<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 0-12969
ended September 30, 1999
TOUCHSTONE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-3778226
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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
Registrant had 11,340,060 shares of Common Stock outstanding at
September 30, 1999.
The registrant hereby amends the following items, financial statements, exhibits
or other portions of its Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 1999:
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 5. Changes in Registrant's Certifying Accountant
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 3
a)Consolidated Balance Sheet as of September 30, 1999 (Unaudited) 3
b)Consolidated Statement of Income for the three months ended
September 30, 1999 and 1998, and the nine months ended
September 30, 1999 and 1998 (Unaudited) 4
c)Consolidated Statement of Cash Flows for the nine months ended
September 30, 1999 and 1998 (Unaudited) 5
d)Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
2
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Item 1. Consolidated Financial Statements
Touchstone Software Corporation
Consolidated Balance Sheet
September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,307,774
Investments 753,915
Restricted cash 620,000
Accounts receivable, net 1,470,920
Inventories, net 88,936
Prepaid expenses and other current assets 469,604
--------------
Total current assets 6,711,149
Investments 574,500
Property, net 159,995
Other assets 58,019
Goodwill and other intangibles, net 2,333,746
--------------
$ 9,837,409
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 22,321
Accounts payable 233,001
Accrued payroll and related expenses 394,821
Accrued cooperative advertising expense 355,139
Accrued merger and acquisition costs 1,276,649
Deferred revenue 1,081,810
Other accrued liabilities 184,978
--------------
Total current liabilities 3,548,719
Long-term debt, net of current maturities 528,190
Other liabilities
Commitments and contingencies 127,312
Shareholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares
Authorized; no shares issued or outstanding
Common stock, $0.001 par value, 20,000,000 shares
Authorized; 11,340,060 shares issued and
outstanding 11,340
Additional paid-in capital 21,231,692
Accumulated deficit (15,609,844)
--------------
Total shareholders' equity 5,633,188
--------------
$ 9,837,409
==============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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TouchStone Software Corporation
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 1,569,204 $ 748,956 $ 4,797,747 $ 3,391,221
Cost of revenues 213,228 205,374 696,746 847,732
------------ ------------ ------------ ------------
Gross profit 1,355,976 543,582 4,101,001 2,543,489
Operating expenses:
Sales and marketing 541,819 624,776 1,429,041 2,269,137
General and administrative 843,593 480,420 2,126,789 1,218,120
Research and development 274,183 422,631 617,401 1,487,930
Amortization of goodwill
and other intangibles 1,187,191 -- 2,382,551 --
Restructure -- 85,220 1,502,624 863,359
------------ ------------ ------------ ------------
Total operating expenses 2,846,786 1,613,047 8,058,406 5,838,546
------------ ------------ ------------ ------------
Loss from operations (1,490,810) (1,069,465) (3,957,405) (3,295,057)
Interest and other income, net 86,119 134,260 185,402 459,171
------------ ------------ ------------ ------------
Loss before income taxes (1,404,691) (935,205) (3,772,003) (2,835,886)
Provision for income taxes -- -- 800 800
------------ ------------ ------------ ------------
Net loss $ (1,404,691) $ (935,205) $ (3,772,803) $ (2,836,686)
------------ ------------ ------------ ------------
Basic and diluted net loss per share $ (0.12) $ (0.12) $ (0.33) $ (0.36)
============ ============ ============ ============
Weighted average common shares 11,340,060 7,948,000 11,340,060 7,920,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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TouchStone Software Corporation
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,772,803) $(2,836,686)
Adjustments to reconcile net loss to net cash
flows (used in) provided by operating activities:
Depreciation and amortization 2,482,917 151,288
Stock options issued for consulting expense 992 8,764
Provision for doubtful accounts 96,645 14,846
Provision for obsolete inventories 7,220 68,317
Change in deferred lease obligation (62,581) 21,086
Income tax refund receivable -- 32,790
Accounts receivable (374,037) 459,005
Inventories 89,131 (107,470)
Prepaid expenses and other current assets (302,617) 62,162
Other assets 439 19,181
Accrued merger, acquisitions and restructuring charges 938,669 662,635
Accounts payable (398,645) (300,817)
Accrued liabilities (96,035) (200,801)
----------- -----------
Net cash used in operating activities (1,390,705) (1,945,700)
Cash flows from investing activities:
Purchase & sale of investment 4,353,153 774,938
Purchases of property -- (65,917)
Sale of property -- 2,342
Capitalized software development costs (2,921,210) --
----------- -----------
Net cash provided by investing activities 1,431,943 711,363
Cash flows from financing activities:
Principal repayment of long-term debt (52,080) --
Proceeds from exercise of stock warrants and options -- --
and repayment on notes receivable 2,493,361 65,659
----------- -----------
Net cash provided by financing activities 2,441,281 65,659
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,482,519 (1,168,678)
Cash and cash equivalents, beginning of period 825,255 1,433,861
----------- -----------
Cash and cash equivalents, end of period $ 3,307,774 $ 265,183
=========== ===========
Supplemental cash flow information:
Interest paid $ 26,342 $ 855
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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TOUCHSTONE SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed consolidated financial statements of Touchstone
Software Corporation (the "Company") as of September 30, 1999 and for the
three and nine months ended September 30, 1999 and 1998 are unaudited. The
condensed consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments, which in the opinion of
management are necessary for a fair presentation of the financial position,
operating results and cash flows for the periods presented. The condensed
consolidated financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 1998 included in the Annual
Report on Form 10-KSB filed by the Company on April 14, 1999.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year or
for any future period.
2. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards 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 is defined
as the change in equity of a company from transactions, other events and
circumstances excluding transactions resulting from investments by owners
and distributions to owners. 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. There was no difference between comprehensive loss and net
loss as reported for the three and nine months ended September 30, 1999 and
1998.
3. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131 supersedes
SFAS No. 14 and requires segment information to be reported on the basis
that is used entirely for evaluating segment performance and deciding how
to allocate resources to segments in quarterly and annual reports. SFAS No.
131 is effective for annual reports for fiscal years beginning after
December 15, 1997, and is applicable to interim financial statements
beginning with the second year of application. The Company believes that
the effect of adopting the new standards will not be material to its
consolidated financial statements.
4. Financing Arrangements
The Company has a bank line of credit, which provides for borrowings up to
$100,000, bears interest at the bank's prime rate of 9.0% at September 30,
1999 and is reviewed on an annual basis for renewal. Borrowings are
collateralized by a $110,000 certificate of deposit, which is recorded as
restricted cash on the accompanying consolidated balance sheet. There were
no borrowings under this line of credit at September 30, 1999.
5. Earnings (Loss) Per Year
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," ("EPS") which replaces the presentation of
"primary" earnings per share with "basic" earnings per share and the
presentation of "fully diluted" earnings per share with "diluted" earnings
per share. All
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previously reported EPS amounts have been restated based on the provisions of
the new standard. Basic EPS amounts are based upon the weighted average number
of common shares outstanding. Diluted EPS amounts are based upon the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares include stock options using the treasury stock method. Common
equivalent shares are excluded from the calculation of diluted EPS in loss
years, as the impact is anti-dilutive. There was no difference between basic and
diluted EPS for each period presented. The number of shares used in computing
EPS is as follows:
For the Three Months
Ended September 30,
1999 1998
Weighted average number of shares outstanding: ---- ----
Basic 11,340,060 7,948,000
For the Nine Months
Ended September 30,
1999 1998
Weighted average number of shares outstanding: ---- ----
Basic 11,340,060 7,920,000
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21A of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The forward-looking statements are made as of the date hereof,
and the Company assumes no obligation to update these statements. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below and those discussed in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998 on file with the Securities and Exchange
Commission.
Overview
Touchstone Software Corporation (the "Company") develops and publishes
utility software packages designed to perform Personal Computer ("PC") hardware
diagnostics, Internet access optimization, and PC to PC file transfer. The
functionality of these packages assists in the set up, maintenance, optimization
and management of personal computers and networks.
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 Company is accounting for the
acquisition as a purchase.
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 was paid through the
issuance of an aggregate of 3,350,000 shares of the Company's Common Stock
immediately following stockholder approval of the issuance of these shares at
the 1999 Annual Meeting of the Company's stockholders (the "Annual Meeting"),
held on July 30, 1999 in Andover, Massachusetts.
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
8
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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 $110,000 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.
