<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): March 8, 1999
TOUCHSTONE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-12969 95-3778226
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1538 TURNPIKE STREET
NORTH ANDOVER, MASSACHUSETTS 01845
(Address of principal executive offices) (Zip Code)
978.686.6468
(Registrant's telephone number, including area code)
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
--- ---
1
<PAGE>
Item 2. Acquisition or Disposition of Assets.
-------------------------------------
Effective as of the close of business on March 8, 1999, TouchStone
Software Corporation (the "Company") acquired all of the issued and outstanding
capital stock of Unicore Software, Inc., a Massachusetts corporation
("Unicore"). At the time of the acquisition, Unicore was privately owned by
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. Unicore is a
leading provider of system management software, including BIOS upgrades, PC
Diagnostics and Year 2000 Solutions, whose customers consist of a majority of
Fortune 500 corporations, government agencies, and major educational and
financial institutions. The original Unicore was founded by Mr. Narath in 1989,
and sold to Award Software International, Inc. ("Award") in 1997. On October 27,
1998, following the merger of Award with and into 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.
Pursuant to the terms and conditions of a definitive Agreement and Plan
of Acquisition ("Acquisition Agreement"), 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. The acquisition is being accounted
for as a purchase by the Company.
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. The balance of the purchase price is to be paid through the
issuance of an aggregate of 3,350,000 shares of the Company's Common Stock
immediately following the 1999 Annual Meeting of the Company's stockholders (the
"Annual Meeting"), as described in more detail below. 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 upcoming 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 Annual Meeting, 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 of the balance of the purchase price
for Unicore. On March 8, 1999, the effective date of the acquisition, the
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
shares of Common Stock present, in person or by proxy, at the Annual Meeting.
Each of the executive officers and directors of the Company, including Mr.
Narath, has indicated the intention to vote all of the shares of the Company's
Common Stock over which such individual has voting control in favor of the
issuance of 3,350,000 shares of the Company's Common Stock in payment of the
balance of the purchase price for Unicore.
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 Annual Meeting, the
Acquisition Agreement provides that the balance of the Unicore purchase price be
paid 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.
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 Annual Meeting. Under certain
2
<PAGE>
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
at the 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 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.
In connection with the acquisition, each of Messrs. Narath and Raza
entered into a three-year employment agreement with the Company. Under the terms
of his employment agreement, Mr. Narath is to serve as the President and Chief
Executive Officer of the Company, and as a member of its Board of Directors, and
as the President, Chief Executive Officer and a director of Unicore which
currently operates as a wholly-owned subsidiary of the Company. The employment
agreement has an initial term of three years commencing March 1, 1999, and will
automatically renew for an additional one-year period on each March 1 unless
terminated by either party on six months prior written notice. For the year
ending December 31, 1999, Mr. Narath is to be paid a base salary of $200,000,
with his base salary to increase to $210,000 for the year ending December 31,
2000 and to $225,000 for the year ending December 31, 2001. In addition to this
base salary, Mr. Narath is to be paid a bonus equal to 3.5% of all consolidated
net sales in excess of $6,000,000 generated by the Company during the year
ending December 31, 1999, plus such other bonuses as the Company's Board of
Directors may determine. Mr. Narath's employment agreement also provides that he
is entitled to receive certain specified supplemental health and life insurance
and all costs of a motor vehicle to be selected by him, in addition to
reimbursement for all of his reasonable business expenses, and to participate in
all of the Company's existing benefit plans.
Should his employment with the Company be terminated for any reason
other than "cause" as defined therein, Mr. Narath would be entitled to receive,
in one payment, an amount equal to one year's base salary at the level then in
effect, plus an amount equal to any bonuses earned during the previous calendar
year. However, if Mr. Narath's employment is terminated for any reason within
one year following a specified change in control of the Company which is not
approved by the Company's Board of Directors, with Mr. Narath voting in favor
thereof, the Company would be obligated to pay Mr. Narath, in one payment, an
amount equal to 200% of one year's salary at the level then in effect, plus 200%
of any bonuses earned during the previous calendar year and an additional amount
equal to all taxes payable by Mr. Narath on the full amount of such payment. In
the event that there is a change in control of the Company which has been
approved by the Company's Board of Directors, with Mr. Narath voting in favor
thereof, he would nevertheless be entitled to terminate his employment agreement
for "good cause" if his duties were substantially diminished within 12 months
thereafter, in which case the Company would be obligated to pay him, in one
payment, an amount equal to one year's base salary at the level then in effect,
plus an amount equal to any bonuses earned during the previous calendar year.
Mr. Raza's employment agreement provides that he is to be employed as a
Vice President of both the Company and Unicore for a three-year period
commencing March 1, 1999, subject to the same provision for additional one-year
extensions. During each year of the initial term, Mr. Raza is to be paid a
base salary of not less than $110,00 and shall be entitled to receive such
bonuses as the Company's Board of Directors may determine. In the event that his
employment with the Company is terminated for any reason other than "cause" as
defined therein, Mr. Raza would be entitled to receive, in one payment, an
amount equal to one year's base salary at the level then in effect, plus an
amount equal to any bonuses earned during the previous calendar year.
