Name & Annual Stock All Other
Principal Compen- Awards Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) ($) SAR (#) Payouts sation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
P. A. Narath 1998 N/A N/A N/A N/A 20,000 N/A N/A
Chief Executive 1997 N/A N/A N/A N/A 0 N/A N/A
Officer, President 1996 N/A N/A N/A N/A 0 N/A N/A
and Director
R. R. Maas 1998 101,149 0 0 0 0 0 0
Exec. V. P. and 1997 93,570 0 0 0 45,400 0 0
Director 1996 95,141 0 20,024 /(1)/ 0 0 0 0
</TABLE>
(1) Represents income recognized upon the exercise of 8,467 stock purchase
warrants in July 1996.
The foregoing table does not include $257,765 in 1998 and $169,167 in 1997
paid to Larry S. Jordan, who served as the President and Chief Executive Officer
of the Company until he resigned in June 1998, nor $242,502 paid to Kenneth S.
Forbes, who became the Company's President and Chief Executive Officer in August
1998 and held those offices until his resignation in December 1998.
Option Grants in Last Fiscal Year
The Company did not grant stock appreciation rights in 1998 to any of the
executive officers named above. Grants of stock options to the named executive
officers in 1998 are summarized in the following table.
<TABLE>
<CAPTION>
Number of Securities % of Total Options Avg.
Underlying Options Granted to Employees Exercise Expiration
Name Granted in 1998 Price Date
- --------------- -------------------- -------------------- -------- ----------
<S> <C> <C> <C> <C>
P. A. Narath 20,000 2.90% $0.69 2008
</TABLE>
39
<PAGE>
Aggregated Option Exercises in 1998 and Option Values as of December 31, 1998
No options were exercised in 1998 by any of the named executive officers.
The value of unexercised options at December 31, 1998, for each of the executive
officers named above are as follows:
<TABLE>
Number of Value of
Unexercised Unexercised
Options/SARs at In-the-Money
12/31/98 (#) Options/SARs at
Shares 12/31/98 ($)
Acquired on Value Exercisable /(1)/ / Exercisable /(1)/ /
Name Exercise (#) Realized ($) Unexercisable /(2)/ Unexercisable /(2)/
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
P. A. Narath 0 0 20,000 /(2)/ $1,800 /(2)/
R. R. Maas 0 0 91,350 /(1)/ 28,000 /(1)/
34,050 /(2)/ $ 0 /(2)/
</TABLE>
The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price for a shares of
the Company's Common Stock on December 31, 1998, which was $.78.
Board of Director Meetings and Committees
During 1998, the Company's Board of Directors held eleven regular meetings
and otherwise took action by written consent.
The Board has established an Audit Committee, comprised of three directors,
Mr. Dingus, Mr. Welch, and Mr. Maas, the majority of whom are non-employees. The
Audit Committee meets to consult with the Company's independent auditors
concerning their engagement and audit plan. Thereafter the committee provides
consultation regarding the auditors' report, and management letter, and, with
the assistance of the independent auditors, also monitors the adequacy of the
Company's internal accounting controls.
The Board of Directors meets as a committee of the whole to nominate the
individuals to be proposed by the Board of Directors for election as directors
of the Company, and has no separate nominating committee.
Compensation of Directors
Each non-employee director is paid an annual retainer of $12,000, or the
equivalent in an auto allowance. The Company pays the expenses incurred by its
non-employee directors in attending Board meetings. In January 1998, the
Company issued a 10-year option to purchase 10,000 shares of common stock, at an
exercise price of $1.72 per share, with a four-year vesting schedule, to Mr.
Dingus for serving on the Company's Board of Directors. In October 1998, the
Company issued a 10-year option to purchase 20,000 shares of common stock, at an
exercise price of $.69 per share, with a four-year vesting schedule, to Mr.
Narath for serving on the Company's Board of Directors. In December 1998, the
Company issued a 10-year option to purchase 10,000 shares of common stock, at an
exercise price of $1.00 per share, with a two-year vesting schedule, to Mr.
Welch for serving on the Company's Board of Directors. No additional
compensation is paid to any of the employee directors.
Employment Agreements
40
<PAGE>
In connection with the acquisition of Unicore, the Company entered into
three-year employment agreements with each of Pierre A. Narath and Jason K.
Raza. For a further description of these employment agreements, see Proposal 2
below.
The Company has also entered into a one-year agreement with Mr. Maas, which
automatically renews, on January 1 of each year unless either party gives notice
by December 1. Under this agreement, Mr. Maas is entitled to receive an annual
base salary determined by the Board of Directors, which for the year ending
December 31, 1999 has been set at $90,700. This agreement provides that, upon
termination of employment with the Company for any reason other than cause, Mr.
Maas will continue to receive compensation at the level in effect on the date of
termination of employment for the remainder of the contract or nine months,
whichever is longer. Mr. Maas is also eligible to receive stock option grants
and bonuses as determined by the Company's Board of Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The following table sets forth the beneficial ownership of common stock of
the Company as of March 2, 1999, by (a) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (b) each of the named
executive officers of the Company referred to below under "EXECUTIVE
COMPENSATION AND OTHER INFORMATION"; (c) each director of the Company; and (d)
all directors and executive officers as a group. Except as otherwise indicated,
the address of each holder identified below is in care of the Company, 2124 Main
Street, Suite 250, Huntington Beach, California 92648.
<TABLE>
<CAPTION>
Number of Shares Approximate
Name Beneficially Owned /(1)/ Percent Owned
- --------------------------------------- ------------------------- --------------
<S> <C> <C>
Larry S. Jordan 436,550 /(2)/ 5.3%
C. Shannon Dingus 384,955 /(3)/ 4.7%
Larry W. Dingus 379,753 /(4)/ 4.7%
Ronald R. Maas 271,260 /(5)/ 3.4%
Kenneth C. Welch III 253,574 /(6)/ 3.2%
Pierre A. Narath 125,000 /(8)/ 1.6%
Jason K. Raza - /(8)/ -
All Directors and Executive Officers
as a Group (4 individuals) 1,029,587 /(7)/ 12.4%
</TABLE>
(1) Except as indicated in the footnotes to this table, the stockholders named
in the table are known to the Company to have sole voting and investment
power with respect to all shares of common stock shown as beneficially
owned by them, subject to community property laws where applicable.
Excludes options that do not vest within 60 days of the date of this
report. As of March 2, 1999, an aggregate of 7,963,060 shares of common
stock were outstanding.
(2) Includes options to purchase 228,550 shares that currently are exercisable.
(3) Includes options to purchase 158,737 shares that currently are exercisable.
Does not include 232,370 shares of common stock or 147,383 shares of common
stock issuable pursuant to currently exercisable options that are
beneficially owned by Larry W. Dingus (husband), with respect to which Ms.
Dingus disclaims beneficial ownership
(4) Includes options to purchase 147,383 shares that currently are exercisable.
Does not include 226,218 shares of common stock or 158,737 shares issuable
pursuant to currently exercisable options that are beneficially owned by C.
Shannon Dingus (wife), with respect to which Mr. Dingus disclaims
beneficial ownership.
(5) Includes options to purchase 96,350 shares that currently are exercisable.
(6) Includes options to purchase 67,000 shares that currently are exercisable.
(7) Includes officers' and directors' shares listed above.
(8) Does not include shares issuable to the named individuals if the balance of
the purchase price for Unicore is paid in common stock.
41
<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
On June 10, 1998, in connection with a corporate restructuring that
resulted in charges of $778,000 included in the Company's second quarter
reported loss of $1,960,000, Larry S. Jordan resigned the office of President
and Chief Executive Officer of the Corporation. Mr. Jordan served as the
President and Chief Executive Officer of the Company and as a member of the
Company's Board of Directors from 1996 until his resignation. As a part of
these restructuring charges, Mr. Jordan was paid $15,000 per month through March
1999 according to the employment contract in force at that time, and received a
severance payment in the amount of $300,000.
On December 31, 1998 Ken Forbes resigned the office of President and Chief
Executive Officer of the Corporation. Included in the restructuring charges of
the fourth quarter of 1998 is a severance payment to Mr. Forbes in the amount of
$161,000. Mr. Forbes was also granted an extension until December 31, 1999 to
exercise a vested option for 20,000 shares.
On June 19, 1998, the Company entered into a Source Code License and Binary
Code Distribution Agreement (the "Award Agreement") with Award Software
International Inc. ("Award"), pursuant to which the Company agreed to pay Award
fees according to a specified schedule for access to and distribution rights
regarding certain proprietary computer software products and related user's
manuals, with a minimum annual fee of $200,000 per year. As a consequence of the
Company's acquisition of Unicore, the Award Agreement is no longer in effect.
Pierre A. Narath held the office of Vice President of Award, and was President
of its subsidiary Unicore Software, Inc., at the time that the Award Agreement
was entered into and subsequently became a director of the Company on July 1,
1998.
For information concerning employment agreement with and stock options
granted to executive officers and directors of the Company, see "Election of
Directors - Compensation of Directors" and "Executive Compensation and Other
Information" above.
Mr. Dingus and Ms. Dingus are husband and wife.
PART IV
Item 14. Exhibits, Lists, and Reports on Form 8-K
- ---------------------------------------------------
(a) Exhibits
--------
1. Exhibits.
The Exhibits listed on the accompanying Index to Exhibits are filed as
part of this report.
(b) Reports on Form 8-K
-------------------
No reports on form 8-K were filed during the quarter ended December
31, 1998.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the under-signed, thereunto duly authorized.
TouchStone Software Corporation
By /s/ Calvin G. Leong
----------------------------
Calvin G. Leong,
Chief Financial Officer
Dated: April 7, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Larry W. Dingus Chairman of the Board of Directors
- -----------------------------------------
Larry W. Dingus Date: 04/07/99
/s/ Pierre A. Narath Chief Executive Officer, President
- ----------------------------------------- and Director
Pierre A. Narath Date: 04/07/99
/s/ Ronald R. Maas Executive Vice President, and
- ----------------------------------------- Director
Ronald R. Maas Date: 04/07/99
/s/ Kenneth C. Welch III Director
- -----------------------------------------
Kenneth C. Welch III Date: 04/07/99
43
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
TouchStone Software Corporation
INDEX TO EXHIBITS
3.1 Certificate of Incorporation of Registrant in Delaware. (9)
3.2 By-Laws of Registrant. (9)
10.1 Incentive Stock Option Plan. (1)
10.1A Amended Incentive Stock Option Plan. (2)
10.1B Non-Qualified Stock Option Plan. (2)
10.1C 1991 Stock Option Plan. (3)
10.1D Employee Stock Purchase Agreement. (5)
10.1E 1994 Non-Qualified Stock Option Plan. (6)
10.1F 1995 Non-Qualified Stock Option Plan. (9)
10.1G Preferred Share Purchase Rights. (7)
10.1H 1997 Incentive Stock Plan. (8)
10.3 Office Lease dated February 7,1995. (6)
10.4 Employment contract for Larry S. Jordan. (10)
10.5 Employment contract Ronald R. Maas. (10)
10.6 Employment contract for C. S. (Jenkins) Dingus. (10)
10.7 Employment contract amendment for C. S. Dingus. (10)
10.8 Asset Purchase Agreement for purchase of Unicore from Phoenix/Award.
10.9 Collateral Pledge Agreement for Lawrence Savings Bank.
10.10 Lawrence Savings Bank Consent to TouchStone/Unicore merger.
10.11 Unicore license agreement for Award/Phoenix CardWare with appendices
and addenda.
10.12 Software Purchase Agreement.
21. Subsidiaries of the Registrant. (6)
23.1 Consent of Independent Auditors.
27. Financial Data Schedule.
(1) Incorporated by reference to the Exhibits to the Registration
Statements on Form S-18, as amended, Registration Number 2-92450-LA as
filed with the Securities and Exchange Commission.
(2) Incorporated by reference to the Company's filing on Form S-8 with the
Securities and Exchange Commission, Registration Number 33-25989.
(3) Incorporated by reference to the Exhibits to the Company's Form 10-KSB
for the year ended December 31, 1992 as filed with the Securities and
Exchange Commission.
(4) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1993 as filed with the Securities and
Exchange Commission.
(5) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1993 as filed with the Securities and
Exchange Commission.
(6) Incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, as amended; Registration number 33-94352 as filed with
the Securities and Exchange Commission.
(7) Incorporated by reference to the Exhibits to the Registration Statement
on Form 8-A, Registration number 00112237 as filed with the Securities
and Exchange Commission.
(8) Incorporated by reference to the Exhibits to the Registration Statement
on Form S-8, Registration number 333-21395 as filed with the Securities
and Exchange Commission.
(9) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1996 as filed with the Securities and
Exchange Commission.
44
<PAGE>
(10) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1997 as filed with the Securities and
Exchange Commission.
45
<PAGE>
EXHIBIT 10.8
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT, dated effective as of October 1, 1998, is
made and entered into by and among Unicore Software, Inc., a Delaware
corporation ("SELLER"), Phoenix Technologies Ltd., a Delaware corporation
("PARENT"), Award Software International Inc., a California corporation
("AWARD"), Unicore Acquisition Corp., a Massachusetts corporation ("PURCHASER"),
and Pierre A. Narath and Jason K. Raza (the"FOUNDERS").
RECITALS
--------
The Founders have formed the Purchaser for the purpose of acquiring certain
assets of Seller, all as hereinafter more specifically described.
Purchaser desires to purchase from Seller, and Seller desires to sell to
Purchaser certain of the assets of Seller as specifically described herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES
---------------------------------------------
1.1 ASSETS TO BE PURCHASED. On the terms and subject to the conditions
----------------------
of this Agreement, at the Closing, Seller shall sell, convey, assign, transfer
and deliver to Purchaser all of its right, title and interest in and to all of
the tangible and intangible assets of Seller including, without limitation, (a)
all of the tangible assets set forth on Seller's September 30, 1998 balance
sheet, more particularly described on EXHIBIT A attached hereto, (b) the
---------
intangible assets more particularly described on EXHIBIT B hereto, including the
---------
goodwill associated therewith, licenses and sublicenses granted and obtained
with respect thereto, and rights thereunder, remedies against infringements
thereof, and rights to protection of interests therein under the laws of all
jurisdictions; (c) all rights under any agreements, contracts or other
arrangements of which the Seller is a party; (d) accounts, notes, and other
receivables; (e) securities; (f) cash and cash equivalents; (g) claims,
deposits, prepayments, refunds, causes of action, rights of recovery, rights of
set-off, and rights of recoupment; (h) books, records, ledgers, files,
documents, correspondence, lists, studies, reports and other printed or written
materials; and (i) the corporate name of Unicore Software, Inc. (collectively,
the "ASSETS"), other than the assets set forth in EXHIBIT C hereto (the
---------
"EXCLUDED ASSETS").
1.2 LIABILITIES TO BE ASSUMED. On the terms and subject to the
-------------------------
conditions of this Agreement, at the Closing, Purchaser, without further action
or the execution of any other instruments, shall assume and shall perform, pay
or discharge, as the same shall become due, all of the liabilities of the Seller
including, without limitation, those liabilities more particularly described on
<PAGE>
EXHIBIT D attached hereto (the "ASSUMED LIABILITIES"), other than the
- ---------
liabilities set forth in EXHIBIT E hereto (the "EXCLUDED LIABILITIES").
----------
1.3 PURCHASE PRICE. The aggregate purchase price for the Assets is
--------------
$950,000 (the "PURCHASE PRICE") payable in lawful money of the United States in
immediately available funds to the account of Seller at Silicon Valley Bank,
Santa Clara, CA, 95054, Route Number 121140399, Account 0700311075, for credit
to Phoenix Technologies Ltd.
1.4 CLOSING. The closing of the purchase and sale of the Assets (the
-------
"CLOSING") will take place as promptly as practicable after the date of this
Agreement and, subject only to the satisfaction or waiver of the conditions set
forth in Article VII, on or before November 6, 1998, or such other date as
Purchaser and Seller mutually agree upon in writing (the "CLOSING DATE"). The
Closing will take place at 10 a.m. local time on the Closing Date and will be
held at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, 650 Page Mill Road, Palo Alto, California, or at such other place
as Purchaser and Seller mutually agree.
1.5 SELLER'S CLOSING DELIVERIES. At the Closing, Seller shall deliver to
---------------------------
Purchaser the following:
(a) duly executed instruments of assignment of all Assets of Seller,
in form and substance satisfactory to Purchaser; and
(b) such other documents and instruments as may be reasonably
necessary to transfer the Assets to Purchaser and otherwise to carry out the
transactions contemplated by this Agreement and to comply with the terms hereof,
in form and substance reasonably satisfactory to Purchaser.
1.6 PURCHASER'S CLOSING DELIVERIES. At the Closing, Purchaser shall
------------------------------
deliver to the Seller:
(a) the Purchase Price in accordance with Section 1.4; and
(b) such other documents and instruments as may be reasonably
necessary to carry out the transactions contemplated by this Agreement to comply
with the terms hereof, in form and substance reasonably satisfactory to Seller.
1.7 PURCHASER'S PRICE ALLOCATION. The Purchase Price shall be allocated
----------------------------
for reporting purposes based on their book value as of the Effective Date so
that the purchased Assets will be listed at their book value and any remainder
allocated to good will. The parties hereby agree that they will not take any
reporting position in any federal, state or local tax filings which is
inconsistent with the above allocation. The parties agree to cooperate with
respect to any filings required by Section 1060 of the Internal Revenue Code of
1986, as amended.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
-2-
<PAGE>
Seller, Phoenix and Award, jointly and severally, hereby represent and
warrant to Purchaser as follows:
2.1 CORPORATE EXISTENCE AND AUTHORITY. Seller is a corporation duly
---------------------------------
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
execute and deliver this Agreement and the agreements contemplated hereby, to
perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby.
2.2 AUTHORIZATION; BINDING EFFECT. The execution and delivery by Seller
-----------------------------
of this Agreement and the agreements contemplated hereby, and the performance by
Seller of its obligations hereunder and thereunder, have been duly and validly
authorized by all necessary corporate action on the part of Seller. This
Agreement and the agreements contemplated hereby have been (or prior to the
Closing will be) duly and validly executed and delivered by Seller and, upon the
execution and delivery thereof by the Purchaser, will constitute the legal,
valid and binding obligations of Seller enforceable against it in accordance
with its terms.
2.3 ABSENCE OF CONFLICTS.
--------------------
(a) Seller has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by Seller do not, and the performance
of this Agreement by Seller will not, (i) conflict with or violate the
Certificate of Organization or Bylaws of Seller, (ii) subject to compliance with
the requirements set forth in Section 2.3(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to the Seller or by
which Seller or any of its properties is bound or affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission or
other governmental authority or instrumentality ("GOVERNMENTAL ENTITY") is
required by or with respect to Seller in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby except for such consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a material adverse
effect on the Assets or have a material adverse effect on the ability of the
Purchaser to use the Assets in the conduct of its business as the Assets were
used by Seller immediately prior to the execution of this Agreement.
2.4 TITLE TO ASSETS. Seller has good and marketable title to the Assets,
---------------
free and clear of any lien, mortgage, pledge, security interest, restriction,
charge or other similar encumbrances. The instruments of assignment and transfer
provided for in Section 1.6, when executed and delivered by Seller at the
Closing, will vest in Purchaser good, valid and marketable title to the Assets
and all rights of Seller under the Assumed Liabilities.
2.5 LITIGATION. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending, or as to which Seller has received any notice of
assertion that in any manner challenges or seeks to prevent, enjoin, alter or
delay any of the transactions contemplated by this Agreement.
-3-
<PAGE>
2.6 AFFILIATE TRANSACTIONS. There is no indebtedness, obligation,
----------------------
contract or agreement between Seller, on the one hand, and any person that
directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control (an "AFFILIATE") with the Seller.
2.7 BROKERS. Neither Seller, Award or Phoenix is obligated to pay, nor
-------
has Seller, Award or Phoenix retained any broker or finder who is entitled to,
any broker's or finder's fee or any other commission or financial advisory fee
based on any agreement or understanding made by Seller, Award or Phoenix in
connection with the transactions contemplated hereby.
2.8 NO OTHER REPRESENTATIONS. Notwithstanding anything to the contrary
------------------------
contained in this Agreement, it is the explicit intent of each party hereto that
Seller is not making any representation or warranty whatsoever, express or
implied, except those representations and warranties contained in this Article
II and in any certificate delivered pursuant to Section 7.2(c).
2.9 NO YEAR 2000 REPRESENTATION OR WARRANTY. Neither Seller nor Seller's
---------------------------------------
Affiliates make any representation or warranty to Purchaser or the Founders that
any Asset transferred to Purchaser hereunder (including the Millenium/Pro
software/firmware), will be able to calculate and compare date data between the
twentieth and twenty-first centuries, at all or without impairment in the
functioning of the Asset or any products, such as hardware, software and
firmware, used in combination with the Asset.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PHOENIX AND AWARD
---------------------------------------------------
Phoenix and Award, jointly and severally, hereby represent and warrant to
Purchaser as follows:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Each of Phoenix and Award are
---------------------------------
corporations duly incorporated, validly existing and in good standing under the
laws of the jurisdiction of their incorporation and have full corporate power
and authority to execute and deliver this Agreement and the agreements
contemplated hereby, to perform their obligations hereunder and thereunder, and
to consummate the transactions contemplated hereby and thereby.
3.2 AUTHORIZATION; BINDING EFFECT. The execution and delivery by Phoenix
-----------------------------
and Award of this Agreement and the agreements contemplated hereby, and the
performance by Phoenix and Award of their obligations hereunder and thereunder,
have been duly and validly authorized by all necessary corporate action on the
part of Phoenix and Award. This Agreement and the agreements contemplated
hereby have been (or prior to the Closing will be) duly and validly executed and
delivered by Phoenix and Award and, upon the execution and delivery thereof by
the Purchaser, will constitute the legal, valid and binding obligations of
Phoenix and Award enforceable against them in accordance with its terms.
-4-
<PAGE>
3.3 ABSENCE OF CONFLICTS.
--------------------
(a) Phoenix and Award have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Phoenix and
Award do not, and the performance of this Agreement by Phoenix and Award will
not, (i) conflict with or violate the Certificate of Incorporation or Bylaws of
Phoenix or the Articles of Incorporation or Bylaws of Award, (ii) subject to
compliance with the requirements set forth in Section 3.3(b) below, conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to Phoenix and Award or by which Phoenix and Award or any of their properties
are bound or affected.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to Phoenix and Award in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby
except for such consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a material adverse effect on the
Assets or have a material adverse effect on the ability of the Purchaser to use
the Assets in the conduct of its business as the Assets were used by Phoenix and
Award immediately prior to the execution of this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND FOUNDERS
--------------------------------------------------------
The Purchaser and the Founders jointly and severally hereby represent and
warrant to Seller, Award and Phoenix as follows:
4.1 CORPORATE EXISTENCE AND AUTHORITY. Purchaser is a corporation duly
---------------------------------
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has full corporate power and authority to
execute and deliver this Agreement and the agreements contemplated hereby, to
perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby. Each of the Purchaser and the
Founders has full power and authority to execute and deliver this Agreement and
the agreements contemplated hereby, to perform their obligations hereunder and
thereunder, and to consummate the transactions contemplated hereby and thereby.