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 January 21, 1999, the NASDAQ Stock Market, Inc. ("NASDAQ") notified the
Company that the NASDAQ Staff had conducted a review of the price data for the
Company's shares during the preceding thirty trading days and had determined
that such data showed a failure to maintain a $1.00 minimum closing price as
required by the Marketplace Rule 4450(a)(5) under Maintenance Standard 1 ("Rule
4450 (a)(5)"). The notice further stated that the Company would be provided
ninety calendar days in which to regain compliance with Rule 4450 (a)(5), during
which if the closing bid price of the Company's shares was equal to or greater
than $1.00 for a minimum of ten consecutive trading days, then the NASDAQ Staff
would verify compliance with the continued listing requirements. Commencing on
March 22, 1999, and on every trading day thereafter through May 12, 1999, the
closing bid price of the Company's shares had been at or above $1.00. The
Company reported to the NASDAQ staff that the requirement specified in the
notice has been met and requested a hearing with the NASDAQ staff regarding the
bid price issue
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.
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On June 10, 1999, the NASDAQ Listing Qualification Panel (the "Panel") held
a hearing on the Company's request for continued inclusion on the NASDAQ
National Market. The Panel, in a decision dated July 19, 1999, determined to
delist the Company's shares from the NASDAQ National Market and noted the
Company did not comply with the requirements for continued listing on the NASDAQ
Small Cap Market. The Panel based its decision primarily on its lack of
confidence in the Company's ability to achieve and maintain compliance with the
minimum bid price requirement of Rule 4450(a)(5). The Panel also cited its
concern that the Company would not maintain the level of net tangible assets
required by Marketplace Rule 4450(a)(3). The Company's shares now trade on the
OTC Bulletin Board.
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. Also, 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.
On July 30, 1999, at the Annual meeting of the Company's stockholders (the
"Annual meeting"), held in Ipswich, Massachusetts, the stockholders approved the
issuance of an aggregate of 3,350,000 shares of the Company's Common Stock to
the former Shareholders of Unicore as the balance of the purchase price for
Unicore. On August 3, 1999 the shares were issued to both Messrs. Narath and
Raza in the amounts of 2,680,000 and 670,000, respectively.
On September 18, 1999, the certificate of deposit securing the Company's
line of credit in the amount of $500,000 matured. The company elected not to
renew the line of credit. The certificate of deposit in the amount of $500,000
was redeemed and put into cash and cash equivalents.
On October 1, 1999, Mr. Larry W. Dingus and Kenneth C. Welch both resigned
from the Company's Board of Directors. On November 2, 1999, Jason K. Raza was
appointed to the Company's Board of Directors. Mr. Raza serves as Vice President
for TouchStone Software, having served as International Sales Manager for
Unicore Software, a wholly owned subsidiary of Phoenix Technologies, (NASDAQ:
PTEC) prior to its acquisition by TouchStone. In addition, Mr. Raza is the
second-largest shareholder in the Company. The Board of Directors has revised
the number of members of the Board from four to three.
10
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Products
The following table sets forth the Company's products:
<TABLE>
<CAPTION>
Product Title Description Date
- ------------------------------------------------------------------------------------- -------------------
<S> <C>
CheckIt (R) CheckIt 98 collects detailed system information, test system August 1998
components, August 1998 pinpoints problems, locates hidden
conflicts and restores critical system files for fast and easy
PC troubleshooting. CheckIt automatically detects problems,
identifies exactly what is not working and guides the user
directly to the information and tests needed to fix it.
CheckIt also tests and corrects Y2K hardware problems.
CheckIt The CheckIt 98 Diagnostic Suite features the portable, August 1998
Diagnostic self-booting diagnostics of CheckIt for DOS, new CheckIt 98,
Suite (R) FastMove! File transfer utility, NetOptimizer Internet
performance enhancement software 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, and 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 an easy and safe May 1998
NetOptimizer(R) way to fine-tune their Internet connection through an
automatic or manual tune-up selection. In addition,
NetOptimizer performs a complete set of modem diagnostic
tests and corrects some common port and modem problems. 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 an
Internet user to evaluate the current and past performance
of their ISP connections.
FastMove!(R) FastMove! Is a file synchronization and transfer program that keeps March 1995
files and directories on desktop PCs, laptops, networks and Zip (last update
drives synchronized and up-to-date with the click of a button. October 1996)
FastMove! Also includes an Ultra Flex Parallel Transfer Cable.
BIOS Upgrade Unicore BIOS Upgrade Solutions for PCs provide a cost-effective
Solutions way of allowing end-users to extend the useful life of their PC
systems without replacing them entirely.