As a condition to the closing of the Unicore acquisition, the Company
deposited the sum of $620,000 in cash with Lawrence Savings Bank of
Massachusetts, in order to obtain the release of Mr. Narath from his personal
guarantee 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.
In connection with the acquisition, each of Messrs. Narath and Raza
also was granted "piggy-back" registration rights with respect to any and all
shares of the Company's Common Stock owned by them, including any shares issued
in payment of the balance of the purchase price.
3
<PAGE>
Item 7. Financial Statements and Exhibits.
----------------------------------
(a) Financial Statements of Business Acquired.
Consolidated Financial Statements for the Year Ended December 1997 and
Independent Auditors' Report
Consolidated Financial Statements for the Nine Months Ended September
30, 1998 and Independent Auditors' Report
Consolidated Financial Statements for the Period from Inception
(October 1, 1998) to December 31, 1998 and Independent Auditors'
Report
(b) Pro Forma Financial Information.
Pro Forma Consolidated Balance Sheet as of December 31, 1998
(Unaudited)
Pro Forma Consolidated Statement of Operations for the Year Ended
December 31, 1998 (Unaudited)
(c) Exhibits.
23.1 Consent of Independent Auditors.
99.A-1 (1) Agreement and Plan of Acquisition dated March 5, 1999.
99.A-2 (1) Employment Agreement with Pierre A. Narath.
99.A-3 (1) Employment Agreement with Jason K. Raza.
99.A-4 (1) Registration Rights Agreement.
99.A-5 (1) Agreement and Plan of Merger dated March 5, 1999.
99.B (1) Press release dated March 10, 1999.
99.2 Financial Statements of Unicore Software, Inc.
described in Item 7(a).
99.3 Pro Forma Consolidated Balance Sheet as of December 31,
1998 (Unaudited), Pro Forma Consolidated Statement of
Operations for the Year Ended December 31, 1998 (Unaudited)
and Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998 (Unaudited).
(1) Incorporated by reference to the correspondingly numbered exhibit
to the Company's Current Report on Form 8-K filed on March 22,
1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOUCHSTONE SOFTWARE CORPORATION
May 24, 1999 By: /s/ Calvin G. Leong
-------------------
Calvin G. Leong
Chief Financial Officer
4
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
23.1 Consent of Independent Auditors.
99.A-1 (1) Agreement and Plan of Acquisition dated March 5, 1999.
99.A-2 (1) Employment Agreement with Pierre A. Narath.
99.A-3 (1) Employment Agreement with Jason K. Raza.
99.A-4 (1) Registration Rights Agreement.
99.A-5 (1) Agreement and Plan of Merger dated March 5, 1999.
99.B (1) Press release dated March 10, 1999.
99.2 Financial Statements of Unicore Software, Inc. described in
Item 7(a).
99.3 Pro Forma Consolidated Balance Sheet as of December 31, 1998
(Unaudited), Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 1998 (Unaudited) and Notes to
Consolidated Financial Statements for the Year Ended December 31,
1998 (Unaudited).
(1) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Current Report on Form 8-K filed on March 22, 1999.
5
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation of the Unicore Software, Inc. Consolidated
Financial Statements for the Year Ended December 1997 and Independent Auditors'
Report, Unicore Software, Inc. Consolidated Financial Statements for the Nine
Months Ended September 30, 1998 and Independent Auditors' Report, and Unicore
Software, Inc. Consolidated Financial Statements for the Period from Inception
(October 1, 1998) to December 31, 1998 and Independent Auditors' Report
appearing in this Current Report on Form 8-K/A of Touchstone Software
Corporation, March 8, 1999 being the date of the earliest event reported.