4.2 AUTHORIZATION; BINDING EFFECT. The execution and delivery by
-----------------------------
Purchaser of this Agreement and the agreements contemplated hereby and the
performance by Purchaser of its obligations hereunder and thereunder have been
duly and validly authorized by all necessary corporate action on the part of
Purchaser. This Agreement and the agreements contemplated hereby have been (or
prior to the Closing will be) duly and validly executed and delivered by
Purchaser and Founders, and upon the execution and delivery thereof by the
Seller, will constitute the legal, valid and binding obligations of Purchaser
and Founders enforceable against them in accordance with their terms.
-5-
<PAGE>
4.3 ABSENCE OF CONFLICTS. The execution and delivery by the Purchaser
--------------------
and the Founders of this Agreement do not, and the performance by the Purchaser
and the Founders of their obligations under this Agreement and the consummation
of the transactions contemplated hereby will not: (i) conflict with or violate
the Articles of Organization or Bylaws of Purchaser or (ii) conflict with or
result in a violation or breach of any law, rule, regulation, order, judgment or
decree applicable to the Purchaser or Founders or by which Purchaser or the
Founders or any of their properties is bound or affected.
4.4 LITIGATION. There is no action, suit, proceeding, claim, arbitration
----------
or investigation pending, or as to which the Purchaser or the Founders have
received any notice of assertion, nor, to Purchaser's or the Founders'
knowledge, is there a threatened action, suit, proceeding, claim, arbitration or
investigation against the Purchaser or the Founders, that in any manner
challenges or seeks to prevent, enjoin, alter or delay any of the transactions
contemplated by this Agreement.
4.5 BROKERS. Neither Purchaser nor Founders are obligated to pay, nor
-------
have Purchaser or Founders retained any broker or finder who is entitled to, any
broker's or finder's fee or any other commission or financial advisory fee based
on any agreement or understanding made by Purchaser or Founders in connection
with the transactions contemplated hereby.
4.6 NO OTHER REPRESENTATIONS. Notwithstanding anything to the contrary
------------------------
contained in this Agreement, it is the explicit intent of each party hereto that
neither Purchaser nor Founders are making any representation or warranty
whatsoever, express or implied, except those representations and warranties
contained in this Article IV and in any certificate delivered pursuant to
Section 7.3(c).
ARTICLE V
COVENANTS OF SELLER AND PARENT
------------------------------
Seller and Parent covenant and agree with Purchaser that, at all times from
and after the date hereof until the Closing, Seller and Parent will comply with
all covenants and provisions of this Article V, except to the extent Purchaser
may otherwise consent in writing.
5.1 REGULATORY AND OTHER APPROVALS. Seller shall proceed diligently and
------------------------------
in good faith and use all requisite commercially reasonable efforts to obtain,
as promptly as practicable, all consents, approvals or actions of, to make all
filings with and to give all notices to Governmental Entities or any other
person.
5.2 INVESTIGATION BY PURCHASER. Seller shall (a) provide Purchaser and
--------------------------
the officers, employees, counsel, accountants, financial advisors, consultants
and other representatives (together, "REPRESENTATIVES") of Purchaser with
access, upon reasonable prior notice and during normal business hours, to all
officers, employees, agents and accountants of Seller and to all assets,
properties, books and records of Seller, but only to the extent that such access
does not unreasonably interfere with the business and operations of Seller, and
(b) make available to Purchaser and such other persons all such information and
data concerning the business and operations of Seller as Purchaser or any of
such
-6-
<PAGE>
other persons reasonably may request in connection with such investigation,
except to the extent that furnishing any such information or data would violate
any law, rule, regulation, order, judgment or decree applicable to Seller or by
which any of its respective assets or properties is bound.
5.3 CONDUCT OF BUSINESS. Until the Closing Date, Seller shall conduct
-------------------
business only in the ordinary course.
5.4 FULFILLMENT OF CONDITIONS. Seller shall use reasonable efforts and
-------------------------
proceed diligently and in good faith to satisfy each Closing condition required
of Seller contained in Article VII of this Agreement and, to the extent
reasonable, shall not take or fail to take any action that could reasonably be
expected to result in the nonfulfillment of any such condition.
5.5 NON-SOLICITATION. After the Closing, Seller and its Affiliates shall
----------------
not directly or indirectly, solicit, encourage or take any other action which is
intended to induce or encourage, or has the effect of inducing of encouraging
any employee of Purchaser to terminate his or her employment with Purchaser,
excluding any general solicitation by the Seller or its Affiliates for
employment publicized by newspaper or other means of general dissemination which
does not specifically target Purchaser's employees.
5.6 CHANGE OF CORPORATE NAME. Promptly after the Closing, Seller shall
------------------------
take all necessary corporate and other action to change Seller's corporate name,
which name shall not contain the name Unicore.
5.7 FURTHER ASSURANCES. If, at any time after the Closing, any further
------------------
action by the Seller is necessary or desirable to vest Purchaser with full
right, title and possession in and to any of the Assets transferred to Purchaser
hereunder, including any patents, trademarks, copyrights, and any applications
therefor, or any trade secrets or other intellectual property, the Seller shall
take all such lawful and necessary action. Seller agrees that if Purchaser is
unable because of Seller's unavailability or dissolution, or for any other
reason, to secure Seller's signature to apply for or to pursue any application
for any United States or foreign patents or mask work or copyrights or trademark
registrations, then the Seller hereby irrevocably designates and appoints the
Purchaser and its duly authorized officers and agents as Seller's agent and
attorney in fact, to act for and on Seller's behalf and stead to execute and
file any such applications and to do all other lawfully permitted acts to
further the prosecution and issuance of patents, copyrights and mask work
registrations thereof with the same legal force and effect as if executed by the
Seller.
ARTICLE VI
COVENANTS OF PURCHASER AND FOUNDERS
-----------------------------------
Purchaser and Founders covenant and agree with Seller that, at all times
from and after the date hereof until the Closing, Purchaser and Founders shall
comply with all covenants and provisions of this Article VI, except to the
extent Seller may otherwise consent in writing.
-7-
<PAGE>
6.1 FULFILLMENT OF CONDITIONS. Purchaser and Founders shall use
-------------------------
reasonable efforts and proceed diligently and in good faith to satisfy each
closing condition required of Purchaser and Founders contained in Article VII of
this Agreement and, to the extent reasonable, shall not take or fail to take any
action that could reasonably be expected to result in the nonfulfillment of any
such condition.
6.2 NON-SOLICITATION. After the Closing, Purchaser and the Founders
----------------
shall not directly or indirectly, solicit, encourage or take any other action
which is intended to induce or encourage, or has the effect of inducing of
encouraging any employee of Seller or its Affiliates to terminate his or her
employment with Seller or its Affiliates, excluding any general solicitation by
the Purchaser for employment publicized by newspaper or other means of general
dissemination which does not specifically target Seller's or its Affiliates'
employees.
6.3 VISITATION RIGHTS. Seller or a representative of Seller or its
-----------------
Affiliates reasonably acceptable to Purchaser shall have the right to attend all
meetings of the Board of Directors of Purchaser and any committee of the Board
of Directors of Purchaser in a nonvoting observer capacity and to receive the
information provided by Purchaser to its Board of Directors; provided, however,
that the visitation rights provided hereunder shall not interfere with the
fiduciary obligations of Purchaser's Board of Directors; and provided further,
however, that Purchaser may require as a condition precedent to such visitation
rights under this Article VI that each person proposing to attend any meeting of
the Board of Directors and each person to have access to any of the information
provided by Purchaser to its Board of Directors shall agree to hold in
confidence and trust and to act in a fiduciary manner with respect to all
information so received during such meetings or otherwise and to sign a
nondisclosure agreement reasonably acceptable to Purchaser and Seller or its
Affiliates.
6.4 RESIGNATION OF OFFICERS AND DIRECTORS. Effective upon the Closing the
-------------------------------------
Founders shall resign from their positions as officers or directors of Seller.
6.5 FURTHER ASSURANCES. If, at any time after the Closing, any further
------------------
action by the Purchaser or the Founders is necessary or desirable to vest
Seller, Parent or any of Seller's or Parent's Affiliates with full right, title
and possession in and to any of Seller's assets not assigned or transferred to
Purchaser hereunder, including any patents, trademarks, copyrights, and any
applications therefor, or any trade secrets or other intellectual property of
Seller, the Purchaser and the Founders shall take all such lawful and necessary
action. The Purchaser and Founders agree that if Seller is unable because of
Purchaser's or any Founder's unavailability or dissolution, or for any other
reason, to secure Purchaser's or such Founder's signature to apply for or to
pursue any application for any United States or foreign patents or mask work or
copyrights or trademark registrations of Seller, then the Purchaser or such
Founder hereby irrevocably designates and appoints the Seller and its duly
authorized officers and agents as Purchaser's and such Founder's agent and
attorney in fact, to act for and on Purchaser's or such Founders' behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the prosecution and issuance of patents, copyrights
and mask work registrations thereof with the same legal force and effect as if
executed by the Purchaser or the Founders.
-8-
<PAGE>
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF THE PARTIES
----------------------------------------
7.1 OBLIGATIONS OF BOTH PARTIES. The obligation of each party to
---------------------------
consummate the purchase and sale of the Assets pursuant to Article I is subject
to the fulfillment, at or before the Closing, of each of the following
conditions:
(A) NO ACTIONS OR PROCEEDINGS. No investigation, action or
-------------------------
proceeding by or before any court or other governmental body shall have been
commenced or threatened, and no inquiry shall have been received that in the
opinion of Seller's or Purchaser's counsel may lead to an action or proceeding
to restrain or otherwise challenge the transactions contemplated hereby.
7.2 OBLIGATIONS OF PURCHASER. The obligation of Purchaser to purchase
------------------------
and pay for the Assets pursuant to Article I is subject to the fulfillment, at
or before the Closing, of each of the following additional conditions (all or
any of which may be waived in whole or in part by Purchaser in its sole
discretion):
(A) REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties made by Seller, Phoenix and Award in this Agreement shall be true and
correct on and as of the Closing Date as though made on and as of the Closing
Date or, in the case of representations and warranties made as of a specified
date earlier than the Closing Date, on and as of such earlier date.
(B) PERFORMANCE. Seller, Phoenix and Award in all material
-----------
respects shall have performed and complied with, the agreements, covenants and
obligations required by this Agreement to be so performed or complied with by
Seller, Phoenix and Award at or before the Closing.
(C) OFFICERS' CERTIFICATES. Seller, Phoenix and Award shall have
----------------------
delivered to Purchaser a certificate, dated the Closing Date and executed by the
President of Seller and the appropriate officers of Phoenix and Award,
respectively, certifying to the satisfaction of the conditions set forth in
Section 7.2(a) and Section 7.2(b).
(D) THIRD PARTY CONSENTS. All third party consents (or waiver in
--------------------
lieu thereof) required for the sale of any of the Assets by Seller to Purchaser
shall have been obtained and shall be in full force and effect.
(E) LEGAL OPINION. The Purchaser shall have received from the Vice
-------------
President and General Counsel of Phoenix an opinion, dated the Closing Date, in
form and content reasonably satisfactory to Purchaser and its counsel.
7.3 OBLIGATIONS OF SELLER. The obligation of Seller, Phoenix and Award to
---------------------
sell, assign and transfer the Assets pursuant to Article I is subject to the
fulfillment, at or before the Closing, of each of the following conditions (all
or any of which may be waived in whole or in part by Seller, Phoenix and Award
in its sole discretion):
-9-
<PAGE>
(A) REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties made by Purchaser and Founders in this Agreement shall be true and
correct in all material respects on and as of the Closing Date as though made on
and as of the Closing Date.
(B) PERFORMANCE. Purchaser and Founders in all material respects
-----------
shall have performed and complied with the agreements, covenants and obligations
required by this Agreement to be so performed or complied with by Purchaser and
Founders at or before the Closing.
(C) OFFICERS' CERTIFICATES. Purchaser and Founders shall have
----------------------
delivered to Seller, Phoenix and Award a certificate, dated the Closing Date and
executed by the Purchaser and the Founders, certifying as to the satisfaction of
the conditions set forth in Sections 7.3(a) and (b).
(D) THIRD PARTY CONSENTS. All third party consents (or waiver in
--------------------
lieu thereof) required for the purchase of the Assets by Purchaser shall have
been obtained and shall be in full force and effect.
ARTICLE VIII
INDEMNIFICATION
---------------
8.1 INDEMNIFICATION OF PURCHASER'S INDEMNIFIED PERSONS. After the
--------------------------------------------------
Closing, Seller, Award and Phoenix, jointly and severally, shall indemnify and
defend Purchaser and its directors, employees, agents, successors and permitted
assigns and each of the Founders and their heirs and permitted assigns
(collectively, "Purchaser's Indemnified Persons") against, and hold Purchaser's
Indemnified Persons harmless from, any loss, liability, damage, cost and expense
(including interest, penalties and reasonable attorneys' fees and expenses for
investigating, defending or settling any actions or threatened actions)
(collectively, "Losses") imposed on or incurred by any of Purchaser's
Indemnified Persons, directly or indirectly, which relate to or arise out of
(a) any Excluded Liability; or
(b) any Losses arising in connection with the breach by Seller,
Phoenix or Award of any of the representations, warranties, covenants or
agreements set forth in this Agreement.
Notwithstanding the foregoing, Seller and its Affiliates shall not
indemnify or defend Purchaser's Indemnified Persons from any Losses arising out
of:
(a) any claim that the Assets or the proposed use, sale, license or
disposition thereof by the Purchaser infringes upon or conflicts with or will
infringe upon or conflict with the rights of any third party;
(b) any claim that Seller or any of its employees or Affiliates
misappropriated any trade secret or other intellectual property rights of any
third party; or
-10-
<PAGE>
(c) any claim that any Asset transferred to Purchaser hereunder
(including the Millenium/Pro software/firmware) is unable to calculate and
compare date data between the twentieth and twenty-first centuries, at all or
without impairment in the functioning of the Asset or any products, such as
hardware, software and firmware, used in combination with the Asset.
8.2 INDEMNIFICATION OF SELLER'S INDEMNIFIED PERSONS. After the Closing,
-----------------------------------------------
Purchaser and Founders jointly and severally agree to indemnify Seller and its
Affiliates, officers, directors, employees, agents, successors and permitted
assigns (collectively, "Seller's Indemnified Persons") against, and hold
Seller's Indemnified Persons harmless from, any Losses imposed on or incurred by
any of Seller's Indemnified Persons, directly or indirectly, which relate to or
arise out of
(a) all liabilities of Seller assumed hereunder other than the
Excluded Liabilities;
(b) any post-Closing liability of the Purchaser imposed on or
incurred by any of Seller's Indemnified Persons, to the extent such liability
does not constitute an Excluded Liability;
(c) any warranty obligations or obligations to perform any continuing
NRE services pursuant to any OEM or similar agreements (but excluding end-user
license agreements) assumed by Purchaser hereunder; and
(d) any Losses in connection with the breach by Purchaser or the
Founders of any of the representations, warranties, covenants or agreement set
forth in this Agreement.
Notwithstanding the foregoing, the Founders' liability pursuant to this
Section 8.2 shall not exceed five hundred thousand dollars ($500,000) in the
aggregate.
ARTICLE IX
TERMINATION
-----------
9.1 TERMINATION. This Agreement may be terminated, and the transactions
-----------
contemplated hereby may be abandoned:
(a) at any time before the Closing, by mutual written agreement of
Seller and Purchaser;
(b) at any time before the Closing, by Seller or Purchaser, in the
event that any final, non-appealable order or law becomes effective restraining,
enjoining or otherwise prohibiting or making illegal the consummation of any of
the transactions contemplated by this Agreement or the License Agreements, upon
notice to the non-terminating party by the terminating party;
(c) at any time after November 30, 1998, by Seller, by notice to
Purchaser if the Closing shall not have occurred on or before such date and the
failure of the Closing to occur is not caused by a material breach of this
Agreement by Seller;
-11-
<PAGE>
(d) at any time after November 30, 1998, by Purchaser, by notice to
Seller if the Closing shall not have occurred on or before such date and the
failure of the Closing to occur is not caused by a material breach of this
Agreement by Purchaser;
(e) at any time before the Closing, by Seller, by notice to
Purchaser, in the event of a material breach of this Agreement by Purchaser
which if uncured would cause one or more of the conditions to Closing set forth
in Article VII not to be satisfied and which is incapable of being cured prior
to the date set forth in Section 9.1(c); and
(f) at any time before the Closing, by Purchaser, by notice to
Seller, in the event of a material breach of this Agreement by Seller which if
uncured would cause one or more of the conditions to Closing set forth in
Article VII not to be satisfied and which is incapable of being cured prior to
the date set forth in Section 9.1(d).
9.2 EFFECT OF TERMINATION. If this Agreement is validly terminated
---------------------
pursuant to Section 9.1, this Agreement will forthwith become null and void, and
there will be no liability or obligation on the part of Seller or Purchaser or
the Founders (or any of their respective officers, directors, employees, agents
or other representatives or Affiliates), except that (i) the provisions with
respect to fees and expenses in Section 9.3 and confidentiality in Section 9.5
will continue to apply following any such termination. Notwithstanding any other
provision in this Agreement to the contrary, upon termination of this Agreement
pursuant to Section 9.1 (other than pursuant to Section 9.1(a), Seller will
remain liable to Purchaser for any willful breach of Section 5.4 ("FULFILLMENT
OF CONDITIONS") of this Agreement by Seller existing at the time of such
termination, and Purchaser will remain liable to Seller for any willful breach
of Section 6.2 ("FULFILLMENT OF CONDITIONS") of this Agreement by Purchaser
existing at the time of such termination, and Seller or Purchaser may seek such
remedies, including damages and fees of attorneys, against the other with
respect to any such breach as are provided in this Agreement or as are otherwise
available at law or in equity.
9.3 EFFECT OF BREACH. In the event that Purchaser or Seller elect to not
----------------
proceed with the Closing of this Agreement because the conditions to Closing
specified in Article VII are not satisfied, any such election shall be without
prejudice to the rights of the party making such election if the nonsatisfaction
of such conditions results from the intentional or willful breach or violation
of any of the representations, warranties, covenants or agreements of the other
party; but otherwise such election shall terminate all obligations and
liabilities of the parties hereunder except as provided in Section 9.2 and in
Section 9.4.
9.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------------------
warranties of each of the parties contained in this Agreement and in any
certificates delivered pursuant to Section 7.2(c) and Section 7.3(c) shall
survive for a period of two (2) years following the Closing. No party shall
have any liability whatsoever with respect to any such representation or
warranty after the survival period for such representation or warranty expires,
except for claims then pending or theretofore asserted in writing by any party
and delivered to the other party in accordance with the terms and conditions of
this Agreement.
-12-
<PAGE>
ARTICLE X
MISCELLANEOUS
-------------
10.1 NOTICES. All notices, requests and other communications hereunder
-------
must be in writing and will be deemed to have been duly given only if delivered
personally or by facsimile transmission or mailed (first class postage prepaid)
to the parties at the following addresses or facsimile numbers:
If to Purchaser, to: Unicore Acquisition Corp.
1538 Turnpike Street
North Andover, MA 01845
Facsimile No.: (978) 683-1630
Attn: Pierre A. Narath, President
in each case with a copy to: Devine, Millimet and Branch, P.A.
12 Essex Street
Andover, MA 01810
Facsimile No.: (978) 470-0618
Attn: Mark E. Tully, Esq.
and in each case with a copy to: Arthur J. McCabe and Associates, P.C.
300 Brickstone Square
Andover, MA 01810
Facsimile No.: (978) 470-3474
Attn: Matthew A. Kraunelis, Esq.
If to Seller, to: Phoenix Technologies Ltd.
411 E. Plumeria Drive
San Jose, CA 95134
Facsimile No.: (408) 570-1238
Attn: Stuart Nichols
in each case with a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Facsimile No.: (650) 493-6811
Attn: Herbert Fockler, Esq.
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 10.1, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section 10.1, be deemed given upon receipt, and (iii) if
delivered by mail in the manner described above to the address as provided in
this Section 10.1, be deemed given upon receipt (in each case regardless of
whether such notice, request or other communication is received by any other
person to whom a copy of such notice, request or
-13-
<PAGE>
other communication is to be delivered pursuant to this Section 10.1). Any party
from time to time may change its address, facsimile number or other information
for the purpose of notices to that party by giving notice specifying such change
to the other party hereto.
10.2 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions
----------------
and agreements between the parties with respect to the subject matter hereof and
thereof, and contain the sole and entire agreement between the parties hereto
with respect to the subject matter hereof and thereof.
10.3 EXPENSES. Whether or not the transactions contemplated hereby are
--------
consummated, Purchaser and Founders will pay their own costs and expenses, and
Seller will pay its costs and expenses, incurred in connection with the
negotiation, execution and closing of this Agreement and the transactions
contemplated hereby.
10.4 PUBLIC ANNOUNCEMENTS. At no time shall the parties or any of its
--------------------
respective Affiliates or Representatives issue or make any report, statement or
release to the public or generally to its customers or suppliers with respect to
this Agreement, or the transactions contemplated hereby without the consent of
the other parties, which consent shall not be unreasonably withheld. If any
party is unable to obtain the approval of its public report, statement or
release from the other parties and such report, statement or release is, in the
opinion of legal counsel to such party, required by law in order to discharge
such party's disclosure obligations, then such party may make or issue the
legally required report, statement or release and promptly furnish the other
party with a copy thereof.