PC Diagnostics Unicore's POSTcard(R) offers hardware diagnostic solutions
Software allowing MIS personnel and PC end-users alike to quickly
determine the causes of their system failures.
Year 2000 Unicore's Millenium/Pro is designed to be a cost-effective
Solutions solution to enable PCs without Year 2000 BIOS compliance to
provide accurate and uninterrupted operation during the
transition into the Year 2000.
PC Card Software Unicore's CardWare(R) enables PCs and portable computers to
install, configure and operate peripheral devices that
comply with PCMCIA standards. CardWare(R) provides a number
of benefits over traditional PC Card software, including
support for Windows NT, the efficient use of system memory,
greater portability, ease of maintenance and a more modular
design.
</TABLE>
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Results of Operations
The following is a preliminary discussion of the financial condition and
results of operations of the Company as of September 30, 1999 and for the three
months ended September 30, 1999 and 1998, respectively, and should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto and the Company's audited consolidated financial statements and notes
thereto for the year ended December 31, 1998, included in the Company's Annual
Report on Form 10-KSB and is qualified in its entirety by reference thereto.
The following table sets forth, for the periods indicated certain
consolidated statement of income information as a percentage of the Company's
total revenues represented by each item. The Company's historical results are
not necessarily indicative of results in any future period.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---------- --------- -------- ----------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 14 27 15 25
Gross profit 86 73 85 75
Operating expenses:
Sales and marketing 35 84 30 67
General and administrative 54 64 45 36
Research and development 17 57 13 44
Amortization of goodwill and
other intangibles 76 - 50 -
Restructure - 11 31 26
---------- --------- -------- ----------
Total operating expenses 182 216 169 173
Loss from operations (96) (143) (84) (98)
Interest and other income, net 6 18 4 14
Loss before income taxes (90) (125) (80) (84)
Provision for income taxes - - - -
---------- --------- -------- ----------
Net loss (90)% (125)% (80)% (84)%
========== ========= ======== ==========
</TABLE>
Comparison of Three Month Periods Ended September 30, 1999 and 1998
Revenues. The Company's revenues consist of product sales, software license
fees and engineering services revenues. 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. Software license fees are recognized upon
delivery of the product, fulfillment of acceptance terms, if any, and
satisfaction of significant supports obligations, if any. Engineering service
revenues generally consist of amounts charged for customization of the software
prior to delivery and are generally recognized as the services are performed.
Revenues increased by approximately 110%, for the three month period ended
September 30, 1999, from the same period of the prior year, primarily due to
higher sales of the Company's BIOS upgrade and Year 2000 solutions partially
offset by lower sales of its utility software packages as a result of increasing
competition in the utility software industry and a change from royalty-based
sales to direct product sales.
12
<PAGE>
Cost of Revenues. Cost of revenues consists of the cost of materials,
freight expenses, inventory obsolescence reserves, fees paid to an
outsource-production fulfillment house, royalties paid to other software
development companies and direct costs associated with engineering services
revenues. Cost of revenues as a percentage of revenue decreased to 14% of
revenues for the three-month period ended September 30, 1999, as compared to 27%
of revenues for the same period of the prior year. This decrease was primarily
due to the Company's decision to terminate the production of its software at an
existing fulfillment house, and relocate production to another fulfillment
house. The Company anticipates that production at the new fulfillment house will
commence during the third quarter of its fiscal year.
Research and Development. Research and development expenses consist
primarily of engineering personnel and related expenses and equipment costs.
Research and development expenses decreased by approximately $148,448, or 35%,
for the three month period ended September 30, 1999, from the same period of the
prior year primarily due to lower engineering personnel and related expenses in
the U.S., partially offset by higher engineering personnel and related expenses
in Europe.
Sales and Marketing. Sales and marketing expenses consist primarily of
personnel and related expenses, sales commissions, travel costs, retail product
merchandising, promotions and the write-off of bad debts. Sales and marketing
expenses decreased by approximately $82,957, or 13%, for the three month period
ended September 30, 1999, from the same period of the prior year primarily due
to lower sales and marketing personnel and related expenses, lower travel costs
and lower retail product merchandising and promotions.
General and Administrative. General and administrative expenses consist
primarily of personnel and related expenses, professional services and
facilities costs. General and administrative expenses increased by approximately
$363,173 or 76%, for the three month period ended September 30, 1999, from the
same period of the prior year due to higher general and administrative personnel
and related expenses and higher professional services fees.