/s/ Cowan, Bolduc, Doherty & Company
Andover, Massachusetts
May 20, 1999
6
<PAGE>
EXHIBIT 99.2
UNICORE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
AND
INDEPENDENT AUDITORS' REPORT
CBD
COWAN, BOLDUC, DOHERTY
& COMPANY
<PAGE>
[LOGO APPEARS HERE]
COWAN, BOLDUC, DOHERTY
& COMPANY
Certified Public Accountants
To the Board of Directors of
Unicore Software, Inc. and Subsidiary
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of Unicore Software
Inc. and its Subsidiary as of December 31, 1997, and the related statements of
income and deficit, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unicore Software, Inc. and
Subsidiary as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Cowan, Bolduc, Doherty & Company
February 10, 1999
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 48,735
Accounts receivable 125,825
Income taxes receivable 63,993
Prepaid expenses 43,030
---------
Total current assets $ 281,583
PROPERTY AND EQUIPMENT - net of accumulated depreciation 54,209
DEFERRED INCOME TAXES 195,510
INTANGIBLE ASSET - net of accumulated
amortization of $240,624 34,376
---------
TOTAL ASSETS $ 565,678
=========
LIABILITIES AND
STOCKHOLDERS' DEFICIENCY
------------------------
CURRENT LIABILITIES:
Current portion of obligation under capital lease $ 2,762
Note payable - stockholder 50,000
Accounts payable 61,993
Accrued expenses 55,761
Accrued income taxes 71,700
Deferred revenue 21,174
Due to parent 414,374
---------
Total current liabilities $ 677,764
STOCKHOLDERS' DEFICIENCY:
Common stock, no par value, 1,000 shares authorized,
100 shares issued and outstanding 35,000
Deficit (147,086)
---------
Total stockholders' deficiency (112,086)
---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 565,678
=========
</TABLE>
See notes to consolidated financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENT OF INCOME AND DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SALES $ 2,412,463
COST OF SALES 400,927
-----------
GROSS PROFIT 2,011,536
OPERATING EXPENSES:
General and administrative $ 916,703
Sales and marketing 474,807
Research and development 454,398
---------
Total operating expenses 1,845,908
-----------
INCOME FROM OPERATIONS 165,628
OTHER INCOME (EXPENSE):
Interest expense (25,952)
Interest income 11,583
---------
Total other expense (14,369)
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 151,259
PROVISION FOR INCOME TAXES 123,770
-----------
NET INCOME 27,489
RETAINED EARNINGS, BEGINNING 136,925
DIVIDENDS (311,500)
-----------
DEFICIT, ENDING $ (147,086)
===========
</TABLE>
See notes to consolidated financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,489
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization $ 147,778
Deferred income taxes (19,630)
(Increase) decrease in:
Accounts receivable 30,038
Income taxes receivable (63,933)
Prepaid expenses (11,783)
Inventory 6,833
Increase (decrease) in:
Accounts payable 28,797
Accrued expenses 11,216
Accrued income taxes 10,083
Deferred revenue (279,276)
---------
Total adjustments (139,877)
---------
Net cash used in operating activities (112,388)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (39,712)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from parent
Principal repayments of note payable - bank 414,374
Dividends (390,000)
Net borrowings on note payable - stockholder (311,500)
Principal repayments of obligation under capital lease 36,416
(6,454)
--------
Net cash used in financing activities (257,164)
--------
NET DECREASE IN CASH (409,264)
CASH, BEGINNING 457,999
--------
CASH, ENDING $ 48,735
=========
</TABLE>
SEE NOTE 11 FOR SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION.
See notes to consolidated financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1997
- -=------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated balance sheet includes the accounts of
Unicore Software, Inc. (the Company) and its wholly-owned subsidiary
Microid Research, Inc. All significant intercompany balances have been
eliminated in consolidation.
Reporting Entity
----------------
Unicore Software, Inc. (the Company) was incorporated in May 1991, as a
Massachusetts corporation and is primarily engaged in the development and
sales of system software which is sold directly to OEM's and end users
throughout the United States.
Revenue Recognition
-------------------
Software and hardware revenue is recognized upon delivery of the product.
Consulting and other revenues are recognized upon the delivery of the
services. Maintenance revenue is recognized ratably over the term of the
maintenance contract.
Cash
----
The Company's bank balances fluctuates during the year and can exceed the
federally insured limit. Management monitors regularly the financial
condition of the financial institutions, along with its cash balances, in
an attempt to minimize this potential risk.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method for financial statement purposes, and accelerated
methods for income tax purposes, over the estimated useful lives of the
assets.
Intangible Asset
----------------
Intangible asset, which represents purchased software, is being amortized
over two (2) years.
Advertising
-----------
Advertising costs are expensed as incurred.
Research and Development Costs
------------------------------
Research and development costs are expensed as incurred.
Income Taxes
------------
Effective January 1, 1997, the Company and its stockholder elected to be
taxed under the Subchapter S provision of the Internal Revenue Code;
therefore the stockholder of the Company was responsible for income taxes
on corporate profits for federal and state tax purposes. On May 31, 1997,
as a result of the purchase of all of the Company's outstanding common
stock by a publicly traded corporation, the Company's Subchapter S
election was revoked.
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
-----------------------
Deferred income tax assets and liabilities are computed for temporary
differences between the financial statement carrying amount and the tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rated applicable to
the periods in which the differences are expected to affect taxable
income.
Deferred income taxes are primarily attributable to timing differences from
the accelerated depreciation and amortization methods for income tax
purposes and the expensing of certain research and development costs for
financial reporting purposes. Income tax expense includes the federal and
state income taxes payable or refundable for the year plus or minus the
change during the year in the deferred tax asset or liability.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and certain reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. ACQUISITION OF WHOLLY-OWNED SUBSIDIARY
On April 17, 1996, the Company acquired all of the outstanding stock of
Microid Research, Inc. The acquisition has been accounted for using the
purchase method of accounting, and accordingly, the purchase price of
$550,000 has been allocated to the assets purchased based upon the fair
value at the date of acquisition. The sole asset acquired was software
which was determined to have a fair value of $275,000. The remaining
$275,000 of the purchase price has been expensed as research and
development costs.