10.5 CONFIDENTIALITY. Each party hereto will hold, and will cause its
---------------
Affiliates and, in the case of Purchaser, any person who has provided or who is
considering providing financing to Purchaser to finance all or any portion of
the Purchase Price, and their respective Representatives, to hold in strict
confidence from any person (other than any such Affiliate, person who has
provided, or who is considering providing, financing or Representatives
thereof), unless (i) compelled to disclose by judicial or administrative process
(including without limitation in connection with obtaining the necessary
approvals of this Agreement and the transactions contemplated hereby of
Governmental Entities) or by other requirements of law or (ii) disclosed in any
action or proceeding brought by a party hereto in pursuit of its rights or in
the exercise of its remedies hereunder, all documents and information concerning
the other party or any of its Affiliates furnished to it by the other party or
such other party's Representatives in connection with this Agreement or the
transactions contemplated hereby, except to the extent that such documents or
information can be shown to have been (a) previously known by the party
receiving such documents or information, (b) in the public domain (either prior
to or after the furnishing of such documents or information hereunder) through
no fault of such receiving party, or (c) later acquired by the receiving party
from another source if the receiving party is not aware that such source is
under an obligation to another party hereto to keep such documents and
information confidential; provided that following the Closing the foregoing
restrictions will not apply to Purchaser's use of documents and information
concerning the Seller furnished by Seller hereunder. In the event the
transactions contemplated hereby are not consummated, upon the request of the
other party, each party hereto will, and will cause its Affiliates, any person
who has provided, or who is providing, financing to such party and their
respective Representatives to, promptly (and in no event later than three (3)
business days after such request) redeliver or cause to be redelivered all
copies of confidential documents and information furnished by
-14-
<PAGE>
the other party in connection with this Agreement or the transactions
contemplated hereby and destroy or cause to be destroyed all notes, memoranda,
summaries, analyses, compilations and other writings related thereto or based
thereon prepared by the party furnished such documents and information or its
Representatives.
10.6 ARBITRATION. If the Seller or its Affiliates on one hand or
-----------
Purchaser on the other hand delivers to such other party a notice, in accordance
with Section 10.1 hereof, of any dispute arising with respect to this Agreement,
then the parties shall use their best efforts to resolve such dispute. In the
event the parties are unable to resolve such dispute within twenty (20) calendar
days from receipt of such written notice, then any party may demand, by written
notice to the other parties, that such issue shall be settled by binding
arbitration to be held in Boston, Massachusetts; provided, however, that the
arbitrators may call and conduct hearings and meetings at such other places as
the parties may agree (an "Arbitration Demand"). All such claims or disputes,
including disputes relating to the breach, interpretation, termination or
validity of this Agreement, shall be finally settled by arbitration under the
Rules of the American Arbitration Association, as in force on the date of this
Agreement, by one arbitrator appointed in accordance with said Rules. The Seller
on the one hand and the Purchaser on the other hand shall each designate one (1)
individual within fifteen (15) calendar days after the delivery of the
Arbitration Demand. Such designated individual's shall mutually agree upon and
shall designate a third individual who shall who shall arbitrate the dispute
(the "Arbitrator"). The Arbitrator shall have no power to add to, subtract from
or modify any of the terms or conditions of this Agreement, nor to award
punitive damages. The parties waive any rights they may have under the laws of
any jurisdiction to apply to the courts of any such jurisdiction for relief from
the provisions of this Section or from any decision of the Arbitrator absent
fraud. The parties further waive any rights they may have under the laws of any
jurisdiction to contest the enforcement of any arbitral award made under this
Section. The final decision of the Arbitrator shall be furnished to the parties
in writing and shall constitute a conclusive determination of the issue in
question, binding upon all parties and shall not be contested by any of them
absent fraud. Each party shall bear its own fees (including its designated
arbitrator's fees and attorney's fees) and other expenses associated with the
arbitration. The non-prevailing party shall bear all other costs associated with
such arbitration, except that the parties shall each pay fifty percent of the
fees of the Arbitrator.
10.7 FURTHER ASSURANCES; POST-CLOSING COOPERATION.
--------------------------------------------
(a) Subject to the terms and conditions of this Agreement, at any
time or from time to time after the Closing, each of the parties hereto shall
execute and deliver such other documents and instruments, provide such materials
and information and take such other actions as may reasonably be necessary to
fulfill its obligations under this Agreement.
(b) Following the Closing, each party will afford the other party,
its counsel and its accountants, during normal business hours, reasonable access
to the books, records and other data relating to the Seller in its possession
with respect to periods prior to the Closing and the right to make copies and
extracts therefrom, to the extent that such access may be reasonably required by
the requesting party in connection with (i) the preparation of tax returns and
financial statements, (ii) the determination or enforcement of rights and
obligations under this Agreement, (iii) compliance with the requirements of any
Governmental Entity, or (iv) in connection with any actual or threatened
-15-
<PAGE>
action or proceeding. Further, each party agrees for a period extending six (6)
years after the Closing Date not to destroy or otherwise dispose of any such
books, records and other data unless such party shall first offer in writing to
surrender such books, records and other data to the other party and such other
party shall not agree in writing to take possession thereof during the ten (10)
day period after such offer is made.
(c) If, in order properly to prepare its tax returns, other documents
or reports required to be filed with Governmental Entities or its financial
statements or to fulfill its obligations hereunder, it is necessary that a party
be furnished with additional information, documents or records relating to the
business or condition of the Seller not referred to in paragraph (b) above, and
such information, documents or records are in the possession or control of the
other party, such other party agrees to use its best efforts to furnish or make
available such information, documents or records (or copies thereof) at the
recipient's request, cost and expense. Any information obtained by Seller in
accordance with this paragraph shall be held confidential by Seller in
accordance with Section 10.5.
(d) Notwithstanding anything to the contrary contained in this
Section, if the parties are in an adversarial relationship in litigation or
arbitration, the furnishing of information, documents or records in accordance
with any provision of this section shall be subject to applicable rules relating
to discovery.
10.8 WAIVER. Any term or condition of this Agreement may be waived at
------
any time by the party that is entitled to the benefit thereof, but no such
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party against whom such waiver is asserted. No waiver by
any party of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or any
other term or condition of this Agreement on any future occasion. All remedies,
either under this Agreement or by law or otherwise afforded, shall be cumulative
and not alternative.
10.9 AMENDMENT. This Agreement may be amended, supplemented or modified
---------
only by a written instrument duly executed by or on behalf of each party hereto.
10.10 NO THIRD PARTY BENEFICIARY. The terms and provisions of this
--------------------------
Agreement are intended solely for the benefit of each party hereto and their
respective successors or permitted assigns, and it is not the intention of the
parties to confer third-party beneficiary rights upon any other person.
10.11 NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement nor any
-----------------------------
right, interest or obligation hereunder may be assigned by any party hereto
without the prior written consent of the other parties hereto and any attempt to
do so will be void. Subject to the preceding sentence, this Agreement is binding
upon, inures to the benefit of and is enforceable by the parties hereto and
their respective successors and assigns.
10.12 INVALID PROVISIONS. If any provision of this Agreement is held to
------------------
be illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto
-16-
<PAGE>
under this Agreement will not be materially affected thereby, (a) such provision
will be fully severable, (b) this Agreement will be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
hereof, (c) the remaining provisions of this Agreement will remain in full force
and effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom, and (d) in lieu of such illegal, invalid
or unenforceable provision, there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in economic and
legal effect to such illegal, invalid or unenforceable provision as may be
possible.
10.13 GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to a contract
executed and performed in such state, without giving effect to the conflicts of
laws principles thereof.
10.14 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
10.15 CONSTRUCTION. The parties hereby acknowledge and agree that the
------------
drafting of this Agreement has been a collaborative effort and that no party
shall be deemed to be the sole or primary drafter. Any rule or provision of law
which provides that a contract or agreement is to be construed against the
author of the contract or agreement shall not apply to this Agreement, or the
documents attached hereto as or schedules hereto.
-17-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first written
above.
UNICORE SOFTWARE INC.
By:_________________________________________
PHOENIX TECHNOLOGIES LTD.
By:_________________________________________
AWARD SOFTWARE INTERNATIONAL INC.
By:_________________________________________
UNICORE ACQUISITION CORP.
By:_________________________________________
"FOUNDERS"
____________________________________________
Pierre A. Narath
____________________________________________
Jason K. Raza
<PAGE>
ASSET PURCHASE AGREEMENT
Exhibit A
Tangible Assets
<TABLE>
<CAPTION>
<S> <C>
Cash $ 82,302.44
Accounts receivable 556,260.95
Prepaid expenses - Comdex 20,000.00
Prepaid expenses - Other 5,925.50
Furniture and fixtures 10,827.21
Machinery and equipment 96,648.78
Accumulated depreciation (41,668.80)
Tenant improvements 26,896.60
Accumulated amortization (3,116.78)
Prepaid expenses - Travel 9,563.73
-----------
Total assets $763,639.63
===========
</TABLE>
<PAGE>
ASSET PURCHASE AGREEMENT
Exhibit B
Intangible Assets
Hardware and software designs
Includes all existing versions of hardware designs, jigs, etc. and software
in source and object code, and descriptive, operating, test or other types of
documentation (including programming and design notes, flowcharts, and design
files) and memorialized know-how, trade secrets and invention disclosures
related to the following:
1. All existing Enhancements (as defined in the Software License Agreement
executed concurrently with the Asset Purchase Agreement) of Award BIOS and
Mr. BIOS software products, developed by Purchaser solely for End User (as
defined in the Software License Agreement executed concurrently with the
Asset Purchase Agreement) upgrades and support; and specifically excluding
all versions of the Award BIOS and Mr. BIOS products themselves, and
upgrades, enhancements, revisions, modifications and derivative works based
on or related to the Award BIOS and Mr. BIOS not specifically developed for
End Users.
2. Millennium/Pro
3. PC Diag
4. POSTcard
5. POSTcard mini
6. POSTcard V3
7. POSTcard PCI
8. QUICK DISK
9. WINDIAG
Trademarks
(a) Common Law Trademarks
1. *Millennium/Pro
*see also Trademark Application filed
(b) Registered Trademarks
1. POSTcard Reg. No. 1,540,284, issued 05/23/89
POSTcard mini }
POSTcard V3 }variations of POSTcard
POSTcard PCI }
2. Unicore Reg. No. 1,995,588, issued 08/20/96
Variations of Unicore Unicore Software Inc.
3. WINDIAG Reg. No. 2, 056,780; issued 04/29/97
<PAGE>
4. PC Diag Reg. No. 1, 901,577; issued 06/27/95
(c) Applications for Registration
1. QUICK DISK Trademark Application No. 75/022,003, filed 11/20/95
2. Millenium/Pro Trademark Application No. 75/474,612, filed 04/27/98
<PAGE>
ASSET PURCHASE AGREEMENT
Exhibit C
Excluded Assets
Software
Including all versions of source and object code and descriptive,
operating, test or other types of documentation (including programming and
design notes, flowcharts and design files) and memorialized know-how, trade
secrets and invention disclosures related to the following:
1. Mr. BIOS
2. Award BIOS
All software, in source and object code formats, as well as all descriptive,
operating, test or other types of documentation (including programming and
design notes, flowcharts and design files) and memorialized know-how, trade
secrets and invention disclosures that were developed by Award Software
International, Inc. prior to its acquisition of Unicore Software, Inc.,
including those related to End User support and upgrades.
Trademarks
(a) Common Law Trademarks
1. Mr. BIOS
2. Microid Research
3. Award BIOS
(b) Registered Trademarks
1. Mr. Chips Reg. No. 1,931,921, issued 10/31/95
Patents Issued
1. Title: "Method and Apparatus for Determining Time Related Operating
Parameters For Computers", Serial No. 08/217,955, Patent No. 5,572,716 ;
filed 03/25/94 ; issued 11/05/96
<PAGE>
Contracts
1. For all executed license agreements, and all pending license agreements for
Award BIOS and Mr. BIOS software, after September 30, 1998 ("Customer
Agreements"), Phoenix shall be entitled to all royalties or other fees payable
by licensees under the Customer Agreements. Purchaser shall remain responsible
and liable for the NRE or other services or performance required under the
Customer Agreements. The terms of the audit provision of Section 9.4 of the
Software License Agreement, executed concurrently with the attached Asset
Purchase Agreement, and Phoenix's right to conduct an audit pursuant to Section
9.4, shall apply to all royalties and fees due Phoenix under Customer
Agreements.
<PAGE>
ASSET PURCHASE AGREEMENT
Exhibit D
Liabilities
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $ 16,904.66
Accrued credit card expense 2,751.75
Accrued commissions 46,330.47
Accrued payroll 29,134.91
Deferred revenue 4,504.85
Employee Stock Purchase Plan 23,074.37
Other accrued liabilities 5,367.33
-----------
Total liabilities $128,068.34
===========
</TABLE>
<PAGE>
ASSET PURCHASE AGREEMENT
Exhibit E
Excluded Liabilities
1. 1997 consolidated tax returns (federal and state) as filed by
PriceWaterhouseCoopers on 9/15/98.
2. Short filing of consolidated tax returns for January 1, 1998 to September
25, 1998 as filed by Phoenix Technologies Ltd.
3. Follow-up filing of consolidated tax returns for the period of September 26,
1998 to September 30, 1998, to be filed by Phoenix Technologies Ltd.
<PAGE>
ASSUMPTION OF LIABILITIES
-------------------------
WHEREAS, Unicore Acquisition Corp., a Massachusetts corporation
("Purchaser"), the shareholders of Purchaser, Unicore Software, Inc., a Delaware
corporation ("Seller") and Phoenix Technologies Ltd. are parties to that certain
Asset Purchase Agreement dated November 6, 1998 (the "Purchase Agreement")
providing, on the terms and conditions set forth in the Purchase Agreement, for
the assignment of certain contracts by Seller to Purchaser, and the assumption
by Purchaser of certain liabilities of Seller; and
WHEREAS, all capitalized terms not herein defined shall have the meanings
ascribed to them in the Purchase Agreement;
NOW, THEREFORE, for and in consideration of the assignment of the contracts
hereinafter described by Seller, and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, it is hereby agreed
as follows:
1. Assumed Liabilities. Purchaser hereby assumes and agrees to discharge and
-------------------
perform when lawfully due all of the liabilities, commitments, and other
obligations of Seller except those liabilities specifically retained by
Seller set forth in Exhibit E to the Purchase Agreement (the "Excluded
Liabilities").
2. Excluded Liabilities. It is the mutual intent of Seller and Purchaser that
--------------------
the Assumption of Liabilities described in Section 1 hereinabove shall not
apply to and Purchaser does not assume and does not agree to pay, discharge,
or perform the Excluded Liabilities.
3. Binding Effect. This Assumption of Liabilities, in each and every respect,
--------------
shall be binding upon and inure to the benefit of Seller and Purchaser and
their respective successors and assigns.
4. Contest of Claims. Notwithstanding the foregoing, nothing herein contained
-----------------
shall be considered to prejudice the right of Purchaser to contest any claim
with respect to any obligation or liability of Seller herein assumed by
Purchaser, and Purchaser shall have any rights which Seller may have or did
have to defend or contest any such claim.
IN WITNESS WHEREOF, the undersigned corporation has caused this instrument
to be signed on its behalf by its duly authorized officer on this 6th day of
November, 1998.
UNICORE ACQUISITION CORP.
By:
--------------------------------
Pierre A. Narath, President
<PAGE>
COLLATERAL PLEDGE AGREEMENT
AGREEMENT made this 5 day of March, 1999, by and among TouchStone Software
Corporation, a Delaware corporation with a principal place of business at 2124
Main Street, Huntington Beach, California 92648 (the "Debtor"), Lawrence Savings
Bank, a Massachusetts savings bank with a principal place of business at 30
Massachusetts Avenue, North Andover, Massachusetts 01845 (the "Secured Party")
and Unicore Software, Inc., formerly known as Unicore Acquisition Corp., a
Massachusetts corporation with a principal place of business at 1538 Turnpike
Street, North Andover, Massachusetts 01845 (the "Borrower").
WHEREAS, the Borrower and the Secured Party are parties to those documents
listed on Exhibit A hereto (collectively, the "Loan Documents");
WHEREAS, pursuant to an Agreement and Plan of Acquisition dated March 5,
1999, the Borrower will be merged (the "Merger") with and into a wholly-owned
subsidiary of the Debtor (the "Merger Sub"), with the Merger Sub as the
surviving corporation;
WHEREAS, the Merger and the consummation of the transactions contemplated
thereby require the consent of the Secured Party pursuant to the terms of the
Loan Documents and the Debtor has requested the written consent of the Secured
Party to the Merger, which consent the Secured Party has agreed to give and
which consent is evidenced by that certain Consent dated March 5, 1999 by the
Secured Party in favor of the Borrower (the "Consent Agreement"); and
WHEREAS, pursuant to the Consent Agreement, the Secured Party has agreed to
the substitution of certain Collateral and the Debtor has agreed to replace
certain collateral with respect to the Loan Documents in the form of a
Certificate of Deposit in the amount of $710,000.00.
NOW, THEREFORE, in consideration of the consent to the Merger by the Secured
Party, the receipt and sufficiency of which is hereby acknowledged, the Debtor
agrees as follows.
1. Security Interest and Collateral. To secure the payment and performance
of each and every debt, liability and obligation of every type and description
which the Borrower may now or at any time hereafter owe to the Secured Party
(whether such debt, liability or obligation now exists or is hereafter created
or incurred, and whether it is or may be direct or indirect, due or to become
due, absolute or contingent, primary or secondary, liquidated or unliquidated,
or joint, several or joint and several; all such debts, liabilities and
obligations being herein collectively referred to as the "Obligations"), the
Debtor hereby grants the Secured Party a continuing security interest (herein
called the "Security Interest")in all property of any kind now or at any time
hereafter owned by the Debtor, or in which the Debtor may now or hereafter have
an interest, which may now be or may at any time hereafter (i) come into the
possession or control of the Secured Party or into the possession or control of
the Secured Party's agents or correspondents, whether such possession or control
is given for collateral purposes or for safekeeping; or (ii) be transferred or
assigned to the Secured Party by any means permitted under Article 8 of the
Uniform Commercial Code; together with all rights in connection with such
property (herein called the "Collateral"). Collateral includes, but is not
limited to, those items listed on Schedule "A" attached hereto.
2. Representations, Warranties and Covenants. The Debtor represents,
warrants and covenants that:
(a) The Debtor will duly endorse, in blank, each and every instrument
constituting Collateral by signing on said instrument or by signing a separate
document of assignment or transfer, if required by the Secured Party.
(b) The Debtor is the sole legal and equitable owner of the Collateral free
and clear of all liens, encumbrances, pledges, security interests and
restrictions of every kind and nature, except the Security Interest and any
restrictive legend appearing on any instrument constituting Collateral.
<PAGE>
(c) The Debtor will keep the Collateral free and clear of all liens,
encumbrances, pledges and security interests, except the Security Interest.
(d) The Debtor will pay, when due, all taxes and other governmental charges
levied or assessed upon or against any Collateral.
(e) At any time, upon request by the Secured Party, the Debtor will deliver
to the Secured Party all notices, financial statements, reports or other
communications received by the Debtor as an owner or holder of the Collateral.
(f) The Debtor shall, at all times, maintain Collateral hereunder with a
market value of not less than $710,000.00.
(g) The Debtor will pay all legal fees incurred by the Secured Party
relating to this transaction.
(h) The Debtor has full corporate power and authority to execute this
Agreement.
(i) Except as required under this Agreement, the Debtor will not pledge,
endorse or transfer the Collateral.
(j) The Security Interest is a valid first lien position, superior to all
others, and has been duly authorized by all necessary corporate action.
3. Rights of the Secured Party. The Debtor agrees that the Secured Party
may at any time, after the occurrence of an Event of Default hereunder and upon
giving notice to the Debtor, (i) notify the obligor on or issuer of any
Collateral to make payment to the Secured Party of any amounts due or
distributable thereon; (ii) in the Debtor's name or the Secured Party's name
enforce collection of any Collateral by suit or otherwise, or surrender, release
or exchange all or any part of it, or compromise, extend or renew for any period
any obligation evidenced by the Collateral; (iii) receive all proceeds of the
Collateral; and (iv) hold any increase or profits received from the Collateral
as additional security for the Obligations, except that any money received from
the Collateral shall, at the Secured Party's option, be applied in reduction of
the Obligations, in such order of application as the Secured Party may
determine, or be remitted to the Debtor.
4. Events of Default. Each of the following occurrences shall constitute an
event of default under this Agreement (herein called "Event of Default"): (i)
the Borrower or the Debtor shall fail to pay any or all of the Obligations when
due or (if payable on demand) on demand, or the Debtor shall fail to observe or
perform any covenant or agreement herein binding on it; (ii) any representation
or warranty by the Debtor set forth in this Agreement or made by the Borrower to
the Secured Party in any financial statements or reports submitted to the
Secured Party by or on behalf of the Borrower shall prove materially false or
misleading; (iii) an Event of Default pursuant to the Loan Documents, or any
related transaction documents; (iv) the filing of a petition in Bankruptcy by or
against the Debtor or the execution of an Assignment for the Benefit of
Creditors by the Debtor.
5. Remedies upon Event of Default. Upon the occurrence of an Event of
Default and at any time thereafter, the Secured Party may exercise any one or
more of the following rights or remedies: (i) declare all unmatured Obligations
to be immediately due and payable, and the same shall thereupon be immediately
due and payable, without presentment or other notice or demand; (ii) exercise
all voting and other rights as a holder of the Collateral; (iii) exercise and
enforce any or all rights and remedies available upon default to a secured party
under the Uniform Commercial Code as in effect from time to time in the
Commonwealth of Massachusetts, and if notice to the Debtor of any intended
disposition of the Collateral or any other intended action is required by law in
a particular instance, such notice shall be deemed commercially reasonable if
given at least five (5) calendar days prior to the date of intended disposition
or other action; (iv) exercise or enforce any or all other rights or remedies
available to the Secured Party by law or agreement against the Collateral,
against the Debtor or against any other person or property (v) set
<PAGE>
off the Collateral against the Obligations.