Interest Income, Net. Interest income, net consists primarily of interest
expense associated with a note outstanding and interest income on cash and cash
equivalents, net of expenses. Interest income, net decreased by approximately
$48,141 for the three month period ended September 30, 1999, from the same
period of the prior year due primarily to decreased holdings of short-term
investments.
Amortization of Goodwill and Acquired Intangibles. The company continues to
amortize the goodwill and other acquired intangibles primarily resulting from
the acquisition of Unicore on a straight-line basis over approximately two
years. Amortization expense increased $1,187,191 or 100% for the three month
period ended September 30, 1999, from the same period of the prior year.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, the Company used cash
resources of approximately $1,390,705 for operating activities.
The Company's cash and cash equivalents, restricted cash, and investments
totaled $5.3 million at September 30, 1999. Working capital decreased from
approximately $5.6 million at December 31, 1998 to approximately $3.2 million at
September 30, 1999. Cash and cash equivalents increased from $940,308 at
December 31, 1999 to $3,307,774 at September 30, 1999. The decrease in working
capital was in part offset by an increase in cash and cashes equivalents. This
decrease was due primarily to decreased holdings of short-term investments, cash
paid to acquire Unicore, and merger related accruals along with overall
operational expenses.
The Company has a bank line of credit, which allows for borrowings up to
$100,000, bears interest at the bank's prime rate of 9.0% at September 30, 1999
and is reviewed, annually by the bank for renewal. Borrowings are collateralized
by a $110,000 certificate of deposit, which is recorded as restricted cash on
the accompanying consolidated balance sheet. There were no borrowings under this
line of credit at September 30, 1999.
Management believes that the Company's existing cash and periodic
borrowings under the line of
13
<PAGE>
credit will be sufficient to fund the Company's operations at currently
anticipated levels through September 30, 2000. 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.
Risk Factors
Acquisition Risk; Difficulties of Integrating Two Companies
The acquisition of Unicore by the Company will require substantial
attention from management. The benefits of this acquisition will not be achieved
unless the operations of both companies are successfully combined in a timely
manner with operating efficiencies. The difficulties of assimilation may be
increased by the need to integrate personnel and to combine different corporate
cultures. The diversion of the attention of management and any difficulties
encountered in the transition process could have an adverse effect on the
revenues and operating results of the combined company. The successful
integration of the two companies will also require integration of the companies'
product offerings and the coordination of their research and development and
sales and marketing efforts. In addition, the process of assimilating the two
organizations could cause the interruption of, or a loss of momentum in, the
activities of either or both of the companies' businesses, which could have a
material adverse effect on the Company's operations.
Competition
The Company competes against many other software vendors both directly, in
the form of competing products, and indirectly, in the form of limited shelf
space, for software products 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. As other
software developers provide greater functionality, features, user value and
performance in their products that eliminate or reduce the need for the
Company's BIOS Upgrades, the market for the Company's products could be
materially diminished. There can be no assurance that other participants in the
software and PC industries will not develop products and solutions that reduce
the demand or obviate the need for the Company's products.
Ability to Respond to Rapid Technological Change; New Product Development
The market for utility and system management software is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The general trend in the software and PC industries is
toward shorter product life cycles, resulting in rapid product and technology
obsolescence. The ability of the Company to grow 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. There can
be no assurance that the Company will be successful in developing such
enhancements or new software, or, even if successful, that it will not
experience delays in achieving such developments. Any failure or delay by the
Company to develop such enhancements or new software or the failure of its
software to achieve market acceptance would adversely affect the Company's
business, financial condition and results of operations. In addition, there can
be no assurance that products or technologies developed by others will not
render the Company's software or technologies non-competitive or obsolete.
Fluctuations in Quarterly Operating Results
The Company has experienced and expects to continue to experience
fluctuations in its quarterly results of operations. The Company's revenues are
affected by a number of factors, including the demand for the Company's
products, the demand for PCs, timing of new product introductions, product mix,
volume and timing of customer orders, activities of competitors and the ability
of the Company to penetrate
14
<PAGE>
new markets. Quarterly revenues and results of operations therefore depend on
the volume and timing of orders received during the quarter, which are difficult
to forecast. Because the Company's staffing and other operating expenses are
based on anticipated revenues, delays in the receipt of orders can cause
significant variations in results of operations from quarter to quarter. The
Company also may choose to reduce prices, increase spending in response to
competition or pursue new market opportunities, each of which decisions may
adversely affect the Company's business, financial condition and results of
operations.