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1997, consisted of the following:
<TABLE>
<S> <C>
Office equipment $ 87,015
Furniture and fixtures 6,827
Leasehold improvements 6,375
--------
Total 100,217
Less: accumulated depreciation 46,008
--------
Property and equipment - net $ 54,209
========
</TABLE>
4. DUE TO PARENT
Due to parent represents advances from the Company's parent corporation in
the normal course of business. The advances, which are unsecured, and non-
interest bearing, have no stipulated repayment terms.
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 1997
_______________________________________________________________________________
5. CAPITAL LEASE OBLIGATION
The future minimum lease payments under a certain capital lease, together
with the present value of the net minimum lease payments as December 31,
1997, were as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998 $ 3,594
Less: amount representing interest 832
---------
Present value of net minimum lease payments
under capital lease 2,762
Less: current portion 2,762
---------
Capital lease obligation - net of current portion $ -
=========
</TABLE>
RELATED PARTY TRANSACTIONS
Note payable-stockholder represents an unsecured, non-interest bearing,
demand note.
7. RETIREMENT PLAN
The Company provides a 401(k) Plan covering substantially all full-time
employees. Employees may contribute to the plan up to 15% of their salary
with a maximum $10,000 in 1997. Company contributions are at the
discretion of the Board of Directors. For the year ended December 31,
1997, the Company made no contributions to the plan.
8. LEASE COMMITMENTS
The Company leases its office and warehouse facilities from an affiliate,
under a five-year operating lease agreement expiring December 2000. The
lease contains a provision for a separate five-year renewal option at an
annual rent expense of no greater than 50% of the rent, as defined in the
agreement.
The Company also leases a motor vehicle under an operating leases agreement
expiring May 1999.
Future minimum lease payments under the non-cancelable portion of the
leases as of December 31, 1997, were as follows:
<TABLE>
<CAPTION>
For the
year ended
December 31,
-----------
<S> <C>
1998 $ 85,920
1999 83,800
2000 78,000
--------
Total $247,720
========
</TABLE>
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
9. INCOME TAXES
The components of the provision for (benefit from) income taxes as of
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal $ 111,136
State 32,264
---------
143,400
---------
Deferred:
Federal (15,213)
State (4,417)
---------
(19,630)
---------
Total $ 123,770
=========
</TABLE>
Deferred tax assets as of December 31, 1997, consisted of the following:
<TABLE>
<S> <C>
Research and development costs $ 110,000
Depreciation and amortization 62,265
Other 23,245
---------
Total non-current deferred tax assets $ 195,510
=========
</TABLE>
10. SUBSEQUENT EVENT
On October 1, 1998, the Company sold substantially all of its assets for
consideration, in the amount of $950,000, and the assumption of
substantially all of its liabilities.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Cash paid during the year for:
Interest $ 25,952
Income taxes 153,088
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND
INDEPENDENT AUDITORS' REPORT
CBD
COWAN, BOLDUC, DOHERTY
& COMPANY
<PAGE>
[LOGO APPEARS HERE]
COWAN, BOLDUC, DOHERTY
& COMPANY
Certified Public Accountants
To the Board of Directors of
Unicore Software, Inc. and Subsidiary
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheet of Unicore Software
Inc. and its Subsidiary as of September 30, 1998, and the related statements of
income and retained earnings, and cash flows for the nine months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unicore Software, Inc. and
Subsidiary as of September 30, 1998, and the results of its operations and its
cash flows for the nine months ended, in conformity with generally accepted
accounting principles.