6. Miscellaneous. Any disposition of the Collateral in the manner
provided in Section 5 shall be deemed commercially reasonable. This Agreement
can be waived, modified, amended, terminated or discharged, and the Security
Interest can be released, only explicitly in a writing signed by the Secured
Party. A waiver signed by the Secured Party shall be effective only in the
specific instance and for the specific purpose given. Mere delay or failure to
act shall not preclude the exercise or enforcement of any of the Secured Party's
rights or remedies. All rights and remedies of the Secured Party shall be
cumulative and may be exercised singularly or concurrently, at the Secured
Party's Option, and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement of any
other. All notices to be given hereunder shall be deemed sufficiently given if
delivered or mailed by registered or certified mail, postage prepaid, or by
telecopier to the party at its address or telecopier number, as the case may be,
set forth above or, to the Debtor, at the most recent address or telecopier
number shown on the Secured Party's records. The Secured Party's duty of care
with respect to Collateral in its possession (as imposed by law) shall be deemed
fulfilled if the Secured Party exercises reasonable care in physically
safekeeping such Collateral or, in the case of Collateral in the custody or
possession of a bailee or other third person, exercises reasonable care in the
selection of the bailee or other third person, and the Secured Party need not
otherwise preserve, protect, insure or care for any Collateral. The Secured
Party shall not be obligated to preserve any rights the Debtor may have against
prior parties, to realize on the Collateral at all or in any particular manner
or order, or to apply any cash proceeds of Collateral in any particular order of
application. The Debtor will reimburse the Secured Party for all expenses
(including reasonable attorneys' fees and legal expenses) incurred by the
Secured Party in the protection, defense or enforcement of the Security
Interest, including expenses incurred in any litigation or bankruptcy or
insolvency proceedings. The Secured Party is hereby appointed the attorney-in-
fact of the Debtor for the purpose of carrying out the provisions hereof. In the
Event of Default, the Secured Party shall have the right and power to receive,
endorse and collect all checks made payable to the order of the Debtor
representing any distribution from the Collateral. This Agreement shall be
binding upon and inure to the benefit of the Debtor and the Secured Party and
their respective heirs, representatives, successors and assigns and shall take
effect when signed by the Debtor and delivered to the Secured Party, and the
Debtor waives notice of the Secured Party's acceptance hereof. If any provision
or application of this Agreement is held unlawful or unenforceable in any
respect, such illegality or unenforceability shall not affect other provisions
or applications which can be given effect, and this Agreement shall be construed
as if the unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby. All representations and warranties
contained in this Agreement shall survive the execution, delivery and
performance of this Agreement and the creation and payment of the Obligations.
If this Agreement is signed by more than one person as the Debtor, the term
"Debtor" shall refer to each of them separately and to both or all of them
jointly; all such persons shall be bound both severally and jointly with the
other(s); and the Obligations shall include all debts, liabilities and
obligations owed to the Secured Party by any Debtor solely or by both or several
or all Debtors jointly or jointly and severally, and all property described in
Section 1 shall be included as part Collateral, whether it is owned jointly by
both or all Debtors or is owned in whole or in part by one (or more) of them.
This Agreement shall be governed by the internal laws (other than conflict laws)
of the Commonwealth of Massachusetts and, unless the context otherwise requires,
all terms used herein which are defined in Articles 1 and 9 of the Uniform
Commercial Code, as in effect in the Commonwealth of Massachusetts, shall have
the meanings therein stated. Each party consents to the personal jurisdiction of
the state and federal courts located in the Commonwealth of Massachusetts in
connection with any controversy related to this Agreement, waives any argument
that venue in any such forum is not convenient, and agrees that any litigation
initiated by any of them in connection with this Agreement shall be venued in
either the Superior Court of Essex County, Massachusetts, or the United States
District Court, District of Massachusetts. THE PARTIES WAIVE ANY RIGHT TO TRIAL
BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
Notwithstanding the foregoing, the parties agree that all disputes, claims
and controversies between them, whether arising from this Agreement or
otherwise, including, without limitation, disputes sounding in contract or tort,
shall be resolved in arbitration proceedings in Boston, Massachusetts, in
accordance with the rules of the American Arbitration Association governing
commercial arbitration. Such
<PAGE>
arbitration shall be commenced upon the written request of either party
forwarded to the other in accordance with the notice provisions applicable to
this Agreement and shall be conducted before a panel of three (3) arbitrators,
one chosen by the Debtor, one chosen by the Secured Party and one appointed by
said Association. No act to take or dispose of any Collateral securing this
Agreement shall constitute a waiver of this arbitration agreement or be
prohibited by this arbitration agreement, including, without limitation,
obtaining injunctive relief or a temporary restraining order; invoking a power
of sale under any deed of trust or mortgage; obtaining a writ of attachment or
appointment of a receiver; or exercising any rights relating to personal
property, including taking or disposing of such property with or without
judicial process pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning any Collateral securing this
Agreement, including any claim to rescind, reform, or otherwise modify any
agreement relating to the Collateral securing this Agreement, shall also be
arbitrated, provided however that no arbitrator shall have the right or the
power to enjoin or restrain any act of any party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction.
Nothing in this Agreement shall preclude either party from seeking equitable
relief from a court of competent jurisdiction. The statute of limitations,
estoppel, waiver, laches and similar doctrines which would otherwise be
applicable in an action brought by a party shall be applicable in any
arbitration proceeding and the commencement of an action for these purposes.
Chapter 251 of the Massachusetts General laws, as amended (known as the "Uniform
Arbitration Act for Commercial Disputes") shall apply to the construction,
interpretation and enforcement of this arbitration provision.
Executed as an instrument under seal as of the date first above
written.
TOUCHSTONE SOFTWARE CORPORATION
By:_________________________________
Its:________________________________
LAWRENCE SAVINGS BANK
By:_________________________________
Mary E. McLemore,
Vice President
Schedule "A""
(Collateral Description)
Certificate of Deposit No. 39702335 in the amount of $710,000.00 invested and
deposited herewith with the Secured Party together with any additions to or
substitutions for said Certificate of Deposit and any and all interest earned
thereon and any and all dividends, interest or replacements or reimbursements
thereof, distributions and proceeds of the same.
<PAGE>
CONSENT
This Consent, dated March 5, 1999 (the "Consent"), is executed by Lawrence
Savings Bank ("LSB") in favor of Unicore Software, Inc. a Massachusetts
corporation (the "Company"), Pierre A. Narath and Jason K. Raza (collectively,
the "Sellers"), and TouchStone Software Corporation, a Delaware corporation
("TouchStone").
WHEREAS, the Company, the Sellers and LSB are parties to those documents
listed on Exhibit A hereto (collectively, the "Loan Documents");
---------
WHEREAS, TouchStone and the Sellers are parties to an Agreement and Plan of
Acquisition (the "Acquisition Agreement"), dated March 5, 1999, pursuant to
which the Company will be merged (the "Merger") with and into a subsidiary of
TouchStone (the "Merger Sub"), with the Merger Sub as the surviving corporation;
WHEREAS, the Merger and the consummation of the transactions contemplated
thereby requires the consent of LSB pursuant to the terms of the Loan Documents
and the Company, the Sellers and TouchStone request the written consent of LSB
to the Merger; and
WHEREAS, TouchStone has agreed to replace the Sellers' collateral with
respect to the Loan Documents with substitute collateral in the form of a
Certificate of Deposit in the amount of $710,000.00 (the "Substitute
Collateral"), and the Sellers request that those collateral instruments listed
on Exhibit B (the "Sellers' Collateral Documents") be released by LSB to the
---------
Sellers and/or terminated, as applicable.
NOW, THEREFORE , in consideration of the Substitute Collateral, the
sufficiency of which is hereby acknowledged, LSB hereby agrees as follows:
1. Upon receipt of the Substitute Collateral, LSB consents to the Merger.
2. To the extent that the Merger conflicts with, results in a breach of,
constitutes a default under, results in the acceleration of any amounts due, or
creates in LSB the right to accelerate, terminate, modify or cancel any of the
Loan Documents, LSB waives such conflict, breach or default and waives any right
of acceleration, termination, modification or cancellation in connection with
the Merger upon receipt of the Substitute Collateral.
3. Upon receipt of the Substitute Collateral, LSB agrees to release and/or
terminate, as applicable, the Sellers' Collateral Documents and to execute a
discharge with respect to the Boxford Mortgage (as defined in Exhibit A) and the
---------
Haverhill Mortgage (as defined in Exhibit A).
---------
4. In all other respects, the Loan Documents shall remain in full force
and effect.
Executed as an instrument under seal as of the date first set forth above.
LAWRENCE SAVINGS BANK
By:___________________________________
Name:
Title:
<PAGE>
EXHIBIT A
Loan Documents
--------------
A. Credit Agreements
-----------------
1. Loan Agreement, dated as of November 9, 1998 (the "LSB Loan
Agreement"), between the Company and LSB.
B. Promissory Notes
----------------
1. Term Note, dated November 9, 1998 (the "Term Note"), issued by the
Company to LSB in the original principal amount of $625,000.00.
2. Promissory Note, dated November 9, 1998 (the "LSB Promissory Note"),
issued by the Company to LSB in the original principal amount of $100,000.00.
C. Other Agreements
----------------
1. Year 2000 Compliance Agreement, dated November 9, 1998 (the "Year 2000
Agreement"), between the Company and LSB.
2. Trademark, Patent and Copyright Security Agreement, dated November 9,
1998 (the "Trademark Security Agreement"), between the Company and LSB.
3. Stock Pledge Agreement, dated as of November 9, 1998 (the "LSB Pledge
Agreement"), between Pierre A. Narath and Jason K. Raza, on the one hand, and
LSB, on the other hand.
4. Commercial Security Agreement, dated November 9, 1998 (the "LSB
Security Agreement").
5. Guaranty, dated November 9, 1998 (the "Pierre Narath Guaranty"), of
Pierre A. Narath in favor of LSB.
6. Guaranty, dated November 9, 1998 (the "Jason Raza Guaranty"), of Jason
Raza in favor of LSB.
7. Guaranty, dated November 9, 1998 (the "Rosemarie Narath Guaranty"), of
Rosemarie Narath in favor of LSB.
8. Mortgage and Security Agreement of Pierre A. Narath and Rosemarie
Narath in favor of LSB, dated November 9, 1998 regarding land situated in
Boxford, Massachusetts (the "Boxford Mortgage").
<PAGE>
9. Mortgage and Security Agreement of Pierre A. Narath and Rosemarie
Narath in favor of LSB, dated November 9, 1998 regarding land situated in
Haverhill, Massachusetts (the "Haverhill Mortgage").
10. Assignment of Leases and Rents of Pierre A. Narath in favor of LSB,
dated November 9, 1998 (the "Assignment of Leases").
11. Assignment of Life Insurance Policy of Pierre A. Narath in favor of
LSB, dated November 9, 1998 (the "Life Insurance Assignment").
<PAGE>
EXHIBIT B
Sellers' Collateral Documents
-----------------------------
1. Unicore Acquisition Corp. Stock Certificate No. 1, representing 80
shares of the Company's common stock issued to Pierre A. Narath.
2. Unicore Acquisition Corp. Stock Certificate No. 2, representing 20
shares of the Company's common stock issued to Jason K. Raza.
3. LSB Pledge Agreement
4. Pierre Narath Guaranty
5. Jason Raza Guaranty
4. Rosemarie Narath Guaranty
5. Boxford Mortgage
6. Haverhill Mortgage
7. Assignment of Leases
8. Life Insurance Assignment
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ****. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
SOFTWARE LICENSE AGREEMENT
BETWEEN
PHOENIX TECHNOLOGIES LTD.
AND
UNICORE ACQUISITION CORP.
This Software License Agreement ("Agreement") is by and between Phoenix
Technologies Ltd., a Delaware corporation, having its principal place of
business at 411 East Plumeria Drive, San Jose, CA 95134 ("Phoenix"), through its
subsidiary Award Software International, Inc ("Award") and Unicore Acquisition
Corp., a Massachusetts corporation having its principal place of business at
1538 Turnpike St., N. Andover, MA 01845 ("Licensee"). Award and Licensee are
sometimes hereinafter referred to jointly as "the Parties", or singularly as "a
Party", and this Agreement is by and between Phoenix and Licensee.
WHEREAS, Phoenix and Licensee have entered into an Asset Purchase Agreement
("Purchase Agreement") by which Licensee is purchasing certain assets, and
taking on certain liabilities, as defined in the Purchase Agreement, of Unicore
Software, Inc. ("Unicore") that are currently held by Phoenix as a result of the
merger between Award, the parent company of Unicore, and Phoenix;
WHEREAS, as part of the Purchase Agreement, Phoenix has agreed to license
certain Award software products to Licensee, under the terms and conditions set
forth herein, for the purpose of developing Enhancements, as defined herein, in
support of End Users of Award Software; and
WHEREAS, as part of the Purchase Agreement, Licensee has agreed to grant
back to Award certain licenses to those software products in which title will
be transferred to Licensee as part of the Purchase Agreement, as well as for
those software upgrades developed by Licensee under this Software License
Agreement.
NOW THEREFORE, the Parties agree to grant each other the following
licenses, contingent upon the execution of the Purchase Agreement by the
Parties, and performance of all obligations by the Parties under the Purchase
Agreement, including the payment by Licensee to Phoenix of the Purchase Price
referenced therein, and subject to the terms and conditions set forth herein.
1.0 DEFINITIONS
1.1 "Defect" will mean any mistake, problem, or error which is capable of: (a)
reproduction by Phoenix, with respect to the Award Software; or (b) reproduction
by Unicore with respect to the Unicore Software, and which causes: (i) an
incorrect functioning or non-functioning of the Award or Unicore Software, or
(ii) renders the Award or Unicore Software inoperable, or (iii) causes the Award
or Unicore Software to fail to meet the Specifications thereof.
1.2 "Derivative Work" means computer software, which is a Modification that is
based on, or incorporating material from, an Enhancement or the Unicore
Software, so that the Modification, as a whole, represents an original work of
authorship.
1.3 "Enhancement" means any standard revision, Defect correction, Upgrade,
update or maintenance release of Award Software, developed by Licensee,
including requests by End Users for additional functionality or feature sets to
the Award Software.
1.4 "Upgrade" means any change in the Award Software to accommodate new and/or
additional peripheral devices
1.5 "Modification" means a revision, augmentation, abridgment, upgrade,
addition, adaptation, or other modification to an Enhancement or Unicore
Software.
1.6 "End User(s)" mean the end users of a PC that incorporates the Award
Software, or utilizes the Award Software as a replacement BIOS.
1.7 "Award Software" means the Award BIOS and Mr. BIOS software products
licensed hereunder, in Source Code format, and delivered to Licensee, and all
Award patent, copyright, trade secret and other intellectual property rights
embodied therein, including all revisions and Updates as provided in the SCAP
Appendix 2 attached hereto, and incorporated herein.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
1.8 "Unicore Software" means the Postcard/TM/, PC Diag/TM/, Quick Disk/TM/, and
Millenium/Pro/TM/ hardware products, and their associated software products in
Source Code format, and all enhancements, upgrades, revisions, corrections and
modifications thereto developed by or for Licensee for a period of one (1) year
from execution of this Agreement; as well as all patent, copyright, trade secret
and other intellectual property rights embodied therein, the title to which will
be transferred to Licensee under the Purchase Agreement.
1.9 "Source Code" means software which is coded in human readable form, and
related system level documentation, including comments and procedural code.
1.11 "Specifications" mean the descriptions, and the functional and operational
performance specified in the documentation for the Award or Unicore Software and
Enhancements licensed hereunder.
2.0 GRANT OF LICENSE.
2.1 To Licensee: For the Initial Term of this Agreement, and all Extensions to
the Initial Term pursuant to Section 11.1, Phoenix grants to Licensee, a
personal, non-transferable, ***** (except as provided in Section 12.5), royalty
bearing license to: (i) use the Award Software to develop new Enhancements, and
to use existing Enhancements previously developed by Licensee, solely for the
purpose of supporting End Users, and for no other purpose; (ii) to license
Enhancements and existing Enhancements to *****; *****; and (iii) to license,
pursuant to Section 2.1.1, the existing Enhancements and new Enhancements to End
Users, and for no other purpose. Licensee understands and agrees that the nature
and intent of the licenses granted hereunder is restricted to End Users, and is
not to be interpreted or construed to include *****. Licensee agrees that in any
agreement that Licensee enters with End Users for Enhancements that Licensee
will ensure that: (a) the End User(s) receive the Enhancement in an object code
format only; (b) the End User agrees that the Enhancements will be subject to
terms and conditions that protect the intellectual property content of the
Enhancement from unauthorized use or disclosure, including reverse engineering
of the Enhancement to determine its operation; and (c) that any agreement
between Licensee and End Users for the supply of Enhancements specifically holds
Phoenix and Award harmless from any liability resulting from the End User(s) use
of said Enhancements. Licensee agrees it will hold Phoenix and Award harmless
from any liability resulting from the use of said Enhancements by said End Users
or third parties; provided, however, that the Enhancements as developed by
Licensee, and not the unmodified Award Software, as licensed hereunder for use
by Licensee, are the basis for such liability. Unless specifically authorized by
Phoenix in writing, each copy of Award Software is provided for use on a single
central processing unit. Licensee will embed the copyright notices included with
the Award Software on any Enhancement so that such notice is displayed on the
post screen or sign-on message of the End User when possible. Licensee will not
alter or remove, nor permit any third party to alter or remove, such copyright
notices.
2.1.1 Licensee shall have an exclusive appointment to distribute Enhancements,
pursuant to Section 2.1(ii) and 2.1(iii) above, for *****, provided that the
Enhancements meet all material aspects of the Specifications, and Phoenix's
quality standards, as set forth in Appendix A, attached hereto and made part of
this Software License Agreement. If Licensee's Enhancements fail to meet all
material aspects of the Specifications, or the standards set forth in Appendix
A, Phoenix shall notify Licensee of the failure, wherein Licensee shall use its
best efforts to provide a cure. If Licensee fails to provide a cure for the
failure, to Phoenix's reasonable satisfaction within ninety (90) days, Phoenix
shall have the option, in its sole discretion, to: (i) to appoint an alternate
primary source for *****; or (ii) terminate the licenses granted hereunder to
the Award Software. Licensee agrees that the quality standards set forth in
Appendix A include satisfactory customer service to End Users, and that an
unreasonable number of valid complaints will be deemed a failure to meet
Phoenix's quality standards. Licensee further understands that third parties
licensed to use the Award Software may appoint individuals in North America to
distribute enhancements and upgrades to End Users, and that Phoenix has no
control over such appointments.
2.1.2 Licensee may only have and use the Award Software at Licensee's business
location described above. Licensee acknowledges that Award Software presently
resides at Licensee's business location described above, and that there is no
delivery obligation by Award or Phoenix under this Software License Agreement.
Licensee may relocate the Award Software to a different location upon written
notice to Phoenix identifying the new location.
2.1.3 Licensee will not sell, transfer, license, distribute, disclose or
sublicense the Award Software, or Enhancements thereto, except to the extent
authorized under this Software License Agreement. Except as provided herein, no
other license, express or implied, by estoppel or otherwise, to any other
intellectual property rights is granted herein, and no other rights to the Award
Software are granted hereunder except as specifically set forth in this Software
License Agreement.
2.1.4 Licensee shall not alter or remove, or permit any third parties to alter
or remove, Phoenix, Award and their suppliers' copyright notice from the Award
Software or Enhancement thereto. Licensee will include, in all Enhancements,
Phoenix and its suppliers' copyright notice embedded in the code and displayed
in the Source Code to the Enhancement.
2.1.5 Licensee may not authorize other parties to copy, reproduce, or otherwise
use the Award Software or Enhancements thereto, other than on behalf of Licensee
as permitted in Section 2.1.7, or to disassemble or reverse engineer the Award
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Software and any Enhancements thereto, without the prior written consent of
Phoenix, such consent shall not be unreasonably withheld. Licensee has no right
to sublicense its rights under Section 2.1 to third parties.
2.1.6 If Licensee is required to use Award Software labels in its supply of
Enhancements to End Users, Licensee (a) will promptly and securely affix an
applicable Award Software label for each copy of the Enhancement on the
integrated circuit or other medium containing the End User's Award Software; and
(b) will not use, reproduce, sublicense, distribute, transfer or ship any copy
of an Enhancement without first having complied with the provisions of this
Section 2.1.6. If Phoenix is required to use Unicore Software labels in its
licensing of Unicore Software, Phoenix: (a) will promptly and securely affix an
applicable Unicore Software label for each copy of the Unicore Software; and (b)
will not use, reproduce, sublicense, distribute, transfer or ship any copy of
Unicore Software without first having complied with the provisions of this
Section 2.1.6. Licensee currently prints its own Award Software labels, and
will continue to print Award Software labels for the purposes of this Section
2.1.6, adhering to the printing guidelines that have been established by Award
for such labels. Award currently prints its own Unicore Software labels, and
will continue to print Unicore Software labels for the purposes of this Section
2.1.6, adhering to the printing guidelines that have been established for such
labels.
2.1.7 Licensee may use the Award Software solely for the purposes of
understanding the Award Software, making Enhancements thereto, and creating
assembled and compiled object code versions of such Enhancements to support End
Users, and distribute said Enhancements in retail market channels, pursuant to
the terms and conditions of this Agreement. Licensee will use the Award Software
only at the site(s) designated in this Software License Agreement, or in another
written document signed by Phoenix. Licensee may disclose the Award Software and
Enhancements thereto only to those employees who (i) need to know and access
same to accomplish the purposes set forth in this Section 2.1; and (ii) who have
signed an agreement with Licensee obligating them (a) not to disclose any of the
Award Software or Enhancement except to Licensee's employees who have a similar
need to know and who have signed similar agreements and (b) not to use any part
of the Award Software or Enhancement thereto for any other purpose other than
those permitted in this Software License Agreement. The confidentiality
provisions regarding disclosure of the Award Software and any Enhancement will
survive any termination of this Agreement and will continue in effect until such
time as Phoenix may make the Award Software or any Enhancement available to the
public without restrictions on disclosure. Licensee acknowledges that the Award
Software and the Enhancements are trade secrets of Phoenix, and Licensee agrees
to maintain the Award Software and Enhancements currently existing, and those
developed under this Software License Agreement, in a secure fashion, exercising
the same degree of care to avoid publication and unauthorized use and disclosure
as Licensee employs with Licensee's own most valuable confidential information,
and take all necessary precautions to protect the Award Software and any
Enhancement from theft and unauthorized disclosure or use. Licensee will always
use at least a reasonable amount of care and protection to ensure the security
of the Award Software and any Enhancements thereto. Licensee will promptly
report any unauthorized disclosure or use, and take all necessary further
actions to remedy any unauthorized disclosure or use for which Licensee or its
agents are responsible, as reasonably requested by Phoenix in order to prevent
or remedy any such violation. Furthermore, Licensee will not sell, transfer,
encumber, license, or sublicense the Award Software disclosed hereunder, or any
Enhancement other than as expressly permitted under this Software License
Agreement.
2.1.8 Licensee has the sole responsibility for supporting Licensee's
Enhancements, and assuring that maintenance releases of such Enhancements have
equivalent functionality and compatibility with Award Software licensed or used
by End Users. Licensee will indemnify and hold Phoenix harmless for any Defects
that arise from Licensee's Enhancements.