Due to all of the foregoing factors, it is likely that in some future
quarters the Company's operating results will be below the expectations of
public market analysts and investors. Regardless of the general outlook for the
Company's business, the announcement of quarterly results of operations below
analyst and investor expectations is likely to result in a decline in the
trading price of the Company's Common Stock.
Ability to Attract and Retain Key Employees
The Company believes that its future success will depend in large part upon
its ability to attract and retain highly skilled technical, management and sales
and marketing personnel. The loss of services of one or more of these key
employees, particularly Pierre A. Narath, Chairman of the Board of Directors,
Chief Executive Officer and President, and Jason K. Raza, a Vice President of
the Company and a member of the Company's Board of Directors, could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, because the development of the Company's
software requires knowledge of computer hardware, diagnostic software, operating
system software, system management software and application software, key
technical personnel must be proficient in a number of disciplines. Competition
for such technical personnel is intense, and the failure of the Company to hire
and retain talented technical personnel or the loss of one or more key employees
could have an adverse effect on the Company's business, financial condition and
results of operations.
Future growth, if any, of the Company will require additional engineering,
sales and marketing, and financial and administrative personnel to expand
customer services and support and to expand operational and financial systems.
There can be no assurance that the Company will be able to attract and retain
the necessary personnel to accomplish its growth strategies or that it will not
experience constraints that will adversely affect its ability to satisfy
customer demand in a timely fashion. If the Company's management is unable to
manage growth effectively, the Company's business, financial condition and
results of operations could be adversely affected.
Management
The Company's ability to compete effectively and manage future growth, if
any, will require the Company to continue to improve its financial and
management controls, reporting systems and procedures on a timely basis, and to
expand, train and manage its work force. There can be no assurance that the
Company will be able to do so successfully, and the failure to do so would have
a material adverse effect upon the Company's business, financial condition and
results of operations. The Company's success will depend to a significant degree
on the ability of its executive officers and other members of its senior
management, none of whom has any prior experience managing public companies in
their current roles, to manage future growth, if any.
Intellectual Property and Proprietary Rights
The Company's success depends in significant part on the development,
maintenance and protection of its intellectual property. The Company regards all
of its software as proprietary and attempts to protect it with a combination of
patents, copyrights, trademarks and trade secrets, employee and third-party
nondisclosure agreements and other methods of protection. Despite these
precautions and the protection of copyright laws, it may be possible for
unauthorized third parties to copy the Company's software or to reverse engineer
or obtain and use information that the Company regards as proprietary. The
Company licenses its object and source code under written license agreements.
Certain provisions of such licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed programs, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign jurisdictions do not protect the Company's proprietary rights to
the same extent as do the laws
15
<PAGE>
of the United States. There can be no assurance that the protections put in
place by the Company will be adequate.
The Company believes that its software does not presently infringe the
copyrights of any third parties. However, there can be no assurance that other
parties will not make allegations of infringement in the future. Such assertions
could require the Company to discontinue the use of certain software codes or
processes, to cease the manufacture, use and sale of infringing products, to
incur significant litigation costs and expenses and to develop non-infringing
technology or to obtain licenses to the alleged infringing technology. Although
the Company has been able to acquire licenses from third parties in the past,
there can be no assurance that the Company would be able to develop alternative
technologies or to obtain such licenses or, if a license were obtainable, that
the terms would be commercially acceptable to the Company in the event such
assertions are made in the future.
Volatile Market for Stock
The market for the Company's stock is highly volatile. The trading price of
the Company's Common Stock has been and will continue to be subject to
fluctuations in response to financial condition and results of operations,
announcements of technological innovations or new products by the Company and
its competitors, changes in the Company's or its competitors' product mix or
product direction, changes in the Company's revenue mix and revenue growth
rates, changes in expectations of growth for the PC industry, as well as other
events or factors which the Company may not be able to influence or control.
Statements or changes in opinions, ratings or earnings estimates made by
brokerage firms and industry analysts relating to the market in which the
Company does business, companies with which the Company competes or relating to
the Company specifically could have an immediate and adverse effect on the
market price of the Company's stock. In addition, the stock market has from time
to time experienced extreme price and volume fluctuations that have particularly
affected the market price for many high-technology companies and that often have
been unrelated to the operating performance of these companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
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; initiate replacement or
remedial action to assure that key systems will continue to operate in the Year
2000; and test the replaced or remedied 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.