Cowan, Bolduc, Doherty & Company
March 10, 1999
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 82,302
Accounts receivable - net of allowance for doubtful
accounts of $40,000 476,151
Prepaid expenses 5,926
---------
Total current assets $ 564,379
PROPERTY AND EQUIPMENT - net of accumulated depreciation 65,178
DEFERRED INCOME TAXES 211,510
----------
TOTAL ASSETS $ 841,067
==========
LIABILITIES AND
STOCKHOLDER'S EQUITY
--------------------
CURRENT LIABILITIES:
Accounts payable $ 27,341
Accrued expenses 79,885
Accrued income taxes 71,245
Deferred revenue 4,505
Due to parent 580,442
---------
Total current liabilities $ 763,418
STOCKHOLDER'S EQUiTY:
Common stock, no par value, 1,000 shares authorized,
100 shares issued and outstanding 35,000
Retained earnings 42,649
---------
Total stockholder's equity 77,649
----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 841,067
==========
</TABLE>
See notes to consolidated financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SALES $ 2,265,230
COST OF SALES 304,073
-----------
GROSS PROFIT 1,961,157
OPERATING EXPENSES:
General and administrative $ 751,202
Sales and marketing 549,772
Research and development 345,401
---------
Total operating expenses 1,646,375
-----------
INCOME FROM OPERATIONS 314,782
OTHER INCOME (EXPENSE):
Interest expense (63)
Interest income 1,506
---------
Total other income 1,443
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 316,225
PROVISION FOR INCOME TAXES 126,490
-----------
NET INCOME 189,735
DEFICIT, BEGINNING (147,086)
-----------
RETAINED EARNINGS, ENDING $ 42,649
===========
</TABLE>
See notes to financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. SUBSIDIARY
=================================
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 189,735
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization $ 57,563
Provision for bad debts 40,000
Deferred income taxes (16,000)
(Increase) decrease in:
Accounts receivable (390,326)
Income taxes receivable 63,993
Prepaid expenses 37,104
Increase (decrease) in:
Accounts payable (34,652)
Accrued expenses 24,124
Accrued income taxes (455)
Deferred revenue (16,669)
---------
Total adjustments (235,318)
---------
Net cash used in operating activities (45,583)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (34,156)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net principal repayments on note payable - stockholder (50,000)
Principal repayments on obligation under capital lease (2,762)
Net advances from parent 166,068
---------
Net cash provided by financing activities 113,306
---------
NET INCREASE IN CASH 33,567
CASH, BEGINNING 48,735
---------
CASH, ENDING $ 82,302
=========
</TABLE>
SEE NOTE 9 FOR SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION.
See notes to financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The accompanying consolidated balance sheet includes the accounts of
Unicore Software, Inc. (the Company) and its wholly-owned subsidiary
Microid Research, Inc. All significant intercompany balances have been
eliminated in consolidation.
Reporting Entity
----------------
Unicore Software, Inc. (the Company) was incorporated in May 1991, as a
Massachusetts corporation and is primarily engaged in the development and
sales of system software which is sold directly to OEM's and end users
throughout the United States.
Revenue Recognition
-------------------
Software and hardware revenue is recognized upon delivery of the product.
Consulting and other revenues are recognized upon the delivery of the
services. Maintenance revenue is recognized ratably over the term of the
maintenance contract.
Cash
----
The Company's bank balances fluctuates during the year and can exceed the
federally insured limit. Management monitors regularly the financial
condition of the financial institutions, along with its cash balances, in
an attempt to minimize the potential risk.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method for financial statement purposes, and accelerated
methods for income tax purposes, over the estimated useful lives of the
assets.
Income Taxes
------------
Deferred income tax assets and liabilities are computed for temporary
differences between the financial statement carrying amount and the tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income.
Deferred income taxes are primarily attributable to timing differences from
the accelerated depreciation and amortization methods and the expensing of
certain research and development costs for financial reporting purposes.
Income tax expense includes the federal and state income taxes payable or
refundable for the period plus or minus the change during the year in the
deferred tax asset or liability.
Research and Development Costs
------------------------------
Research and development costs are expensed as incurred.
Advertising
-----------
Advertising costs are expensed as incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and certain reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
SEPTEMBER 30, 1998
- -------------------------------------------------------------------------------
2. ACQUISITION OF WHOLLY-OWNED SUBSIDIARY
On April 17, 1996, the Company acquired all of the outstanding stock of
Microid Research, Inc. The acquisition has been accounted for using the
purchase method of accounting, and accordingly, the purchase price of
$550,000 has been allocated to the assets purchased based upon the fair
value at the date of acquisition. The sole asset acquired was software
which was determined to have a fair value of $275,000. The remaining
$275,000 of the purchase price has been expensed as research and
development costs.
3. PROPERTY AND EQUIPMENT
Property and equipment as of September 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
<S> <C>
Office equipment $ 96,649
Furniture and fixtures 10,827
Leasehold improvements 26,897
---------
Total 134,373
Less: accumulated depreciation 69,195
---------
Property and equipment - net $ 65,178
=========
</TABLE>
4. DUE TO PARENT
Due to parent represents unsecured, non-interest bearing advances from the
Company's corporate parent, made in the ordinary course of business and
has no stipulated repayment term.
5. INCOME TAXES
The components of the provision for (benefit from) income taxes as of
September 30, 1998, were as follows:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal $ 110,430
State 32,060
---------
142,490
---------
Deferred:
Federal (12,400)
State (3,600)
---------
(16,000)
---------
Total $ 126,490
=========
</TABLE>
Deferred tax assets as of September 30, 1998 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Research and development costs $ 110,000
Depreciation and amortization 78,265
Other 23,245
---------
Total non-current deferred tax assets $ 211,510
=========
</TABLE>
<PAGE>
UNICORE SOFTWARE, INC. AND SUBSIDIARY
-------------------------------------
================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
6. LEASE COMMITMENTS
The Company leases its office and warehouse facilities from an affiliate,
under a five-year operating lease agreement expiring December 2000. The
lease contains a provision for a separate five-year renewal option at an
annual rent expense of no greater than 50% of the rent, as defined in the
agreement.