2.2 To Phoenix: Licensee grants to Phoenix the following perpetual,
irrevocable, world wide, fully paid nonexclusive licenses: (i) to make, have
made, use, demonstrate, sell, import, export and otherwise distribute or
dispose of the Unicore Software as part of Phoenix's software product offering,
under existing and future Phoenix trademarks, to its customers and potential
customers as Phoenix deems necessary as part of Phoenix's business; (ii) to
prepare Modifications and Derivative Works based on the Unicore Software; and
use, demonstrate, sell, import, export and otherwise distribute or dispose of
said Modification and Derivative Works as part of Phoenix's software product
offering, under existing and future Phoenix trademarks, to its customers and
potential customers, as it deems necessary as part of Phoenix's business. The
licenses granted to Phoenix hereunder include the right to grant sublicensing
rights to the Unicore Software, and Modifications and Derivative Works based
thereon, to Phoenix customers, wherein the scope of such sublicensing rights
shall be within the scope of the licenses granted to Phoenix, but shall not
include the right for customers to grant sublicensing rights unless approval is
provided by Licensee, which shall not be unreasonably withheld.
2.2.1 Phoenix will not sell, transfer, license, distribute or disclose the
Unicore Software except to the extent authorized under this Software License
Agreement. Except as provided herein, no other license, express or implied, by
estoppel or otherwise, to any other intellectual property rights is granted
herein.
2.2.2 Phoenix shall not alter or remove, or permit any third parties to alter
or remove, Licensee's and their suppliers' copyright notice from the Unicore
Software, or Modification or Derivative Works thereof. Phoenix will include, in
all Modifications and Derivative Works, Licensee and its suppliers' copyright
notice embedded in the code and displayed in the Source Code to the
Modifications or Derivative Works, identifying same as the underlying work in
conjunction with Phoenix's own copyright notice for said Modifications or
Derivative Works.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
2.2.3 Phoenix may not authorize other parties to copy, reproduce, or otherwise
use the Unicore Software, or to disassemble or reverse engineer the Unicore
Software, other than on behalf of, or for the benefit of, Phoenix, or as
otherwise authorized under this Software License Agreement, without the prior
written consent of Licensee, which shall not be unreasonably withheld.
2.2.4 Phoenix may disclose the Unicore Software only to those employees ,
contractors and customers (including potential customers) who (i) need to know
and access same to accomplish the purposes set forth in this Section 2.2; and
(ii) who have signed an agreement with Phoenix obligating them (a) not to
disclose any of the Unicore Software, or Modification thereto, except to
Phoenix's employees who have a similar need to know and who have signed similar
agreements and (b) not to use any part of the Unicore Software for any other
purpose other than those permitted in this Software License Agreement. The
confidentiality provisions regarding disclosure of the Unicore Software will
survive any termination of this Agreement. Phoenix agrees to maintain the
Unicore Software in a secure fashion, exercising the same degree of care to
avoid publication and unauthorized use and disclosure as Phoenix employs with
its own most valuable confidential information of a like nature, and take all
necessary precautions to protect the Unicore Software and any Modification from
theft and unauthorized disclosure or use. Phoenix will always use at least a
reasonable amount of care and protection to ensure the security of the Unicore
Software. Phoenix will promptly report any unauthorized disclosure or use and
take any further actions as are reasonably requested by Licensee to prevent or
remedy any such violation.
2.2.5 Licensee will provide to Phoenix, for a period of one (1) year after the
execution of this Agreement, all updates, upgrades enhancements, modifications,
revisions (including the addition of new features and functionality) to the
Unicore Software, that are developed by or for Licensee, upon when such updates,
upgrades enhancements, modifications, revisions (including the addition of new
features and functionality) are first released.
3. OWNERSHIP.
3.1 Award Software, Enhancements and Derivative Works: Title and full
ownership in the Award Software, related documentation, and all copies thereof
will remain with Phoenix and/or its suppliers. Phoenix retains the right,
subject to the exclusive appointment set forth in Section 2.1.1, to use, copy,
modify, sublicense, and distribute the Award Software, and modifications,
derivative works and enhancements (including Enhancements) thereto made by or
for Phoenix. Licensee will do nothing to infringe upon any rights of Phoenix or
others in the Award Software, any other deliverables or documentation. Licensee
hereby acknowledges the ownership by Phoenix or its suppliers of the trademarks,
copyrights, patent rights, trade secrets and other intellectual property rights
for or in the Award Software. Licensee will cooperate with Phoenix, executing
all required documents, to ensure that all title to the Award Software is
perfected and recorded in Phoenix's name in within two (2) weeks of the
Effective Date.
3.1.2 All right, title and interest in and to Enhancements, and any and all
modifications to said Enhancements that are made by or for Licensee will remain
with Licensee. Licensee will provide Phoenix with a copy, in Source Code form,
of any Enhancement or modifications to Enhancements, made by or for Licensee, on
a quarterly basis. Subject to the exclusive appointment and confidentiality
obligations set forth herein, Phoenix shall have the right to make, have made,
use, demonstrate, sell, sublicense, import, export and otherwise distribute or
dispose of the Enhancements, or modifications thereto, in any manner Phoenix
deems appropriate in conducting its business. Any derivative work, as defined
under U.S. Copyright Laws, prepared by or for Licensee that is based on the
Award Software shall be classified as a "Work Made For Hire" and are and will
remain the sole and exclusive property of Phoenix. Licensee agrees that
regardless of whether such derivative works, or any portions thereof are legally
Works Made For Hire, all such derivative works to the Award Software, and any
portions thereof, will be the sole and exclusive property of Phoenix, and
Licensee hereby assigns to Phoenix all rights therein and in all related
intellectual property rights. Licensee hereby waives any and all moral rights,
as defined under the Berne Convention, in such works to the extent permitted by
law. At Phoenix's request and expense, Licensee will assist and cooperate with
Phoenix in all respects and will execute documents reasonably requested by
Phoenix to acquire, transfer, maintain, and perfect such intellectual property
rights. Licensee represents and warrants that: (a) any derivative works and any
and all modifications of the Award Software and Enhancements thereto made by
Licensee are the original work of Licensee; and (b) that any derivative works
and any and all modifications of the Award Software and Enhancements made by
Licensee will not infringe upon any rights of Phoenix or any third party.
3.2 Unicore Software: Upon execution of the Purchase Agreement, and subject to
the compliance of all terms and conditions therein by Licensee, title and full
ownership in Unicore Software will vest to Licensee, and ownership in said
Unicore Software and all copies thereof, will remain with Licensee. Licensee
retains the right to use, copy, modify, sublicense and distribute the Unicore
Software, and modifications and enhancements thereto made by or for Licensee.
Phoenix will take no action that, to the best of its knowledge, would infringe
upon Licensee's rights to the Unicore Software. Phoenix hereby acknowledges the
ownership by Licensee of the intellectual property embodied in the Unicore
Software. Phoenix will cooperate with Licensee in the execution of all required
documents to ensure that title is perfected and recorded in Licensee's name
within two (2) weeks of the Effective Date. Licensee shall supply Phoenix with
all such documents.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
3.2.1 Any and all Modifications, including Derivative Works, to the Unicore
Software made by or for Phoenix will remain the property and responsibility of
Phoenix. Phoenix shall have the right to make, have made, use, demonstrate,
sell, sublicense, import, export and otherwise distribute or dispose of the
Modification or Derivative Works, in any manner Phoenix deems appropriate in
conducting its business. Phoenix will have the right to register copyrights of
its Derivative Works (as a derivative work) and will have the responsibility of
defending them. Any Derivative Work will contain Licensee's copyright notice
embedded in the code and displayed in the Source Code to the Derivative Work.
4. CONFIDENTIALITY.
The Award Software, and Enhancements related thereto, include Phoenix
confidential and proprietary information and will remain the confidential and
proprietary information of Phoenix and/or its third party suppliers; likewise
the Unicore Software, and Modifications and Derivative Works thereof includes
confidential and proprietary information of Licensee and will remain the
confidential and proprietary information of Licensee ("Confidential
Information"). Confidential Information shall also include any and all technical
data, user's manuals, and information supplied by Phoenix to Licensee, and by
Licensee to Phoenix. As used herein a Party receiving Confidential Information
shall be a "Recipient" and a Party disclosing Confidential Information shall be
a "Disclosing Party". Confidential Information communicated verbally by the
Disclosing Party shall be identified as confidential at the time it is first
communicated and shall be described in writing within thirty (30) business days
of disclosure. Recipient of Confidential Information shall use reasonable
efforts to prevent the disclosure of the Confidential Information in any form,
except as identified herein for the purposes of this Agreement. Recipient may
only disclose Confidential Information to its employees whose duties require
such access and who are obligated to maintain the information in confidence.
This obligation of confidentiality with respect to the Recipient of Confidential
Information from a Disclosing Party shall not apply to information which is
shown to be (i) available to the public other than by breach of this Agreement
by Recipient; (ii) rightfully received by Recipient from a third party without
breach of a duty to the Disclosing Party; (iii) independently developed by
Recipient's employees without use of the Confidential Information; or (iv) known
to Recipient prior to first receipt from the Disclosing Party and with no
restriction of confidentiality. Unless otherwise provided for herein, the
Confidential Information will be safeguarded until such time as the Disclosing
Party makes the Confidential Information available to the public without
restrictions on disclosure. Recipients of Confidential Information will use at
least the same degree of care Recipient uses to protect its own most
confidential information but in no event less than reasonable care. Recipient
agrees to not disclose to third parties the existence or terms of this
Agreement, except where obligated by law to do so.
5.0 PHOENIX'S LIMITED WARRANTY AND REMEDIES
5.1 Phoenix warrants that the Award Software, as delivered by Phoenix to
Licensee hereunder will, for a period of three months after delivery of such
Award Software to Licensee, perform in accordance with the Specifications.
5.1.2 During the warranty period, Phoenix will repair Defects in the Award
Software which cause the Award Software to fail to conform to the
Specifications, provided Licensee has given Phoenix written notice of such
Defect.
5.1.3 Upon receiving a Defect notice from Licensee, Phoenix will have five (5)
working days in which to acknowledge whether or not the Defect exists. In the
event that the Defect exists, Phoenix will have twenty (20) working days in
which to correct the Defect.
5.1.4 If Phoenix is unable to correct any Defect after reasonable efforts,
Licensee may either (i) correct the Defect itself; or (ii) have a third party,
acceptable to Phoenix, provide the correction, wherein Phoenix's acceptance
shall not be unreasonably withheld provided the third party is under an
agreement that protects the intellectual and trade secret content of the Award
Software from unauthorized disclosure or use. If Phoenix and Licensee agree
that the Defect substantially reduces the value of the Award Software to
Licensee, Licensee may terminate the license granted by Phoenix for the Award
Software. Licensee's termination of its licenses under the Award Software shall
not affect the licenses granted Phoenix for the Unicore Software, which shall
remain in full force and effect.
5.1.5 THIS SECTION 5 SETS FORTH LICENSEE'S SOLE AND EXCLUSIVE REMEDIES FOR THE
PERFORMANCE OR NONPERFORMANCE OF THE AWARD SOFTWARE AND FOR ANY WARRANTY CLAIM
WITH RESPECT TO THE AWARD SOFTWARES. THE WARRANTY ABOVE WILL BECOME NULL AND
VOID WITH RESPECT TO ANY AWARD SOFTWARE THAT HAS BEEN MODIFIED IN ANY WAY BY
ANYONE OTHER THAN PHOENIX, WHETHER OR NOT SUCH MODIFICATIONS WERE PERMITTED
HEREUNDER.
5.1.6 Disclaimer of All Other Warranties. PHOENIX MAKES NO WARRANTIES, EITHER
EXPRESS OR IMPLIED, WITH RESPECT TO THE AWARD SOFTWARE OTHER THAN THE ONES
EXPRESSLY SET FORTH IN THIS SECTION 5, AND PHOENIX EXPRESSLY DISCLAIMS ANY SUCH
WARRANTIES, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. NO AGENT
OF PHOENIX IS AUTHORIZED TO ALTER OR EXPAND THE WARRANTY OBLIGATIONS OF PHOENIX
AS SET FORTH IN THIS SECTION 5.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
6.0 LICENSEE'S LIMITED WARRANTY AND REMEDIES
6.1 Licensee warrants that the Unicore Software and Enhancement developed by
Licensee will, for a period of three months after delivery to Phoenix, perform
in accordance with the Specifications. For the Millenium/Pro software/firmware
("Millenium Pro"), Licensee further warrants that prior to delivery of the
Millenium Pro, and all Enhancements thereto developed by Licensee, to Award,
that the Millenium Pro and all such Enhancement will be tested for Y2K
compliance, using the compliance test specified by the NTSL on February 15, 1998
for Y2K compliance. If other compliance test updates are issued by the NTSL, and
if the Millenium Pro does not comply with the test updates issued by the NTSL,
Licensee will immediately notify Phoenix of the non-compliance. Licensee will
not deliver ant Millenium Pro product that does not meet the Y2K compliance
criteria. Licensee will fully indemnify and defend Award under Section 8.1 for
any violation of this Y2K compliance warranty.
6.1.2 During the warranty period, Licensee will repair Defects in the Unicore
Software and Enhancement which cause the Unicore Software or any Enhancement to
fail to conform to the Specifications, provided Phoenix has given Licensee
written notice of such Defect.
6.1.3 Upon receiving a Defect notice from Phoenix, Licensee will have five (5)
working days in which to acknowledge whether or not the Defect exists. In the
event that the Defect exists, Licensee will have twenty (20) working days in
which to correct the Defect.
6.1.4 If Licensee is unable to correct any Defect after reasonable efforts,
Phoenix shall have the option to either: (i) correct the Defect itself; or (ii)
have a third party, acceptable to Licensee, provide the correction, wherein
Licensee's acceptance shall not be unreasonably withheld provided the third
party is under an agreement that protects the intellectual and trade secret
content of the Unicore Software from unauthorized disclosure or use. If Phoenix
believes that the Defect substantially reduces the value of the Unicore Software
to Phoenix, Phoenix may terminate the license granted by Licensee for the
Unicore Software. Phoenix's termination of its licenses under the Unicore
Software shall not affect the licenses granted Licensee for the Award Software,
which shall remain in full force and effect.
6.1.5 THIS SECTION 6 SETS FORTH PHOENIX'S SOLE AND EXCLUSIVE REMEDIES FOR THE
PERFORMANCE OR NONPERFORMANCE OF THE UNICORE SOFTWARE AND ANY MODIFICATIONS TO
THE UNICORE SOFTAWRE DEVELOPED BY LICENSEE, AND FOR ANY WARRANTY CLAIM WITH
RESPECT TO THE UNICORE SOFTWARE AND ANY MODIFICATION THERETO DEVELOPED BY
LICENSEE. THE WARRANTY ABOVE WILL BECOME NULL AND VOID WITH RESPECT TO ANY
UNICORE SOFTWARE THAT HAVE BEEN MODIFIED IN ANY WAY BY ANYONE OTHER THAN
PHOENIX, OR LICENSEE OR THIRD PARTIES AUTHORIZED TO PERFORM SUCH MODIFICATIONS,
OR AS PERMITTED HEREUNDER.
6.1.6 Disclaimer of All Other Warranties. LICENSEE MAKES NO WARRANTIES, EITHER
EXPRESS OR IMPLIED, WITH RESPECT TO THE UNICORE SOFTWARE OR ANY DEVELOPED
MODIFICATIONS OTHER THAN THE ONES EXPRESSLY SET FORTH IN THIS SECTION 6, AND
LICENSEE EXPRESSLY DISCLAIMS ANY SUCH WARRANTIES, INCLUDING BUT NOT LIMITED TO
THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT. NO AGENT OF LICENSEE IS AUTHORIZED TO ALTER OR EXPAND THE
WARRANTY OBLIGATIONS OF LICENSEE AS SET FORTH IN THIS SECTION 6.
7. LIMITATION OF LIABILITY. For the purposes of this Agreement, Phoenix shall
not be liable for any property damage, personal injury, loss of profits,
interruption of business or any special, consequential or incidental damages,
however caused, whether for breach of warranty, contract, strict liability or
otherwise. Phoenix disclaims all liability, including liability for
infringement of any intellectual property rights relating to the Award Software
or other Confidential Information provided under this Agreement. Licensee agrees
that Licensee is assuming full responsibility for any and all risks and
liability of any type, whether known or unknown, relating to Licensee's exercise
of the license rights to the Award Software granted to Licensee herein. Phoenix
shall under no circumstances be liable to Licensee, any End User or other third
party, that receives Enhancements or NRE services from Licensee, for damages of
any kind whatsoever arising out of or based upon a claim that the Award
Software, or any modifications thereof, violates any patent, copyright, trade
secret or other intellectual property right of any third party; Licensee shall
defend, indemnify and hold Phoenix harmless from all such allegations and/or
claims pursuant to Section 8 hereunder. Licensee shall under no circumstances
be liable to Phoenix, or other third party, that receives Modifications to the
Unicore Software, or Derivative Works base thereon from Phoenix, for damages of
any kind whatsoever arising out of or based upon a claim that the Modifications
or Derivative Works, as developed by Phoenix, violates any patent, copyright,
trade secret or other intellectual property right of any third party, provided
that the basis for the claim is not cause by the Unicore Software alone. Phoenix
shall defend, indemnify and hold Licensee harmless from all such allegations
and/or claims pursuant to Section 8 hereunder.
8. INDEMNIFICATION
8.1 Indemnification of Phoenix Licensee will at its expense indemnify and
hold harmless Phoenix, and at Phoenix's option defend Phoenix, from any and all
actions, claims, costs, liabilities, losses, and expenses including, but not
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
limited to, reasonable attorneys' fees and cost of suit incurred by Phoenix as a
result of or arising from: (i) Licensee's use, misuse or modification of the
Award Software and use, misuse, sale and distribution of Enhancements thereto to
End Users and authorized third parties; (ii) arising out of or resulting from
Licensee's performance of NRE services, and any product or deliverable resulting
therefrom; and (iii) for Phoenix's use and incorporation of Unicore Software as
part of Phoenix's commercial software product line, including allegations,
claims, disputes or proceedings alleging that the Unicore Software or any
Enhancement infringes upon the patent or copyright of a third party, or that
the Unicore Software or any Enhancements wrongfully incorporates trade secrets
of a third party. The foregoing obligations upon Licensee apply only if: (i)
Phoenix promptly gives Licensee written notice of any claims and/or threatened
claims; (ii) Phoenix allows Licensee to direct and control the defense and/or
settlement of the claim; and (iii) Phoenix provides Licensee with the authority,
information and assistance (at Licensee's expense) that Licensee reasonably
requests to defend the claim, gives all relevant and available evidence in
Phoenix's possession (subject to an acceptable confidentiality agreement), and
gives reasonable assistance to Licensee in the defense of such claim or
threatened claim.
8.2 Indemnification of Licensee Phoenix will at its expense indemnify and
hold harmless Licensee, and at Licensee's option defend Licensee, from any and
all actions, claims, costs, liabilities, losses, and expenses including, but not
limited to, reasonable attorneys' fees and cost of suit incurred by Licensee as
a result of or arising from Phoenix's use, sale and distribution of
Modifications and Derivative Works to the Unicore Software developed by Phoenix,
provided however, that the Modifications and/or Derivative Works as developed by
Phoenix, and not the Unicore Software alone, are the basis for any such action
or claim.
9.0 PAYMENT
9.1 Licensee agrees to pay Phoenix a royalty of: (a) ***** percent for the first
***** dollars in net revenue; and thereafter (b) ***** percent of the net
revenue, that Licensee receives in the sale, licensing, supply, and
distribution of: (i) the Unicore Software; and (ii) the Enhancements to End
Users, as of the Effective Date of this Software License Agreement, and pursuant
to the transfer of title to the Unicore Software under the Purchase Agreement,
and the licenses granted hereunder. Licensee will submit royalty reports to
Phoenix, on a form approved by Phoenix, before the end of the month following
each calendar quarter after the Effective Date of this Agreement. Each report
will accurately set forth the number of units of each Enhancement sold, or
otherwise distributed or disposed of by Licensee during such quarter. Each such
report will be accompanied by payment of all royalty amounts due to Phoenix
pursuant to said report. Licensee's obligations to furnish quarterly royalty
reports and to make quarterly royalty payments to Phoenix will continue as long
as Licensee sells or distributes Enhancements. Royalty reports are required even
if Licensee reports no such sales or other distributions or disposals of
Enhancements. If Licensee stops providing Enhancements, Licensee will promptly
submit to Phoenix a written notice, a final quarterly royalty report, a final
royalty payment in the full amount of all royalty amounts due to Phoenix, and a
written certification that it has stopped distributing Enhancements based upon
the Award Software to End Users. No moneys paid hereunder are refundable unless
specifically provided for in this Agreement.
9.2 Royalty fees payable by Licensee to Phoenix hereunder do not include any
taxes or charges imposed by any federal, state, local, or foreign jurisdiction.
Licensee will pay any and all such taxes and charges (other than taxes based on
Phoenix's net income).
9.3 If a foreign government requires taxes to be withheld on payments to be
made by Licensee hereunder, then to the extent Phoenix is entitled to and can
utilize a US Foreign Tax Credit for such taxes, Licensee may deduct such taxes
from the amount owed to Phoenix and pay them to the appropriate tax authority.
Licensee will obtain and deliver to Phoenix a receipt and all other documents
necessary for Phoenix to claim a Foreign Tax Credit.
9.4 Once per calendar year Phoenix may audit or have a mutually agreed upon
independent nationally recognized accounting firm audit the records and
supporting documentation of Licensee relating to the number of Enhancements
shipped, distributed, transferred, or otherwise disposed of by Licensee to
determine whether Licensee has correctly reported and calculated the royalty
fees due Phoenix hereunder. If the Parties cannot mutually agree on a third
party auditor, the selection of the firm to conduct the audit shall be made by
the two firms initially selected. To facilitate the audit, Licensee will give
the auditors reasonable access, during normal business hours, to Licensee's
premises where such records and documentation are located, provided that such
auditors have executed a confidentiality agreement prior to such access. If an
audit discloses an underpayment of royalties, Licensee will immediately pay
Phoenix the additional royalties due, together with interest thereon from the
original payment due date at the rate of one percent per month or the highest
rate allowed by law (whichever is less). Phoenix and Licensee will bear their
own expenses incurred in the audit; however, if an audit discloses an
underpayment of royalties of five percent (5%) or more of the total royalties
originally due for the period being audited, Licensee will reimburse Phoenix for
all expenses incurred by Phoenix in the audit.
10.0 SUPPORT ,TRAINING, MAINTENANCE AND NRE
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
10.1 Licensee will provide support, maintenance and training to Phoenix, and End
Users via telephone consultation only, at no additional charge to Phoenix, for
the Award Software and Enhancements thereto. Support, maintenance and training
may include, but may not be limited to, (i) consultation and advice on the use
of the Award Software and Enhancements; (ii) assistance in problem
determination; (iii) correction of Defects in the Award Software and
Enhancements; and (iv) development of Upgrades for End Users. Licensee agrees to
provide reasonable and adequate service and support to all its customers and
users of Licensee's products for any Enhancements contained in Licensee's
Products. An unreasonable number of valid complaints that remain unresolved for
an unreasonable amount of time, regarding the support and service offered by
Licensee shall be deemed a violation of the Quality standards set forth by
Phoenix. Licensee will bear all expenses associated with its support of its
customers and End Users. Phoenix will bear all costs for its employees traveling
to Licensee's site to receive such training on Enhancements, and may request
that such training include Unicore Software.