16
<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. 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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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
GmbH. Mr. Legerer formerly served as 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 is defending 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 2. Change in Securities
(c) As described in Part I, Item 2, the registrant entered
into an agreement to acquire all of the issued and outstanding
capital stock of Unicore Software, Inc. on March 8, 1999. This
agreement provided for the payment of the balance of the purchase
price through the issuance of an aggregate of 3,350,000 shares of
the Company's Common Stock upon receipt of shareholder approval.
Shareholder approval was obtained at the Company's Annual Meeting
held on July 30, 1999 and on August 3, 1999 the Company issued
670,000 shares to Mr. Raza and 2,680,000 shares to Mr. Narath.
The shares were issued without registration pursuant to the
exemption provided by Section 4(2) of the Securities Act of 1933
for transactions by an issuer not involving any public offering.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An Annual Meeting of Stockholders of the Company was held
on July 30, 1999.
(b) Matters voted on at the meeting and votes cast on each
were as follows:
1. To elect four directors to the Company's Board of Directors, each to hold
office until his successor is elected and qualified or until his earlier
resignation or removal.
Total Vote
Total Vote Withheld
For Each From Each
Director Director
-------- --------
Pierre A. Narath 6,791,520 173,719
Larry W. Dingus 6,291,414 673,825
Ronald R. Maas 5,993,331 971,908
Kenneth C. Welch III 6,748,703 216,536
2. To consider and vote upon a proposal to approve the issuance of 3,350,000
share of the Company's Common Stock as payment of the balance of the
purchase price payable by the Company in connection with the Company's
March 8, 1999 acquisition of Unicore Software, Inc.
For Against Abstain Not Voted
--- ------- ------- ---------
2,873,277 148,757 12,908 3,930,297
(d) For more information on matters submitted to a vote of security holders
by the Company during its most recent Annual Meeting of Stockholders held on
July 30, 1999 in Ipswich, Massachusetts, please refer to the Company's Proxy
Statement dated July 8, 1999.
18
<PAGE>
Item 5. Changes in Registrant's Certifying Accountant
(a)(1) (i) By letter dated November 15, 1999, the Company notified
Deloitte & Touche LLP ("Deloitte & Touche") of its dismissal as the
Company's principal independent accountant.
(ii) Neither of Deloitte & Touche's reports on the financial
statements of the Company for the fiscal years ended December 31, 1998 or
December 31, 1997 contained an adverse opinion nor a disclaimer of opinion,
nor was modified as to uncertainty, audit scope or accounting principles.
(iii) The decision to change accountants was approved by the
Company's Board of Directors on November 5, 1999.
(iv) It is the Company's opinion that during the fiscal years
ended December 31, 1998 and December 31, 1997, and the period January 1,
1999 through November 15, 1999 there were no disagreements with Deloitte &
Touche on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or any reportable
event.
(a)(2) On November 15, 1999, the Company engaged Vitale Caturano &
Company as its new principal independent accountant.
(a)(3) Attached as an Exhibit to this Form 10-QSB/A amendment No. 1 is
a letter from Deloitte & Touche to the Commission commenting on the
contents of Item 5 of the Company's Form 10-QSB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
Exhibit 16 Letter from Deloitte & Touche
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this Amendment No. 1 on Form 10-QSB/A to be
signed on its behalf by the undersigned thereunto duly authorized.
TOUCHSTONE SOFTWARE CORPORATION
November 29, 1999 by: /s/ Pierre A. Narath
-----------------------------
Pierre A. Narath
Chairman, President and Chief Executive Officer
November 29, 1999 by: /s/ Christopher J. Gaudette
-----------------------------
Christopher J. Gaudette
Controller / Principal Accounting Officer
20
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
16 Letter from Deloitte & Touche
27 Financial Data Schedule.
<PAGE>
EXHIBIT 16
November 29, 1999
Securities and Exchange Commission
Mail Stop 9-5
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We have read Item 5 of the TouchStone Software Corporation Form 10QSB/A
amendment No. 1 bearing a signature dated November 29, 1999 and agree with the
statements made in Item 5(a) of such Form 10QSB/A amendment No. 1 except that we
have no basis to agree or disagree with the statements made in:
. Paragraph (a)(1)(iii) of Item 5
. Paragraph (a)(2) of Item 5
Yours truly,
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
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