The Company also leases a motor vehicle under an operating leases agreement
expiring in May 1999.
Future minimum lease payments under the non-cancelable portion of the
leases as of September 30, 1998, were as follows:
<TABLE>
<CAPTION>
For the
year ended
September 30,
------------
<S> <C>
1999 $ 85,780
2000 78,000
2001 19,500
---------
Total $ 183,280
=========
</TABLE>
7. RETIREMENT PLAN
The Company provides a 401(k) Plan covering substantially all full-time
employees. Employees may contribute to the plan up to 15% of their salary
with a maximum $10,000 in 1998. Company contributions are the discretion
of the Board of Directors. For the nine months ended September 30, 1998,
there were no Company contributions to the plan.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<S> <C>
Cash paid during the year for:
Interest $ 63
</TABLE>
9. SUBSEQUENT EVENT
On October 1, 1998, the Company sold substantially all of its assets for
consideration, in the amount of $950,000 and the assumption of
substantially all of its liabilities.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (OCTOBER 1, 1998)
TO DECEMBER 31, 1998
AND
INDEPENDENT AUDITORS' REPORT
CBD
COWAN, BOLDUC, DOHERTY
& COMPANY
<PAGE>
[LOGO APPEARS HERE]
COWAN, BOLDUC, DOHERTY
& COMPANY
Certified Public Accountants
To the Board of Directors of
Unicore Software, Inc.
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheet of Unicore Software Inc. as of
December 31, 1998, and the related statements of income and deficit, and cash
flows for period from inception (October 1, 1998) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Unicore Software, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for the
three months then ended, in conformity with generally accepted accounting
principles.
Cowan, Bolduc, Doherty & Company
April 12, 1999
<PAGE>
UNICORE SOFTWARE, INC.
======================
BALANCE SHEET
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 121,183
Accounts receivable - net of allowance for doubtful accounts
of $40,000 632,489
Inventory 93,808
---------
Total current assets $ 847,480
PROPERTY AND EQUIPMENT - net of accumulated depreciation 68,975
GOODWILL - net of accumulated amortization of $6,536 385,638
-----------
TOTAL ASSETS $ 1,302,093
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 89,294
Accounts payable 78,149
Accrued expenses 112,138
Accrued royalties 110,859
Accrued distribution 100,000
---------
Total current liabilities $ 490,440
LONG TERM DEBT - net of current maturities 528,266
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,000 shares authorized,
100 shares issued and outstanding 100
Additional paid in capital 334,900
Deficit (51,613)
---------
Total stockholders' equity 283,387
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,302,093
===========
</TABLE>
See notes to financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC.
======================
STATEMENT OF INCOME AND DEFICIT
FOR THE PERIOD FROM INCEPTION (OCTOBER 1, 1998) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
SALES $1,029,022
COST OF SALES 160,528
----------
GROSS PROFIT 868,494
OPERATING EXPENSES:
General and administrative $ 392,308
Sales and marketing 225,010
Research and development 144,802
---------
Total operating expenses 762,120
----------
INCOME FROM OPERATIONS 106,374
OTHER INCOME (EXPENSE):
Interest expense (8,785)
Interest income 798
---------
Total other expense (7,987)
----------
NET INCOME 98,387
DISTRIBUTIONS (150,000)
----------
DEFICIT, ENDING $ (51,613)
==========
</TABLE>
See notes to financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC.
======================
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 1, 1998) TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES.
Net income $ 98,387
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization $ 11,645
(Increase) decrease in:
Accounts receivable (113,586)
Inventory (93,808)
Prepaid expenses 3,174
Increase (decrease) in:
Accounts payable 50,808
Accrued expenses 27,748
Accrued royalties 110,859
----------
Total adjustments (3,160)
---------
Net cash provided by operating activities 95,227
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (8,906)
Acquisition of cash 82,302
----------
Net cash provided by investing activities 73,396
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 10,000
Distributions (50,000)
Principal repayment of long-term debt (7,440)
----------
Net cash used in financing activities (47,440)
---------
NET INCREASE IN CASH 121,183
---------
CASH, ENDING $ 121,183
=========
</TABLE>
SEE NOTE 8 FOR SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION.
See notes to financial statements and
Independent Auditors' Report.
- --------------------------------------------------------------------------------
<PAGE>
UNICORE SOFTWARE, INC.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Entity
----------------
Unicore Software, Inc. (the Company), formerly Unicore Acquisition Corp.
was incorporated in October 1998, as a Massachusetts corporation and is
primarily engaged in the development and sales of system software which is
sold directly to OEM's and end users throughout the United States.
Revenue Recognition
-------------------
Software and hardware revenue is recognized upon delivery of the product.
Consulting and other revenues are recognized upon the delivery of the
services. Maintenance revenue is recognized ratably over the term of the
maintenance contract.