10.2 Phoenix shall provide limited support, assistance and documentation, as
well as assistance with updates to the Award Software, to the extent necessary
to enable Licensee to develop Enhancements to the Award Software, and upgrades
thereto. Updates to the Award Software will be available to Licensee through
the traditional code drop process utilized by Award and Licensee. If Phoenix
makes the Award Software available to its other licensees under Phoenix's SCAP
Program, updates will be then be provided to Licensee under the SCAP Program, a
copy of the terms for such a Program are attached hereto as Appendix B. If the
method of obtaining updates under the SCAP Program is not satisfactory to
Licensee, Phoenix will work with Licensee to determine a mutually acceptable
alternative method for Licensee to obtain updates. Licensee may attend Phoenix
training classes at Phoenix's normal training rate.
10.3 Licensee will provide NRE services to End Users at said End User's
request, or at Phoenix's request if the End User has solicited Phoenix to
perform such NRE services. Phoenix will refer End User's making such a request
to Licensee, wherein Licensee will independently negotiate and contract directly
with the End User's for the performance of such services. Licensee will notify
any such End User that Phoenix is not a party to such services, and will have no
responsibility for the actions or work performed by Licensee in conduction such
NRE services. To the extent that Licensee retains ownership of the work product
developed while performing the NRE services, and that such work product is based
upon the Award Software, Licensee will provide Phoenix a license under such work
product pursuant to Section 2.2. Phoenix and Award shall additionally provide
referrals to Licensee on their web sites, as well as at trade shows where
Phoenix and/or Award are presenting Award Software.
11.0 TERM AND TERMINATION.
11.1 This Software License Agreement will have an Initial Term of ***** years
("Initial Term") from the Effective Date, or until this Agreement is terminated
by mutual agreement, for default, and/or as otherwise provided herein. This
Software License Agreement may be renewed and extended ("Extentions") upon
receipt by Phoenix of Licensee's intention to renew and extend the Initial Term,
six (6) months prior to the expiration of the Initial Term. Upon Phoenix's
receipt of the Licensee's request, this Software License Agreement may be
extended for an additional period of Three (3) years, with subsequent Three (3)
year Extensions available upon Phoenix's receipt of Licensee's request for
additional extensions of the Term within the time parameters provided herein.
Any such Extension shall be automatically granted by Phoenix, provided that
Licensee has performed in accordance with the rights and restrictions set forth
in this Agreement in all material respects, and met the Quality requirements in
both its Enhancements and service and support of End Users in all material
respects. If during the Initial Term or an Extension, Phoenix reasonably
believes Licensee has not satisfactorily met the Quality requirements in a
material , or has conducted itself in such a manner that Phoenix reasonably
believes may cause harm to Phoenix, Phoenix will notify Licensee and Licensee
will be required to cure the Quality problem to the reasonable satisfaction of
Phoenix, which shall not be unreasonably denied. If Licensee fails to provide a
satisfactory cure, Phoenix may reject the request for any Extension to this
Agreement, and Licensee's rights under the Award Software shall terminate.
Phoenix's rights granted under the Unicore Software shall remain in full force
and effect, pursuant to section 11.4.
11.2 Either party may terminate their respective license grant for material
breach of either the Purchase Agreement, or this Software License Agreement, by
providing thirty (30) days written notice, unless the breach is corrected within
the thirty (30) day period after such notice. If Award is the terminating party,
the licenses granted to Licensee under this Software License Agreement shall be
suspended until a cure for the action resulting in Award initiating the
termination is reached
11.3 Material breach on the part of Licensee will include, but not be limited
to, breach of the confidentiality, warranty or indemnification obligation of
either the Purchase Agreement or this Software License Agreement, misuse of the
licenses granted hereunder, the filing of a voluntary or involuntary petition to
declare insolvency or bankruptcy which is not dismissed within forty five (45)
days; making an assignment or other arrangement for the benefit of creditors;
being dissolved or liquidated; or being party to a merger, consolidation, or
other corporate reorganization in which a Party hereunder to such a merger,
consolidation, or other corporate reorganization is not the survivor.
11.4 Upon termination of the license granted herein, the Party subject to the
termination will stop reproducing, selling, distributing or sublicensing the use
of copies of the relevant (Award or Unicore) Software (including Enhancements in
the case of Award Software), and will deliver the Software, and all other
material pertaining to the Software, to the notifying
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Party, and will warrant that all said materials have been returned except for
those properly distributed by Licensee prior to the date of termination. The
termination of licenses granted hereunder will not affect the rights granted to
the other Party not subject to the termination, wherein such Party's rights
shall continue in full force and effect.
11.5 Licensee and Phoenix will remain obligated under this Agreement, including
the payment of royalties, for transactions that have already been completed and
to those parts of this Agreement relating to confidentiality, warranties,
indemnity, limitation of liability, and obligations upon termination.
12.0. GENERAL.
12.1 Licensee and Phoenix agree that this Software License Agreement
constitutes the complete agreement and understanding between the parties with
respect to the subject matter herein. This Software License Agreement, and the
Purchase Agreement, and all Exhibits and Appendices attached hereto, supersedes
all prior agreements, understandings, and negotiations, whether written or
verbal, with respect to the subject matter herein. No amendment or modification
of this Software License Agreement will be effective unless it is set forth in a
writing which refers to the particular provisions so amended or modified and is
executed by authorized representatives of both Parties.
12.2 Notices will be sent by first class mail, postage prepaid, by courier or
other personal delivery or by telecopy (with telephonic confirmation of receipt)
to the Parties at the following addresses:
For Phoenix: For Licensee:
411 East Plumeria Drive 1538 Turnpike Street
San Jose, CA 95134 North Andover, MA 01845
U.S.A U.S.A.
Attn: General Counsel Attn: President, with copy to:
Mark E. Tully, Esq.
Devine, Millimet & Branch
12 Essex St., P.O. Box 39
Andover, MA 01810
or to such other address as a Party designates in writing to the other Party.
Notices to Phoenix will be sent to the attention of the Legal Department.
12.3 This Agreement will be governed by and construed in accordance with the
internal laws of the State of California, without regard to or application of
choice of law rules or principles, with venue for any such disputes which arise
in connection with this Agreement being resolved in the state and federal courts
in Massachusetts.
12.4 No third party will have any rights under this Agreement. Nothing in this
Agreement will constitute the parties to be partners or joint venturers with, or
agents or employees of, each other. The parties are independent contractors,
and neither Party will have any right or power to create any obligation or
responsibility on behalf of the other Party.
12.5 Neither Party may assign its rights under this Agreement without the
other party's written consent, which shall not be unreasonably withheld. This
Section notwithstanding, either Party hereunder may assign its rights and
obligation under this Agreement in conjunction with a merger, acquisition,
divestiture or other legal proceeding involving the transfer of a controlling
interest of a Party's business, or a party's division, subsidiary or affiliate
business. In the event that the third party involved in the merger, acquisition,
divestiture or other transfer of a controlling interest is a competitor of the
non-assigning Party, the non assigning Party may terminate the licenses granted
hereunder to the assigning Party. Any attempted assignment or delegation by not
in accordance with this Section will be void and will give the non-assigning
Party the right to terminate this Agreement on written notice. Subject to the
foregoing,this Agreement will inure to the benefit of and be binding on the
respective successors and assigns of the Parties.
12.6 Waiver by either Party of nonperformance or any breach of any provision of
this Agreement will not operate as a waiver of any subsequent nonperformance or
other breach of the same or any other provision. The failure by a Party to
exercise any of its rights under this Agreement will not be deemed to constitute
a waiver of any such rights, or other rights or remedies available to such
Party.
In witness whereof, the Parties hereto have executed this Agreement on the date
specified below by an individual empowered with the requisite corporate
authority to do so.
Phoenix: Phoenix Technologies Ltd.
Signature:
Name: ___________________________
Title:___________________________
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Date: November 6, 1998
_______________________________
Licensee: Unicore Acquisition Corp.
Signature:___________________________
Name:________________________________
Title:_______________________________
Date: November 6, 1998
_______________________________
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ****. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
ADDENDUM "A"
TO THE
SOFTWARE LICENSE AGREEMENT
BETWEEN
PHOENIX TECHNOLOGIES LTD.
AND
UNICORE SOFTWARE, INC.
This Addendum A ("Addendum") is entered into as of the last date specified
in the execution block below, and by agreement of the Parties, and for the
purpose of making each Party whole, is made effective as of October 1, 1999
("Effective Date") between Phoenix Technologies Ltd., a Delaware corporation
having its principal place of business at 411 East Plumeria Drive, San Jose,
California 95134 ("Phoenix"), and Unicore Software Inc. a Massachusetts
corporation having its principal place of business at 1538 Turnpike St., N.
Andover, MA 01845 ("Licensee"). Phoenix and Licensee shall be collectively
referred to in this Addendum as "Parties" or singularly as "Party".
Whereas Phoenix through its subsidiary Award Software International, Inc.
("Award") and Unicore Acquisition Corp. have entered into a Software License
Agreement (Agreement No. 18430100), dated November 6, 1998 ("Controlling
Agreement"), for the licensing of certain Award Software, as defined in the
Controlling Agreement;
Whereas Unicore Acquisition Corp. has changed its name since the Effective
Date and is now conducting business as Unicore Software Inc., referred to herein
as "Licensee", and now wishes to modify the Controlling Agreement to: (i) add
Phoenix's CardWare product as part of the Award Software licensed under the
Controlling Agreement, pursuant to the additional terms specified herein; and
(ii) to modify the Controlling Agreement as set forth herein.
NOW THEREFORE, the Parties agree to modify the Controlling Agreement as
follows:
1. Both Parties agree that the Phoenix CardWare product shall be added to and
made part of the Controlling Agreements subject to the following additional
terms that shall govern the use and distribution of the CardWare product by
Licensee:
(a) A new Section 1.12 shall be added as follows: "CardWare" shall mean
Phoenix's software solution, in Source Code format, that is PC Card
database independent, and utilizes PCMCIA standard Card Information
Structure (CIS) that provides "Plug and Play" operation and
compatibility for PC cards.
(b) A new Section 2.1.9 shall be added entitled "CardWare License Grant",
and shall set forth the following additional terms and conditions for
the use and distribution of CardWare by Licensee:
2.1.9 (a) For the Initial Term of this Agreement, and all Extensions
to the Initial Term pursuant to Section 11.1, Phoenix grants to
Licensee, a personal, restricted, non-transferable,*****, royalty
bearing license to use CardWare solely for the purpose of: (i)
understanding CardWare, making Enhancements thereto; (ii) creating
assembled and compiled object code versions of such Enhancements; and
(iii) distributing said Enhancements *****, pursuant to the terms and
conditions of this Agreement, and for no other purpose. Licensee
understands and agrees that the nature and intent of the licenses
granted hereunder is restricted to: (1) *****, and Licensee will ensure
any dealers, distributors, or resellers it engages will market the
CardWare product, and all Enhancements thereto, only to those *****;
and (2) *****; and Licensee agrees to use its reasonable best efforts
to ensure any dealers, distributors, or resellers will market the
CardWare product, and all Enhancements thereto, only to those *****.
Under no circumstances shall the licenses granted herein, or any *****;
for the purposes of the CardWare product, *****.
2.1.9(b) Licensee agrees that in any agreement that Licensee enters
with ***** for Enhancements that Licensee will ensure that: (a) *****
receive the Enhancement in an object code format only; (b) ***** agree
that the Enhancements will be subject to terms and conditions that
protect the intellectual property content of the Enhancement from
unauthorized use or disclosure, including reverse engineering of the
Enhancement to determine its operation; and (c) any agreement between
Licensee and ***** for the supply of Enhancements specifically holds
Phoenix and Award harmless from any liability resulting from the *****
use of said Enhancements. Licensee agrees it will hold Phoenix and
Award harmless from any liability resulting from the use of said
Enhancements by said ***** or third parties; provided, however, that
the Enhancements as
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
developed by Licensee, and not the unmodified CardWare product, as
licensed hereunder for use by Licensee, are the basis for such
liability. Unless specifically authorized by Phoenix in writing, each
copy of CardWare is provided for use on a single PC.
2.1.9(c ) Licensee will embed the copyright notices included with the
CardWare on any Enhancement so that such notice is displayed on the
post screen or sign-on message of the ****** when possible. Licensee
will not alter or remove, nor permit any third party to alter or
remove, such copyright notices.
2.1.9(d) Licensee may disclose CardWare and Enhancements thereto only
to those employees who (i) need to know and access same to accomplish
the purposes set forth in this Section 2.1.9; and (ii) who have signed
an agreement with Licensee obligating them (a) not to disclose any of
portion of CardWare or any Enhancement except to Licensee's employees
who have a similar need to know and who have signed similar agreements;
and (b) not to use any part of the CardWare or Enhancement thereto for
any other purpose other than those permitted in this Software License
Agreement. The confidentiality provisions regarding disclosure of
CardWare and any Enhancement will survive any termination of this
Agreement and will continue in effect until such time as Phoenix may
make CardWare or any Enhancement available to the public without
restrictions on disclosure. Licensee acknowledges that CardWare and
the Enhancements are trade secrets of Phoenix, and Licensee agrees to
maintain the CardWare and Enhancements currently existing, and those
developed under this Software License Agreement, in a secure fashion,
exercising the same degree of care to avoid publication and
unauthorized use and disclosure as Licensee employs with Licensee's own
most valuable confidential information of a like nature, and take all
necessary precautions to protect the CardWare product and any
Enhancement from theft and unauthorized disclosure or use. Licensee
will always use at least a reasonable amount of care and protection to
ensure the security of the CardWare and any Enhancements thereto.
Licensee will promptly report any unauthorized disclosure or use, and
take all necessary further actions to remedy any unauthorized
disclosure or use for which Licensee or its agents are responsible, as
reasonably requested by Phoenix in order to prevent or remedy any such
violation. Furthermore, Licensee will not sell, transfer, encumber,
license, or sublicense the CardWare product licensed hereunder, or any
Enhancement other than as expressly permitted under this Software
License Agreement.
2.1.9(e) Licensee may only have and use the CardWare product at
Licensee's business location specified above. Licensee acknowledges
that CardWare presently resides at Licensee's business location
specified above, and that there is no delivery obligation by Award or
Phoenix under this Addendum or Software License Agreement. Licensee may
relocate the CardWare product to a different location upon ten (10)
days advance written notice to Phoenix identifying the new location.
2.1.9(f) Licensee will not sell, transfer, license, distribute,
disclose or sublicense the CardWare product, or Enhancements thereto,
except to the extent authorized under this Software License Agreement.
Except as provided herein, no other license, express or implied, by
estoppel or otherwise, to any other intellectual property rights is
granted herein, and no other rights to CardWare are granted hereunder
except as specifically set forth in this Software License Agreement.
2.1.9(g) Licensee shall not alter or remove, or permit any third
parties to alter or remove, Phoenix, Award and their suppliers'
copyright notice from the CardWare product or Enhancement thereto.
Licensee will include, in all Enhancements, Phoenix and its suppliers'
copyright notice embedded in the code and displayed in the Source Code
to the Enhancement.
2.1.9(h) Licensee may not authorize other parties to copy,
reproduce, or otherwise use the CardWare product or Enhancements
thereto, other than on behalf of Licensee as permitted in this Section
2.1.9, or to disassemble or reverse engineer the CardWare product and
any Enhancements thereto, without the prior written consent of Phoenix.
2.1.9(i) Licensee is required to use Phoenix software labels in
its supply of CardWare and/or Enhancements to *****. Licensee (a) will
promptly and securely affix an applicable Phoenix software label for
each copy of the CardWare and/or Enhancement on the medium containing
the ***** CardWare product; and (b) will not use, reproduce,
sublicense, distribute, transfer or ship any copy of an Enhancement
without first having complied with the provisions of this Section 2.1.9
and the otherwise controlling provisions of this Software License
Agreement.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
(c) A new Section 3.1.3 shall be added for the CardWare product as follows:
"Title and full ownership in the CardWare product, Enhancements,
related documentation, and all copies thereof will remain with Phoenix
and/or its suppliers. Phoenix retains the right to use, copy, modify,
sublicense, and distribute the CardWare product, and modifications,
derivative works and enhancements (including Enhancements). Licensee
will provide Phoenix a copy of all Enhancements developed by Licensee
within ten (10) Days of development. Licensee will do nothing to
infringe upon any rights of Phoenix or others in the CardWare product,
any other deliverables or documentation. Licensee hereby acknowledges
the ownership by Phoenix or its suppliers of the trademarks,
copyrights, patent rights, trade secrets and other intellectual
property rights for or in the CardWare product Any derivative work, as
defined under U.S. Copyright Laws, prepared by or for Licensee that
is based on CardWare shall be classified as a "Work Made For Hire" and
are and will remain the sole and exclusive property of Phoenix.
Licensee agrees that regardless of whether such derivative works, or
any portions thereof are legally Works Made For Hire, all such
derivative works to CardWare, and any portions thereof, will be the
sole and exclusive property of Phoenix, and Licensee hereby assigns to
Phoenix all rights therein and in all related intellectual property
rights. Licensee hereby waives any and all moral rights, as defined
under the Berne Convention, in such works to the extent permitted by
law. At Phoenix's request and expense, Licensee will assist and
cooperate with Phoenix in all respects and will execute documents
reasonably requested by Phoenix to acquire, transfer, maintain, and
perfect such intellectual property rights. Licensee represents and
warrants that: (a) any derivative works and any and all modifications
of CardWare and Enhancements thereto made by Licensee are the original
work of Licensee; and (b) that any derivative works and any and all
modifications of CardWare and Enhancements made by Licensee will not
infringe upon any rights of Phoenix or any third party.
(d) Section 5 of the Controlling Agreement shall be replaced with the
following with respect to the CardWare product:
LICENSEE UNDERSTANDS THAT THE CARDWARE PRODUCT IS BEING PROVIDED "AS-IS",
AND THAT PHOENIX MAKES NO WARRANTIES, WHATSOEVER, WHETHER EXPRESS, IMPLIED OR
STATUTORY, INCLUDING, BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY,
NONINFRINGEMENT, FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY WARRANTY OTHERWISE
ARISING OUT OF ANY PROPOSAL, SPECIFICATION, OR SAMPLE. IN NO EVENT WILL
PHOENIX OR ITS SUPPLIERS BE LIABLE TO LICENSEE FOR ANY LOSS OF PROFITS, LOSS
OF USE, INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES ARISING OUT OF
THIS ADDENDUM, WHETHER OR NOT PHOENIX HAD ADVANCE NOTICE OF THE POSSIBILITY OF
SUCH DAMAGES. PHOENIX REPRESENTS THAT AS OF THE EFFECTIVE DATE OF THIS
AGREEMENT IT IS NOT AWARE OF ANY CLAIM OR ALLEGATION BY ANY THIRD PARTY THAT
THE CARDWARE PRODUCT INFRINGES AN ISSUED U.S. PATENT OR REGISTERED U.S.
COPYRIGHT HELD BY SAID THIRD PARTY.
(e) Section 8.2 of the Controlling Agreement shall not apply to the CardWare
product.
(f) Section 9.1 of the Controlling Agreement with respect to the CardWare
product, shall be modified as follows:
(i) Section 9.1.1(a), specifying a royalty rate of ***** percent shall
be deleted as of March 5, 1999, and the continuing royalty rate
thereafter for the Award Software licensed under the Controlling
Agreement (other than CardWare) shall be ***** percent, as stated
in 9.1(b), provided Phoenix receives ***** Dollars within Five (5)
business days of execution of this Addendum.
(ii) A new Section 9.5 shall be added for the licensing of CardWare,
which shall read as follows:
Licensee agrees to pay Phoenix, as a prepayment on future
royalties for the sale, licensing, supply, and distribution of the
CardWare product: (a) ***** Dollars within Ten (10 Days of
execution of this Addendum or prior to March 31, 1999; (b) an
additional ***** Dollars prior to March 31, 1999; ***** Dollars
within Ninety (90) days following execution of this Addendum or
prior to June 10, 1999, whichever is earlier. Licensee agrees the
royalty rate applicable to the CardWare product that shall be
payable to Phoenix shall be ***** percent of the net revenue that
Licensee receives from the sale,
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
licensing, supply, and distribution of the CardWare product and
Enhancements thereto as of the Effective Date of this Addendum.
Licensee will submit royalty reports to Phoenix, on a form
approved by Phoenix, identifying each CardWare or CardWare
Enhancement sale, before the end of the month following each
calendar quarter after the Effective Date of this Agreement. Each
report will accurately set forth the number of units of each
CardWare product or CardWare Enhancement sold, or otherwise
distributed or disposed of by Licensee during such quarter. Each
such report will be accompanied by payment of all royalty amounts
due to Phoenix pursuant to said report. Licensee's obligations to
furnish quarterly royalty reports and to make quarterly royalty
payments to Phoenix will continue as long as Licensee sells or
distributes CardWare products or CardWare Enhancements. Royalty
reports are required even if Licensee reports no such sales or
other distributions or disposals of CardWare products or CardWare
Enhancements. If Licensee stops providing CardWare products or
CardWare Enhancements, Licensee will promptly submit to Phoenix a
written notice, a final quarterly royalty report, a final royalty
payment in the full amount of all royalty amounts due to Phoenix,
and a written certification that it has stopped distributing
CardWare products or CardWare Enhancements to *****. No moneys
paid hereunder are refundable unless specifically provided for in
this Agreement.
(g) Section 10 of the Controlling Agreement shall not apply to CardWare. For
Support, Training, Maintenance and NRE (Section 10), the following
shall apply for the CardWare product:
Licensee has the sole responsibility for supporting and maintaining the
CardWare product and Licensee's Enhancements, and assuring that
maintenance releases of such Enhancements have equivalent functionality
and compatibility with the CardWare product licensed or used by *****.
Licensee will indemnify and hold Phoenix harmless for any Defects that
arise from Licensee's Enhancements. Updates or revisions to the
CardWare product will be supplied to Licensee pursuant to the SCAP
Program identified in Section 10.2 when they are developed and made
available by Phoenix; however, Phoenix shall have no obligation to
develop such updates or enhancements, and any such development is at
the sole discretion of Phoenix.
(h) For CardWare, the following Sections of the Controlling Agreement that
reference Award Software, those Sections shall also apply to the
CardWare product: 1.3, 1.9, 4, 7, 8.1, 9.2, 9.3, 9.4, 11, 12, and all
Appendixes and Exhibits to the Controlling Agreement.
2. Section 11.1, with respect to all products licensed under the Controlling
Agreement (including CardWare), Section 11.1 shall be modified as follows:
"...Phoenix reasonably believes Licensee has not satisfactorily met the
material aspects of the Quality requirements, or has conducted itself
in such a manner that Phoenix reasonably believes may cause harm to
Phoenix, Phoenix will notify Licensee and Licensee will be required to
cure the Quality problem to the reasonable satisfaction of Phoenix,
which shall not be unreasonably denied."
3. Section 11.2, with respect to all products licensed under the Controlling
Agreement, Section 11.2 shall be modified to replace the name "Award" with
the name "Phoenix".
Each Party acknowledges that it has read this Addendum, understands it, and
agrees to be bound by its terms. This Addendum may only be modified by a written
instrument duly executed by authorized representatives of both Parties. The
terms and conditions not stated herein shall be as set forth in the Controlling
Agreement.
Licensee may not assign this Addendum, except as set forth in the Controlling
Agreement and only in conjunction with the Controlling Agreement.
This Addendum is entered into on behalf of the Parties by their duly authorized
representatives as identified below.
Phoenix: Phoenix Technologies Ltd.
Signature:__________________________________
Print Name/Title:___________________________
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Date:__________________________________
Licensee: Unicore Software Inc.
Signature:_____________________________
Print Name/Title:______________________
Date:__________________________________
APPENDIX A (QUALITY GUIDELINES)
TO
SOFTWARE LICENSE LICENSE ADDENDUM
BETWEEN
PHOENIX TECHNOLOGIES LTD.
AND
UNICORE ACQUISITION CORP.
Software Release Policy (Version 1.8a)
Requirements: To release a high quality software product, and provide high
quality service and support to ****** that meets or exceeds specified
requirements for timeliness and performance expectations. Delivery of products
and service to customers shall be made only after all key processes have been
successfully completed and quality control ("Quality") has issued the
appropriate certification.
General Guideline: At each release category (full deployment, intermediate
deployment, early deployment, or engineering), for approved distribution of
software without restrictions, the product must have received a Quality
certification and gone through the release process (KP011) as defined in the
Software Development Handbook, including completion of shipping request in the
release database. To receive a Quality certification the criteria defined below
must be met. If the Product does not pass the Quality certification criteria,
the Quality test report will identify problem areas. Whether the product passes
or fails the criteria, the Quality test report may be distributed to the
customer. Before any software can be released, it must be archived using the
officially sanctioned version control system for that product. For BIOS code,
the versions control tool is PVCS/VCM or Microsoft Visual Source Safe.
Exception Procedures: Exceptions to this policy require a written notification
to the customer, a project management corrective action plan for the exceptions,
and Quality acceptance of the plan. The written notification to the customer
includes all deviations from the key processes, including the areas of design
specification, code reviews, coding, unit test, quality testing, release notes,
list of unresolved defects, and a written schedule for fixing the deviations.
If fixes are not accomplished by the schedule date, within one day the customer
will be notified in writing of new schedule.
Full Deployment Release (FD) Criteria (Defined as fully compliant product for
unrestricted distribution to customers.)
To receive a Full Deployment Quality certification:
The criteria for the intermediate deployment phase continue to apply and
are expanded to include additional criteria.
These checklist items need to be in place.
A. Customer-ready set of Release Notes that has been reviewed and approved
are available.
B. All code is under appropriate version control.
C. The product has been successfully built.
D. The release has all components available, has been fully integrated and
tested for both function and compatibility criteria.
E. Product has successfully completed KP09/10. (Validation testing and
Problems Resolution)
F. The OEM release has been successfully tested on the OEM specific
platform.
G. Complete set of user documentation has been reviewed against the product
and differences noted and resolved.
If SPRs of severity one or two are not resolved, the product cannot be
released. Product must be returned to development engineering for
fixing.
If SPRs of severity three or four are detected in validation testing, a
conditional release is possible under satisfaction of the following
requirements:
A. Customer receives written notification of all known SPRs and accepts
product as is in writing.
B. Phoenix provides customer with written schedule for fixing SPRs.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
The Quality score is no higher than 4.
The product has been successfully deployed in all product lines, including
desktop, notebook, and server, where applicable. For an OEM, the product has
been successfully tested on specific platform.
Intermediate Deployment (ID) Criteria (Defined as broad distribution to primary
users to assess production readiness.)
To receive an Intermediate Deployment Quality certification:
The criteria for the early deployment phase continue to apply and are
expanded to include additional criteria.
These checklist items need to be in place.
A. Customer release notes are available for review.
B. All code is under appropriate version control.
C. All features are fully operational; that is, functions perform as
required by specification.
D. Product has exited KP09/10. Validation testing complete.
E. The OEM release is based on a specific factory CORE code base release.
F. The OEM release has been successfully validated on OEM specific
platform.
G. Preliminary user documentation is complete.
All SPRs of severity 1 and 2 are resolved.
All Severity 3 and 4 SPRs detected by Quality identified and fixes
scheduled.
The Quality score is no higher than 8.
Tested on at least two reference platforms and at least two deployments
platforms, completed with feedback/SPRs complying with intermediate deployment
definition. For OEM, tested on specific platform.
Preliminary Deployment (PD) Release Criteria (Defined as limited distribution to
development partners or OEMs to assess functionality and performance.)
To receive a preliminary deployment Quality certification:
These checklist items need to be in place.
A. Engineering Release notes available.
B. All code is under appropriate version control.
C. The code is architecturally stable; that is, none of the known SPRs
require an architectural change.
D. Product has exited KP08. All features present and code complete. KP09
validation testing complete.
E. The core production release has been tested on at least one reference
platform.
F. The OEM release has been engineering tested on the OEM platform or an
OEM platform that is as similar as possible (functionally and spec-wise)
to the target platform.
G. Preliminary user documentation is provided.
All SPRs of severity 1 and 2 are resolved.
All Severity 3 and 4 SPRs detected by Quality identified and fixes
scheduled.
The Quality score is no higher than 16.
Engineering Release Criteria (Defined as restricted distribution to a target
development partner for early functional evaluation with no quality guarantee.)
This is basically a code drop for a customer and typically only binary code is
provided. As an exception, source code may be provided if under version control
and customer is notified of engineering release status. Typically arrangements
are done under a written contractual agreement between Phoenix and the customer;
that is, NDA is in place, and licensing IP agreement also exists. This category
can also be for "bring-up-BIOS" (early development code with limited
functionality) or for sample source code for training.
The Exception policy described above is used to make this type of release
All code is under appropriate version control.
It must go through the release process (KP011) as defined in the Software
Development Handbook, including completion of shipping request in the release
database.
Release notes are available.
Authorized by appropriate managers with notification to Quality
authorization required from engineering manager or project manager.
Note that there are several types of engineering release deliverables supplied
without Quality testing.
. There is an evaluation BIOS for a prospective customer. Typically, it is
a binary BIOS delivered for evaluations, made up from the development
code base. It is build to support a specific chipset configuration. There
may not be any defined requirements for this evaluation unit.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
. The custom BIOS is for customers requiring special changes to the
standard BIOS. A binary BIOS is delivered. A platform may or may not be
available for testing. Even without a test platform, key processes are
completed: design, design review, code review, build, and release process
KP011.
. The source code release is the delivery of the BIOS source code that
supports a specific configuration that is not available for testing. The
criteria are user documentation, release notes, and component quality
reports.
. Partial source code release results when the customer requests code with
limited and specific functionality. There is no access to the customer
hardware. The criteria are again the completion of the appropriate key
process steps.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
APPENDIX B (SCAP)
TO
SOFTWARE LICENSE AGREEMENT
BETWEEN
PHOENIX TECHNOLOGIES LTD.
AND
UNICORE ACQUISITION CORP.
This Appendix B to the Software License Addendum is entered into by and between
Phoenix Technologies Ltd., a Delaware corporation, ("PHOENIX" herein) and
Unicore Acquisition Corp. ("LICENSEE" herein), and is made with reference to the
following facts and circumstances:
A. PHOENIX and LICENSEE entered into a Software License Agreement
("Software License") that is being executed concurrently with an Asset
Purchse Agreement between PHOENIX, through its subsidiary Award
Software International, Inc ("Award"), and pursuant to which PHOENIX
and LICENSEE entered into a cross licensing arrangement for certain
computer software programs, and Enhancements and Upgrades thereto for
******.
B. Pursuant to Section 10.2 of the Software License, LICENSEE has been
granted the right to obtain access to updates and new revisions
("Updates") to the Award Software that have been developed by or for
PHOENIX, with one means being a Source Code Access Program.
C. PHOENIX and LICENSEE desire to define the terms and conditions
governing LICENSEE's access and use of the Updates via a Source Code
Access Program, as set forth herein.
NOW, THEREFORE, in consideration of the promises and covenants hereinafter
set forth, PHOENIX and LICENSEE agree as follows:
1. SOURCE CODE ACCESS PROGRAM ("SCAP") FOR PHOENIX UPDATES TO AWARD SOFTWARE
a. Source Code Disclosure: Subject to the terms and conditions set out
----------------------
herein, PHOENIX grants to LICENSEE a non-exclusive, and worldwide license
to participate in the Phoenix Source Code Access Program ("SCAP") for
PHOENIX developed Updates to the Award Software, as defined in the Software
License, and to use and modify source code delivered to LICENSEE under the
SCAP for development of Enhancements, pursuant to the terms and
restrictions defined in the Software License, and for no other purpose.
LICENSEE may obtain source code disclosure for all Updates which are, or
will be made, available during the term of the Software License. LICENSEE
shall use the Updates and logical add-on programs only at the sites set out
in the Software License, and as permitted in said Software License and this
Appendix, and for no other purposes whatsoever.
LICENSEE shall not disclose any part of the Updates other than to those
employees who: (i) need to know said source code in order to understand or
modify the Award Software pursuant to the terms and restrictions set forth
in the Software License; and (ii) who have signed an agreement with
LICENSEE obligating them: (a) not to disclose any of the Update source code
except to LICENSEE's employees who have signed similar agreements; and (b)
not to use any part of the Update source code for any other purpose other
than those permitted in the Software Addendun and this Appendix. Phoenix
retains ownership of all intellectual property rights (including patents,
copyrights, trademarks and trade secrets) in and relating to the Updates.
LICENSEE acknowledges that the Updates are trade secrets of Phoenix and
LICENSEE agrees to maintain the Updates in a secure fashion, exercise the
same degree of care to avoid publication and unauthorized use and
disclosure as LICENSEE employs with its own proprietary and confidential
information of a like nature, and take all reasonable precautions to
protect the Updates from theft and unauthorized disclosure or use.
LICENSEE shall promptly report any unauthorized disclosure and take any
further actions to remedy any unauthorized
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
disclosure or use for which LICENSEE or its agents are responsible, as are
reasonably requested by PHOENIX to prevent or remedy any such violation.
The confidentiality provisions of this Appendix shall survive any
termination of this Appendix, and shall continue in effect until such time
as PHOENIX may make the Updates available to the public without
restrictions on disclosure.
b. Review of SCAP: The parties agree that from time to time PHOENIX may
--------------
request and LICENSEE will allow PHOENIX entry to LICENSEE's premises and
access to LICENSEE's records to review the use and internal distribution of
the Updates, to meet with LICENSEE's representatives to discuss such use
and distribution, and to verify that LICENSEE is in compliance with this
Appendix and the terms and conditions of the Software License.
2. SOURCE CODE ACCESS PROGRAM FEES.
In partial consideration for the licenses granted by LICENSEE to PHOENIX
under the Software License, PHOENIX agrees that LICENSEE access to the
Source Code Access Program shall be free of charge, provided LICENSEE is in
compliance with all terms of the Software License.
4. INCORPORATION OF ALL PROVISIONS OF PRIOR AGREEMENT AND SUBSEQUENT APPENDIX.
Except as expressly set forth herein, this Appendix is subject to each and
every provision of the Asset Purchase Agreement and the Software License;
each of which is incorporated herein by reference.
5. ENTIRE AGREEMENT.
This Appendix, and the incorporated Asset Purchase Agreement and Software
License, sets forth the entire agreement and understanding of the parties with
respect to LICENSEE's access and use of Award Software Updates, and supersedes
all prior and contemporaneous oral and/or written agreements, communications,
and understandings relating thereto. Neither party has entered into this
Appendix by reason of or in reliance on any representations of fact or opinion
which are not expressly set forth herein.
IN WITNESS WHEREOF, PHOENIX and LICENSEE have executed this Appendix as of the
day and year first above written.
Phoenix technologies Ltd. Unicore Acquisition Corp.
By:____________________________ By:_______________________________
Name:__________________________ Name:_____________________________
Title:_________________________ Title:____________________________
Date of Signing:______________ Date of Signing:__________________
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
AGREEMENT REGARDING CHANGE IN CONTROL
This Agreement Regarding Change in Control (the "Agreement"), dated as
of March 5, 1999, is made by and between Unicore Software, Inc., a Massachusetts
corporation ("Unicore"), and Phoenix Technologies Ltd., a Delaware corporation
("Phoenix").
WHEREAS, Phoenix and Unicore Acquisition Corporation (now Unicore) are
parties to a Software License Agreement dated as of November 6, 1998 (the
"License Agreement");
WHEREAS, TouchStone Software Corporation, a Delaware corporation
("TouchStone"), and the shareholders of Unicore are parties to an Agreement and
Plan of Acquisition (the "Acquisition Agreement"), dated as of March 5, 1999,
pursuant to which Unicore will be merged (the "Merger") with and into a new
Unicore Acquisition Corp. (the "Merger Sub"), a Delaware corporation and a
wholly-owned subsidiary of TouchStone, with the Merger Sub as the surviving
corporation;
WHEREAS, following the Merger, Merger Sub will change its name to
"Unicore Software, Inc." and will, by operation of law, be subject to all of the
rights and obligations of Unicore, as well as all restrictions imposed on
Unicore;
WHEREAS, pursuant to the terms of the License Agreement, the
consummation of the Acquisition Agreement and the transactions contemplated
thereby may require the consent of Phoenix; and
WHEREAS, Unicore and TouchStone request the
written consent of Phoenix to the Merger.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Following the Merger, in addition to those material breaches
listed in the License Agreement, the occurrence of any of the following shall
constitute a material breach of the License Agreement, giving Phoenix the right
to terminate the licenses granted by Phoenix under the License Agreement upon
satisfaction of the notice and cure provisions set forth in Section 11.2 of the
License Agreement:
(a) the filing by Merger Sub of a voluntary or involuntary petition
to declare insolvency or bankruptcy which is not dismissed within
forty-five (45) days;
(b) the making by Merger Sub of an assignment, including assignments
to Touchstone or any other affiliate or subsidiary of Touchstone,
or other arrangement for the benefit of creditors;
(c) the filing by TouchStone of a voluntary or involuntary petition
to declare insolvency or bankruptcy which is not dismissed within
forty-five (45) days;
(d) the making by TouchStone of an assignment or other arrangement
for the benefit of creditors;
(e) any change in the business model of Merger Sub, Touchstone, or
any subsidiary, affiliate or related entity of Merger Sub or
Touchstone pursuant to which any of the aforementioned entities
develops and markets a product which would be in direct
competition with the Award Software (as defined in the License
Agreement) licensed to Unicore under the License Agreement; or
(f) a change in control or ownership of fifty percent (50%) or more
of the voting stock of Touchstone or Merger Sub (collectively, a
"Change in Control"), if within twenty-one (21) days of its
receipt of written notice of the proposed Change in Control: (i)
Phoenix reasonably determines that the Change in Control would
have a material adverse effect on Phoenix; and (2) Phoenix
delivers written notice to Merger Sub within such twenty-one (21)
day period specifying the basis for its reasonable determination
that the Change in Control would have a material adverse effect
on Phoenix.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
2. Following the Merger, neither Phoenix nor Merger Sub may assign
its rights under the License Agreement without the other party's written
consent, which shall not be unreasonably withheld or delayed.
3. Phoenix hereby consents to the Merger and the assignment of the
License Agreement, by operation of law, to Merger Sub and executes this
Agreement to effectuate such consent, and for the purposes of the Merger
contemplated herein only, Phoenix, agrees not to exercise its termination right
under Section 11.3 of the License Agreement. Following the Merger, Merger Sub
shall be entitled to the benefit of all rights of Unicore under the License
Agreement and shall be subject to all of the obligations and restrictions of
Unicore under the License Agreement.
4. In the event of any cleanroom or independent development by Merger
Sub of Award Software (as defined in the License Agreement) licensed under the
License Agreement, other than those developments related to Enhancements or
derivative works not otherwise permitted under the terms of the License
Agreement, Phoenix and Merger Sub shall enter into a mutually acceptable license
agreement which shall provide a reasonable royalty to Phoenix for the licensing
and distribution of products based upon said development.
5. The governing law and venue for disputes regarding this Agreement
shall be in accordance with the terms of the License Agreement.
6. This Agreement shall be binding upon and shall inure to the
benefit of the successors and assigns of each of the parties hereto, including
without limitation, Merger Sub, which is a successor of Unicore.
7. Each party acknowledges that it has read this Agreement,
understands it, and agrees to be bound by its terms. This Agreement may only be
modified by a written instrument duly executed by authorized representatives of
both parties. The terms and conditions not stated herein shall be governed by
the terms of the License Agreement.
[Reminder of Page Intentionally Left Blank]
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Executed as an instrument under seal as of the date first set forth
above.
PHOENIX TECHNOLOGIES LTD.
By:__________________________________
Name:
Title:
UNICORE SOFTWARE, INC.
By:__________________________________
Name:
Title:
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as *****. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
EXHIBIT 10.12
SOFTWARE PURCHASE AGREEMENT
This Software Purchase Agreement (the "Agreement") is entered into as of
this 31st day of March, 1999 (the "Effective Date") between Phoenix Technologies
Ltd., a Delaware corporation having its principal place of business at 411 East
Plumeria Drive, San Jose, California 95134 (the "Seller"), and TouchStone
Software Corporation, a Delaware corporation having its principal place of
business at 1538 Turnpike Street, North Andover, Massachusetts 01845 (the
"Buyer").
WHEREAS, Seller desires to sell the CardWare software product and the
intellectual property content embodied therein, as identified hereunder; and to
use its best efforts to assign all CardWare license and support agreements
("CardWare Agreements") for CardWare in effect as of the Closing Date in
accordance with the terms and conditions of this Agreement; and
WHEREAS, Buyer desires to purchase title to CardWare, and assume all rights
and obligations under the Contract Rights currently in effect as of the Closing
Date, all in accordance with the terms and conditions hereof.
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the parties agree as follows:
ARTICLE I
SALE AND PURCHASE OF ASSETS
---------------------------
1.0 Definitions: For the purposes of this Agreement, CardWare shall mean
-----------
the Phoenix software solution, existing on the Closing Date, that is PC Card
database independent, and utilizes PCMCIA standard Card Information Structure
(CIS) that provided "Plug and Play" operation and compatibility for PC cards,
and all copyright and trade secrets embodied therein.
1.1 Transfer of Assets, Patent License. Subject to the terms and
--- ----------------------------------
provisions hereof, Buyer shall purchase and acquire from Seller, and Seller
shall sell, transfer and convey to Buyer, all title and rights and obligations
(except for the Undisclosed Agreements (as hereinafter defined)) of Seller in
CardWare, including, without limitation, the following (collectively, the
"Software"):
(a) all documentation (including internal documentation, documentation made
available to customers and training materials), sales activity reports (to be
delivered to Buyer after the Closing Date) flow-charts, source code notes,
software in source and object code, and descriptive, operating, test or other
types of documentation and memorialized know-how, trade secrets and inventions,
specific to CardWare, and all revisions, release levels and versions of the
foregoing, used on or with CardWare (hereinafter collectively referred to as the
"Software Documentation");
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
(b) all patents and patent applications of Seller only to the extent that
it covers the CardWare product, and are not applicable to any other products of
the Seller; copyrights, and all trademarks covering the Software or any portion
thereof, including the CardWare trademark, the foregoing being more specifically
described in the Schedule of Proprietary Rights attached hereto as Exhibit A and
---------
made a part hereof (collectively, the "Proprietary Rights");
(c) All rights and obligations of Seller under sales agreements, license
agreements, and maintenance and support agreements, and addendums and amendments
thereto, as set forth in the attached schedule of contract rights, attached
hereto as Exhibit B and made a part hereof (collectively, the "Contract
---------
Rights").
(d) For those patents and patent applications of Seller covering other
products of Seller, and not subject to sub-section (b), Seller shall grant to
Buyer a fully paid, royalty free, worldwide, irrevocable, perpetual nonexclusive
license under any Necessary Claims of any issued patent belonging to Seller, or
patent application pending as of the Closing Date belonging to Seller, that is
required for Buyer to fully exercise its rights and enjoyment of CardWare, in
the form it exists, both operationally and functionally as of the Closing Date.
"NECESSARY CLAIMS" shall mean those claims of all issued patents and patent
applications, other than design patents and design registrations, throughout the
world, in existence prior to the Closing Date, which are required by Buyer in
exercising its rights and enjoyment of the assignment of title to CardWare as
delivered after Closing.
(e) All revenues and royalties related to the Software, from whatever
source, generated after the Closing Date (the "Revenues"). Seller agrees to
promptly deliver to Buyer all Revenues upon Seller's receipt thereof.
1.2 Encumbrances. The sale and transfer of the Software, shall, at the
--- ------------
time of Closing (as hereinafter defined), be free and clear of all obligations,
security interests, liens, and encumbrances whatsoever. This Section
notwithstanding, Seller shall have no obligation or liability with respect to
Buyer's previous licensing of CardWare, prior to the Closing Date, and any
encumbrances that Buyer may have created with respect to its own licensing and
sale of CardWare.
1.3 Purchase Price. The purchase price for the sale and transfer of the
--- --------------
Software to Buyer is the sum of ****** ***** Dollars (the "Purchase Price"). The
Purchase Price shall be payable as follows:
(a) Buyer has previously remitted to Seller the sum of ***** (*****)
Dollars (the "Initial Payment") pursuant to the terms of that certain Software
License Agreement, dated November 6, 1998, as amended (as so amended, the
"Software License Agreement") between Seller and Unicore Software, Inc.
("Unicore"), a wholly-owned subsidiary of Buyer. This Initial Payment shall be
applied towards the Purchase Price.