Cash
----
The Company's bank balances fluctuates during the year and can exceed the
federally insured limit. Management monitors regularly the financial
condition of the financial institutions, along with its cash balances, in
an attempt to minimize the potential risk.
Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method for financial statement purposes, and accelerated
methods for income tax purposes, over the estimated useful lives of the
assets.
Income Taxes
------------
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code; therefore, the stockholders of the Company are
responsible for the income taxes on corporate profits for federal and
state tax purposes.
Research and Development Costs
------------------------------
Research and development costs are expensed as incurred.
Advertising
-----------
Advertising costs are expensed as incurred.
Intangible Asset
----------------
Intangible asset, which represents goodwill, is being amortized over
fifteen (15) years.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and certain reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE>
UNICORE SOFTWARE, INC.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998, consisted of the following:
<TABLE>
<S> <C>
Office equipment $ 43,493
Furniture and fixtures 6,174
Leasehold improvements 24,417
--------
Total 74,084
Less: accumulated depreciation 5,109
--------
Property and equipment - net $ 68,975
========
</TABLE>
3. LINE OF CREDIT
The Company has available a bank line of credit with a maximum borrowing
amount of $100,000 expiring October 1999, secured by substantially all the
assets of the Company and guaranteed by the stockholders. Interest is
calculated at the bank's cash collateral certificate of deposit rate, (the
bank's cash collateral certificate of deposit rate was 4.35% as of
December 31, 1998)plus 2%, on the outstanding balance. As of December 31,
1998, no borrowings were outstanding under the line of credit.
4. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 1998:
Installment note payable - bank, due in 84 monthly principal installments
of $7,440, plus interest at the bank's cash collateral certificate of
deposit rate, (the bank's cash collateral certificate of deposit rate
amounted to 4.35% at December 31, 1998) plus 2%, final installment due
December 2005, secured by substantially all assets of the Company
guaranteed by the stockholders
<TABLE>
<S> <C>
$617,560
Less: current maturities 89,294
--------
Long-term debt - net of current maturities $528,266
========
</TABLE>
Annual maturities of long-term debt as of December 31, 1998, were as
follows:
<TABLE>
<CAPTION>
For the
year ended
December 31,
------------
<S> <C>
1999 $ 89,294
2000 89,294
2001 89,294
2002 89,294
2003 89,294
Thereafter 171,090
--------
Total $617,560
========
</TABLE>
<PAGE>
UNICORE SOFTWARE, INC.
======================
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
5. PROFIT SHARING PLAN
The Company provides a 40 1(k) Plan covering substantially all full-time
employees. Employees may contribute to the plan up to 15% of their salary
with a maximum $10,000 in 1998. Company contributions are the discretion
of the Board of Directors. For the period ended December 31, 1998, the
Company made no contributions to the plan.
6. LEASE COMMITMENT
The Company leases its office and warehouse facilities from an affiliate,
under a five-year operating lease agreement expiring December 2000. The
lease contains a provision for a separate five-year renewal option at an
annual rent expense of no greater than a 50% increase in rent, as defined
in the agreement.
Future minimum lease payments under the non-cancelable portion of these
leases as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
For The
Year Ended
December 31,
------------
<S> <C>
1999 $ 83,800
2000 78,000
--------
Total $161,800
========
</TABLE>
7. LICENSE AGREEMENT
During October 1998, the Company entered into a four-year license agreement
to obtain rights to certain software products. As part of the agreement,
the Company is required to pay royalties at a rate of 17.5% of the net
revenues of the certain software products. Effective March 1999, the
royalty rate was decreased to 10% of the net revenues of the certain
software products.