<PAGE>
****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
(B) AT THE TIME OF CLOSING, THE SUM OF ***** ***** DOLLARS (THE "CLOSING
PAYMENT"), PAYABLE IN THE FORM OF SELLER'S CHECK, SHALL BE SENT TO SELLER BY
OVERNIGHT DELIVERY AND SHALL BE HELD BY SELLER IN ESCROW UNTIL SELLER HAS
DELIVERED TO BUYER THE INSTRUMENTS OF ASSIGNMENT REFERENCED IN SECTION 5.1(A).
THE PARTIES ACKNOWLEDGE THAT ***** DOLLARS OF THE CLOSING PAYMENT REPRESENTS
PAYMENTS OWED BY UNICORE UNDER THE SOFTWARE LICENSE AGREEMENT WHICH IS BEING
APPLIED TO THE PURCHASE PRICE HEREUNDER.
(C) ON OR BEFORE JUNE 1, 1999, THE SUM OF ***** ***** DOLLARS (THE "FINAL
PAYMENT") SHALL BE DELIVERED BY BUYER TO SELLER IN THE FORM OF SELLER'S CHECK IN
SUCH AMOUNT.
As security for the Final Payment, Buyer shall grant Seller a purchase
money security interest in the Software pursuant to a mutually acceptable
Security Agreement to be entered into by the parties after the Closing (the
"Security Agreement"). Such security interest shall be discharged upon payment
of the Final Payment. Such Security Agreement shall provide that title to the
Software shall revert to Seller in the event the Final Payment is not made when
due.
(d) It is the understanding of the Parties that this transaction would not
be subject to sales tax. Should the Commonwealth of Massachusetts assess a sales
tax to Seller relating to the transfer of the Software to Buyer, Buyer will
assume the tax liability for the sales tax assessed and related interest.
1.4 Closing. The completion of the contemplated transactions (the
--- -------
"Closing") shall take place on March 31, 1999, or such later date as may be
mutually agreed upon by the parties (the "Closing Date").
1.5 Assumption of Liabilities. Buyer assumes all rights and obligations
--- ----------------------------
related to the Software including those liabilities related to the Contract
Rights, and except for the Transitional Liability assumed by Seller, Buyer
assumes all liability related to the Software which may exist prior to the
Closing Date. Notwithstanding the foregoing, Seller shall be responsible for
all liabilities related to a breach of any of Seller's representations and
warranties set forth in this Agreement and for any breaches of the Contract
Rights by Seller prior to the Closing Date.
1.6 Access and Information. Seller shall give to Buyer, and Buyer's
--- ----------------------
agents, upon reasonable notice, during normal business hours, from the Closing
Date to a period Six (6) months from the Closing Date, access to those books,
records, contracts and commitments of Seller (including Contract Rights)
directly relating to the Software and shall use all reasonable efforts to
furnish Buyer, during such period, with information concerning the Software as
Buyer may reasonably request.
1.7 Conduct of Business. Seller warrants and represents to Buyer that,
--- -------------------
pending completion of the Closing, unless otherwise agreed in writing by Buyer:
<PAGE>
(a) Seller shall not sell, license, contract, commit or otherwise encumber
the Software, other than licensing in the ordinary course of business,
consistent with past practice, which Buyer understand includes the licensing of
CardWare under the Contract Rights.
(b) Other than in the ordinary course of business, consistent with past
practice, Seller shall not amend or modify any previously executed license
agreement for CardWare, unless such amendment or modification is requested by
the licensee and approved by Buyer , or unilaterally terminate any previously
executed license agreement to which it is a party or which in any way relates to
the Software. This obligation shall not apply to pending license agreements
that have not been executed as of the Closing Date. For those license agreements
still pending after the Closing Date, Seller shall refer all such prospective
licensees to Buyer, and Seller shall thereafter have no further obligation.
(c) Seller shall use all reasonable efforts to preserve the Software and
the intellectual property rights embodied therein, in good order, including,
without limitation, preserving for Buyer the goodwill of suppliers, customers
and others having business relationships with Seller which relates to the
Software or any portion thereof.
1.8 Transitional Liability Seller for a period of Six (6) months after the
----------------------
Closing Date will assume the obligation and liability for performance under
those license agreements (the "Transitional Liability") that have not been
identified to Buyer as of the Closing Date (the "Undisclosed Agreements"), and
properly assigned to Buyer. Seller's sole obligation and responsibility to
Buyer for any Undisclosed Agreements discovered after the Six (6) month period
shall be to promptly disclose and assign such agreements to Buyer. Buyer shall
be under no obligation to assume any Undisclosed Agreement if the Buyer, in its
discretion, determines that the terms and conditions of such agreements would
unduly burden Buyer or subject Buyer to enhanced liability, and may provide
written notice to Seller of Buyer's option not to assume any Undisclosed
Agreements which Seller provides to Buyer after the Closing Date.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller represents and warrants to Buyer as follows:
2.1 Corporate Existence and Authority. Seller is a corporation duly
--- ---------------------------------
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
execute and deliver this Agreement and the agreements contemplated hereby, to
perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby.
2.2 Authorization; Binding Effect. The execution and delivery by Seller
--- -----------------------------
of this Agreement and the agreements contemplated thereby, and the performance
by Seller of its
<PAGE>
obligations hereunder and thereunder, have been duly and validly authorized by
all necessary corporate action on the part of Seller. This Agreement and the
agreements known to Seller contemplated hereby have been (or prior to the
Closing will be) duly and validly executed and delivered by Seller and, upon the
execution and delivery thereof by the Buyer, will constitute the legal, valid
and binding obligations of Seller enforceable against it in accordance with its
terms.
2.3 Absence of Conflicts. Seller has all requisite corporate power and
--- --------------------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Seller do
not, and the performance of this Agreement by Seller will not, (i) conflict with
or violate the Certificate of Incorporation or By-laws of Seller, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to the Seller or by which Seller or any of its properties is bound or affected;
or (iii) breach any agreement relating to the Software to which Seller is a
party.
2.4 Non-Infringement. To the best of Seller's knowledge, as of the
--- ----------------
Closing Date, the Software does not infringe any patents, copyrights, trade
secrets, trademarks or other proprietary rights of any third parties and, to the
best of Seller's knowledge, no intellectual property rights or licenses are
required from third parties to exercise any rights with respect to the Software.
2.5 CardWare Proprietary Rights. The Proprietary Rights are in full force
--- ---------------------------
and effect and there are no liens, claims, proceedings or causes of action which
in any way effect the validity or enforceability of such Proprietary Rights.
Except for the Contract Rights and shrink-wrap license agreements, no rights or
licenses, express or implied, have been granted to any third parties under
CardWare's Proprietary Rights.
2.6 Contracts, Licenses, Permits and Approvals. Seller represents that
--- ------------------------------------------
all the agreements identified in the Contract Rights are in full force and
effect, that there are no defaults thereunder by Seller, and, to the best of
Seller's knowledge, no defaults by third parties and that the licensees
thereunder have no claims against Seller with respect to such Contract Rights.
Seller has made a diligent effort to determine all existing licensing and
support agreements for CardWare in order to identify all agreements defined as
Contract Rights, and to the best of Seller's knowledge, has no presently
existing contracts or commitments extending beyond the execution date hereof
which in any way relate to the Software that are not included in the Contract
Rights. Seller shall use its best efforts to obtain the consent of third parties
to the assignment of the Contract Rights. For those licenses that are pending
and have not been executed by Seller, Buyer at its option can either: (i) have
the agreement and the potential licensee referred to Buyer for completion of the
licensing transaction, wherein Seller shall have no further obligation; or (ii)
Seller can complete the licensing transaction and thereafter assign the executed
license to Seller; or (iii) reject the license altogether.
2.7 Litigation. As of the Closing Date there is no suit or action, or
--- ----------
legal,
<PAGE>
administrative, arbitration or other proceeding or governmental investigation
affecting the Software pending, or to the best of the knowledge and belief of
Seller, threatened against Seller which could adversely effect the Software.
2.8 Good Title. Seller has and shall transfer to Buyer at Closing, good
--- ----------
and marketable title to the Software. Seller represents that the Software is
free and clear of any and all security interests, encumbrances or liens.
Notwithstanding the foregoing, Seller shall not be held liable or responsible
for any such security interests, encumbrances or liens placed on CardWare by
Buyer during the period in which Buyer was marketing and sub-licensing CardWare
under a license from Seller.
2.9 Representations and Warranties. No representation or warranty by
--- ------------------------------
Seller in this Agreement or any documents provided hereunder contains or will
contain any untrue statement or omission or will omit to state any material fact
necessary to make the statements contained herein or therein not misleading.
All representations and warranties made by Seller in this Agreement and any
documents provided hereunder shall be true and correct, as qualified in such
statements, as of the date of Closing with the same force and effect as if they
had been made on such date.
2.10 Software. The Software Documentation represents a complete set of
---- --------
user guides and reference material necessary to maintain and support CardWare.
There are no known errors, malfunctions and/or defects in the Software; and to
the best of Seller's knowledge there is no known unauthorized use of the
Software or any portion thereof by any third party; and the Software and all
portions thereof have been licensed for use by third parties only in accordance
with terms and conditions set forth in the licenses identified in the Contract
Rights.
2.11 Rights of Seller in Software. The Software was acquired by Seller as
---- ----------------------------
a result of a merger with Award Software International ("Award") and to the best
of Seller's knowledge and belief was created solely by employees, or agents of
Award who are / were under an obligation to assign all right, title and interest
therein to Award / Seller.
2.12 CardWare Revenues. All documentation and information provided to
---- -----------------
Buyer by Seller relating to revenues generated by the Software, including,
without limitation, the documentation attached hereto as Exhibit C, is true,
----------
complete and accurate in all respects.
2.13 Liabilities. Seller represents that, to the best of its knowledge,
---- -----------
as of the Closing Date, it is not aware of any liabilities of any nature (other
than the Contract Rights) relating to the Software.
2.14 Limitation of Warranties. Seller's warranties include only express
------------------------
written warranties as are contained in this Agreement. Any other express
warranties, oral or written, not contained in this Agreement have no force and
effect. Except as set forth in this Agreement, Seller hereby disclaims all
implied warranties, including without limitation, implied warranties of
merchantability and implied warranties of fitness for special or ordinary
<PAGE>
uses or purposes, or for noninfringement. The Software, except as expressly
warranted or represented herein, is purchased "as is" and "with all faults."
EXCEPT AS SET FORTH IN THIS AGREEMENT, SELLER MAKES NO REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO CARDWARE, AND SELLER DISCLAIMS
ALL WARRANTIES INCLUDING, WITHOUT LIMITATION, THE WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE (INCLUDING WITHOUT LIMITATION ANY RIGHTS
UNDER PATENT, COPYRIGHT AND TRADE SECRETS). BUYER ACCEPTS CARDWARE IN "AS IS"
CONDITION. EXCEPT AS SET FORTH IN THIS AGREEMENT, SELLER SHALL NOT BE LIABLE
OR OBLIGATED IN ANY MANNER FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OR INCIDENTAL
DAMAGES, UNDER ANY LEGAL THEORY, EVEN IF SELLER HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer represents and warrants to Seller as follows:
3.1 Corporate Existence and Authority. Buyer is a corporation duly
--- ---------------------------------
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
execute and deliver this Agreement and the agreements contemplated hereby, to
perform its obligations hereunder and thereunder, and to consummate the
transactions contemplated hereby and thereby.
3.2 Authorization; Binding Effect. The execution and delivery by Buyer
--- -----------------------------
of this Agreement and the agreements contemplated thereby, and the performance
by Buyer of its obligations hereunder and thereunder, have been duly and validly
authorized by all necessary corporate action on the part of Buyer. This
Agreement and the agreements contemplated hereby have been (or prior to the
Closing will be) duly and validly executed and delivered by Buyer and, upon the
execution and delivery thereof by Seller, will constitute the legal, valid and
binding obligations of Buyer enforceable against it in accordance with its
terms.
3.3 Absence of Conflicts. Buyer has all requisite corporate power and
--- --------------------
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Buyer does
not, and the performance of this Agreement by Buyer will not, (i) conflict with
or violate the Certificate of Incorporation or By-laws of Buyer, (ii) conflict
with or violate any law, rule, regulation, order, judgment or decree applicable
to the Buyer or by which Buyer or any of its properties is bound or affected.
3.4 Representations and Warranties. No representation or warranty by
--- ------------------------------
Buyer in this Agreement or any documents provided hereunder contains or will
contain any untrue statement or omission or will omit to state any material fact
necessary to make the statements contained
<PAGE>
herein or therein not misleading. All representations and warranties made by
Buyer in this Agreement and any documents provided hereunder shall be true and
correct as of the date of Closing with the same force and effect as if they had
been made as of such date.
3.5 Litigation. There are no pending, or to the best knowledge and
--- ----------
belief of Buyer, threatened actions or proceedings before any court or
administrative agency or other authority which might or will materially or
adversely affect Buyer's ability or right to perform all of Buyer's obligations
hereunder.
3.6 Assumption of Rights and Obligations. Buyer assumes, agrees to be
-------------------------------------
bound by, and undertakes to perform each and every one of the terms and
conditions contained in the Contract Rights in all respects, as if Buyer were
the original party.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
4.1 Conditions Precedent to Seller's Obligations. The obligations of
--- --------------------------------------------
Seller to complete the Closing hereunder are, at Seller's option, subject to the
following conditions:
(a) all representations and warranties by Buyer contained in this
Agreement shall be true in all material respects as of and at the Closing.
(b) Buyer shall have performed and complied with all agreements, terms and
conditions required by this Agreement to be performed and complied with by Buyer
on or before the Closing, including the payment of the Closing Payment.
4.2 Conditions Precedent to Buyer's Obligations. The obligations of
--- -------------------------------------------
Buyer to complete the Closing under this Agreement are, at Buyer's option to
waive any of the forgoing, subject to fulfillment by Seller, or otherwise, of
each of the following conditions:
(a) all representations and warranties of Seller, as specified and
qualified in this Agreement shall be true in all respects as of and at the
Closing with the same effect as if said representations and warranties had been
made on and as of the Closing, except and to the extent otherwise specifically
provided by the terms and conditions of this Agreement.
(b) Seller shall have performed and complied with the terms and conditions
required by this Agreement and to be performed and complied with by Seller on or
before the Closing.
(c) Seller shall have delivered to Buyer such other instruments and
documents as Buyer shall reasonably request that are necessary for the purpose
of further perfecting the title of Buyer in the Software. Pursuant to this
obligation, Seller shall deliver all those Contract Rights known and in Seller's
possession at the time of Closing. Buyer fully understands that other licenses
may exist that Seller is not aware of, or cannot locate. Failure to deliver all
licenses outstanding for CardWare shall not be deemed a breach of this
obligation.
<PAGE>
4.3 Waivers and Consents. Promptly following the execution of this
--- --------------------
Agreement, Seller shall use its best efforts to obtain such written waivers and
consents as may be required or reasonably requested by Buyer in connection with
the sale and assignment of the Software to Buyer in accordance with the terms of
this Agreement.
ARTICLE V
CLOSING OBLIGATIONS
-------------------
5.1 Seller's Obligations at Closing. At the Closing, Seller shall
--- -------------------------------
execute and deliver to Buyer:
(a) a bill of sale, assignment, and such other instruments and documents
of conveyance and transfer to Buyer in all of the Software.
(b) use all reasonable efforts to secure all appropriate original
instruments of consent or waiver executed by third parties with respect to all
Contract Rights being transferred to Buyer hereunder in order to more fully
effect the transfer of the Contract Rights. Buyer understands and agrees that
Seller may not be able to secure consent for all outstanding licenses for
CardWare, and that Seller's inability to secure consent for all outstanding
licenses for CardWare shall not be a breach of Seller's obligations hereunder.
(c) possession of the originals of all Software Documentation and all
copies thereof.
5.2 Seller's Further Assurances. From time-to-time, at Buyer's request,
--- ---------------------------
whether at or after the Closing and without further consideration, Seller shall
execute and deliver to Buyer such instruments as may reasonably be required to
carry out the intent and purpose of this Agreement, and deliver to Buyer such
other data, papers and information as may be requested by Buyer to assist Buyer
in the use of the Software.
5.3 Buyer's Obligations at Closing. At Closing, or any mutually agreed
--- ------------------------------
upon time after Closing, Buyer shall execute and deliver to Seller the Closing
Payment.
ARTICLE VI
MISCELLANEOUS
-------------
6.1 Brokerage. Each party hereto represents and warrants to the other
--- ---------
that no broker or finder is entitled to any commission, or similar fee, in
connection with the making or carrying out of this Agreement.
6.2 Effectiveness. This Agreement supersedes any and all agreements
--- -------------
related to CardWare, if any, previously made between the parties relating to the
subject matter hereof and there are no understandings or agreements other than
those included or referenced herein.
<PAGE>
6.3 Notices and Communications. Any notice, payment, request,
--- --------------------------
instruction, or other document to be delivered hereunder shall be deemed
sufficiently given if in writing and delivered personally or mailed by certified
mail, postage prepaid, if to Buyer addressed to Buyer at the address set forth
above, with one copy to Mark E. Tully, Esq., Devine, Millimet & Branch, P.A., 12
Essex Street, P.O. Box 39, Andover, MA 01810 and if addressed to Seller at the
address first set forth above, with one copy to Stuart J. Nichols, Esq. unless
in each such case Buyer or Seller shall have notified the other in writing of a
different address.
6.4 Non-Waiver. No delay or failure on the part of either party in
--- ----------
exercising any right hereunder, and no partial or single exercise thereof, will
constitute a waiver of such right or of any other right hereunder.
6.5 Headings. Headings in this Agreement are for convenience only and
--- --------
are not to be used for interpreting or construing any provisions hereof.
6.6 Governing Law. This Agreement shall be construed in accordance with
--- -------------
and governed by the laws of the Commonwealth of Massachusetts to the
jurisdiction of whose courts the parties hereto submit.
6.7 Counterparts. This Agreement may be executed in two or more
--- ------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one in the same instrument.
6.8 Binding Nature. The provisions of this Agreement shall be binding
--- --------------
upon and inure to the benefit of each of the parties hereto and their respective
successors and assigns.
6.9 Survival of Representations and Warranties. Except as otherwise
--- ------------------------------------------
expressly provided in this Agreement, the representations and warranties of
Buyer and Seller shall survive the Closing.
6.10 Amendment; Successors and Assigns. This Agreement may be amended
---- ---------------------------------
only by an instrument signed by the authorized representatives of the parties
hereto. Neither party may assign any of its rights, obligations, or liabilities
arising hereunder without the prior written consent of the other, except as
otherwise provided herein, and any such assignment or attempted assignment shall
be null and void.
6.11 Termination of Unicore License Agreement. Effective as of the
---- ----------------------------------------
Closing Date, the parties hereto and Unicore agree that Addendum A to the
Unicore Software License Agreement with respect to licensing of the Software
shall terminate and neither Unicore, Seller or Buyer shall have any
obligations thereunder with respect to the Software (including, without
limitation, any payment obligation).
6.12 Audit. Once per calendar year Buyer may audit the records and
---- -----
supporting documentation of Seller relating to the Software to determine
whether Seller has correctly remitted to Buyer all Revenue due Buyer hereunder.
To facilitate the audit, Seller will give
<PAGE>
the auditor reasonable access, during normal business hours, to Seller's
premises where such records and documentation are located, provided that such
auditor has executed a confidentiality agreement prior to such access. If an
audit discloses an underpayment of Revenues, Seller will immediately pay Buyer
the additional Revenue due, together with interest thereon from the original
payment due date at the rate of one percent (1%) per month or the highest rate
allowed by law (whichever is less). Buyer and Seller will bear their own
expenses incurred in the audit; however, if an audit discloses an underpayment
of Revenue of five percent (5%) or more of the total Revenues originally due for
the period being audited, Seller will reimburse Buyer for all expenses incurred
by Buyer in the audit.
6.13 Noncompetition. Seller agrees, for a one (1) year period after the
--------------
Closing Date, to not independently develop, directly or indirectly, any products
which are similar in functionality and operation as the Software.
Notwithstanding the foregoing, the Seller shall not be prohibited from licensing
the CardExecutive software product from Softex, and derivatives and
modifications based thereon.
6.14 Japanese Customers. Within two (2) weeks of the Closing Date, the
------------------
parties shall enter into a mutually satisfactory agreement with respect to the
providing of service and support by Seller to customers using the Software in
Japan.
6.15 NRE Fees. All NRE fees incurred by Buyer after the Closing Date
--------
regarding the April 16, 1997 (with all amendments) Agreement between the Seller
and Compaq Computer Corp. (the "Compaq Agreement") shall belong to Buyer. All
NRE fees incurred by Seller prior to the Closing regarding the Compaq Agreement
shall belong to Seller. Notwithstanding anything to the contrary set forth in
this Agreement, Seller agrees to complete all NRE work which it has initiated
and to use all reasonable efforts to provide for the transition of such NRE work
to the Buyer.
6.16 Delivery of Hardware Platforms. Seller agrees to promptly (but no
------------------------------
later than two weeks or any mutually agreed upon extension thereof) deliver to
Buyer all hardware platforms (including, without limitation, Compaq platforms,
Toshiba platforms, DEC platforms, any PC-card inventory related to the
Software, and hardware related to the development of the Software) utilized by
Seller in connection with the Software.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as an instrument under seal by their authorized representatives as
of the date first above written.
PHOENIX TECHNOLOGIES LTD.
By: ___________________________
Name: ___________________________
Title: ___________________________
TOUCHSTONE SOFTWARE CORPORATION
By: ___________________________
Pierre A. Narath, President
UNICORE SOFTWARE, INC. (with respect to
Section 6.11 only)
By: ___________________________
Pierre A. Narath, President
<PAGE>
EXHIBIT 23.1--INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-25989 and 333-21395 on Form S-8 of Touchstone Software Corporation of our
report dated March 9, 1999, appearing in this Annual Report on Form 10-KSB of
Touchstone Software Corporation for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
Costa Mesa, California
April 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,325,255
<SECURITIES> 5,897,469
<RECEIVABLES> 1,193,528
<ALLOWANCES> 0
<INVENTORY> 185,287
<CURRENT-ASSETS> 8,768,526
<PP&E> 134,888
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,326,669
<CURRENT-LIABILITIES> 3,124,557
<BONDS> 0
0
0
<COMMON> 7,963
<OTHER-SE> 7,004,256
<TOTAL-LIABILITY-AND-EQUITY> 10,326,669
<SALES> 4,729,240
<TOTAL-REVENUES> 4,835,823
<CGS> 1,367,196
<TOTAL-COSTS> 1,367,196
<OTHER-EXPENSES> 7,134,359
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,096,116)
<INCOME-TAX> 800
<INCOME-CONTINUING> (3,096,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,096,916)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