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<S> <C>
Cash paid during the year for:
Interest $ 8,785
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 99.3
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
TOUCHSTONE SOFTWARE CORPORATION
Pro Forma Consolidated Balance Sheet
As of December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
TouchStone Unicore Pro Forma Combined
Historical Historical Combined Adjustments Pro Forma
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Current Assets:
Cash and cash equivalents $ 825,255 $ 121,183 $ 946,438 $ 946,438
Investments 5,897,469 5,897,469 (1,205,000) a. 4,692,469
Restricted Cash 500,000 500,000 500,000
Accounts receivable, net 1,193,528 632,489 1,826,017 1,826,017
Inventories, net 185,287 93,808 279,095 279,095
Prepaid expenses and other
current assets 166,987 0 166,987 0 166,987
------------ ---------- ------------ ---------- ------------
Total current assets 8,768,526 847,480 9,616,006 (1,205,000) 8,411,006
Investments 1,364,797 0 1,364,797 0 1,364,797
Property, net 134,888 68,975 203,863 0 203,863
Goodwill 0 385,638 385,638 3,001,963 b. 3,387,601
Other assets 58,458 0 58,458 0 58,458
------------ ---------- ------------ ---------- ------------
Total Assets 10,326,669 1,302,093 11,628,762 1,796,963 13,425,725
============ ========== ============ ========== ============
LIABILITIES &
SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable 631,646 78,149 709,795 709,795
Accrued Payroll and related
expenses 152,336 0 152,336 152,336
Accrued cooperative advertising 413,002 0 413,002 413,002
Accrued restructuring expense 380,128 0 380,128 380,128
Deferred revenue 1,243,034 0 1,243,034 1,243,034
Purchase obligations 0 0 0 2,080,350 c. 2,080,350
Current maturities of
long-term debt 0 89,294 89,294 89,294
Other accrued liabilities 304,411 322,977 627,388 627,388
------------ ---------- ------------ ---------- ------------
Total current liabilities 3,124,557 490,440 3,614,997 2,080,350 5,695,347
Other liabilities 189,893 528,266 718,159 0 718,159
Shareholders' equity
Common stock 7,963 100 8,063 (100) 7,963
Additional paid-in capital 18,754,516 334,900 19,089,416 (334,900) 18,754,516
Accumulated deficit (11,750,260) (51,613) (11,801,873) 51,613 (11,750,260)
------------ ---------- ------------ ---------- ------------
Total shareholders' equity 7,012,219 283,387 7,295,606 (283,387) 7,012,219
------------ ---------- ------------ ---------- ------------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY 10,326,669 1,302,093 11,628,762 1,796,963 13,425,725
============ ========== ============ ========== ============
</TABLE>
7
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Pro Forma Combined
Touchstone Unicore Combined Adjustments Pro Forma
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,835,823 $3,294,252 $ 8,130,075 $ 8,130,075
Cost of Revenues 1,367,196 464,601 1,831,797 1,831,797
----------- ---------- ----------- -----------
Gross Profit 3,468,627 2,829,651 6,298,278 6,298,278
Operating Expenses
General and administrative 1,956,603 1,143,510 3,100,113 3,100,113
Sales and marketing 2,380,787 774,782 3,155,569 3,155,569
Research and development 1,721,716 490,203 2,211,919 2,211,919
Restructuring costs 1,075,253 0 1,075,253 1,075,253
----------- ---------- ----------- -----------
Total operating expenses 7,134,359 2,408,495 9,542,854 9,542,854
Income (loss) from operations (3,665,732) 421,156 (3,244,576) (3,244,576)
Other income, net 569,616 (6,544) 563,072 563,072
Amortization of Goodwill (1,129,200) d. (1,129,200)
-----------
Profit before taxes (3,096,116) 414,612 (2,681,504) (1,129,200) (3,810,704)
Provision for income taxes 800 126,490 127,290 127,290
----------- ---------- ----------- -----------
Net income (loss) $(3,096,916) $ 288,122 $(2,808,794) $(1,129,200) $(3,937,994)
=========== ========== =========== =========== ===========
Net loss per common share,
basic and diluted $ (0.39) $ (0.50)
Weighted average shares
outstanding, basic & diluted 7,930,000 7,930,000
</TABLE>
8
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
1. The following Pro Forma Financial Statements are Unaudited and give effect
to the acquisition of all of the issued and outstanding common stock of Unicore
Software, Inc. ("Unicore") by Touchstone Software Corporation (the "Company") on
a purchase accounting basis. Both the Company's and Unicore's fiscal years end
on December 31.
The Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1998
assumes that the acquisition occurred on December 31, 1998 and combines the
Consolidated Balance Sheet of the Company and the Consolidated Balance Sheet of
Unicore as of December 31, 1998.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998 assumes that the acquisition occurred at January 1,
1998, and combines the Consolidated Statement of Operations of the Company for
the year ended December 31, 1998 with the Consolidated Statement of Operations
of Unicore for the year ended December 31, 1998.
Such unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
acquisition occurred at the beginning of the period presented nor is it
necessarily indicative of future financial position or results of operations,
and is based upon certain assumptions and adjustments described in the notes to
the pro forma consolidated financial statements. These unaudited pro forma
combined financial statements are based upon the respective historical
consolidated financial statements of the Company and Unicore, and should be read
in conjunction with the respective historical consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1998, and in this Current Report on Form 8-K/A for
Unicore.
2. The allocation of the $3,285,350 purchase price for Unicore Software is
allocable to the specific identifiable tangible and intangible assets and
liabilities as follows:
<TABLE>
<S> <C>
Current assets $ 847,480
Long-term asset 68,975
Liabilities (1,018,706)
Goodwill 3,387,601
-----------
Total 3,285,350
===========
</TABLE>
3. Pro Forma Adjustments
a. This adjustment reflects the cash portion of the purchase price paid to
the stockholders of Unicore.
b. This adjustment reflects the recording of goodwill.
c. This adjustment is an accrual for the estimated remaining purchase
obligation.
d. This adjustment reflects the amount of the goodwill amortization after
the conclusion of the first year of combined operations. Goodwill is
calculated based on the purchase price less the net tangible assets of
Unicore, and is amortized over three years.
9
