Exhibit 99.3
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the
acquisition by DSET Corporation of ISPSoft Inc. in a transaction to be accounted
for as a purchase. The unaudited pro forma balance sheet is based on the
individual balance sheets of DSET Corporation and ISPSoft Inc. incorporated by
reference or appearing elsewhere in the joint proxy statement/prospectus
contained in DSET's Registration Statement on Form S-4 (File No. 333-65898) and
has been prepared to reflect the acquisition by DSET Corporation of ISPSoft Inc.
as of September 30, 2001. The unaudited pro forma statement of operations is
based on the individual statements of operations of DSET Corporation and of
ISPSoft Inc. incorporated by reference or appearing elsewhere in the joint proxy
statement/prospectus contained in DSET's Registration Statement on Form S-4
(File No. 333-65898) and combines the results of operations of DSET Corporation
and ISPSoft Inc. (acquired by DSET Corporation on January 31, 2002) for the year
ended December 31, 2000 and the nine months ended September 30, 2001 as if the
acquisition occurred on January 1, 2000. On August 8, 2001 the Board of
Directors of DSET declared a one-for-four reverse stock split to holders of
record as of the close of trading on August 21, 2001. All references to number
of shares and per share information in the unaudited pro forma financial
statements have been adjusted to reflect the stock split on a retroactive basis.
DSET expects to incur merger-related pre-tax charges covering the costs
of the merger principally in the quarter in which the merger is consummated.
Such pre-tax charges, which are currently estimated to be in the range of $1.7
million, will primarily consist of the direct costs of the merger, including
fees to financial advisors, legal counsel and independent accountants and
printing and other fees and expenses relating to holding a meeting of
shareholders and preparing the joint proxy statement/prospectus contained in
DSET's Registration Statement on Form S-4 (File No. 333-65898). Moreover,
additional unanticipated expenses may be incurred in connection with this
transaction.
The unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
operating results that would have been achieved if the merger had been
consummated as of the beginning of the periods presented, nor are they
necessarily indicative of future operating results or financial position of
DSET. No material pro forma adjustments are required to conform the financial
reporting policies of DSET and ISPSoft for the periods presented. However, on a
prospective basis, DSET will review the accounting practices of ISPSoft to
ensure consistency with those of DSET. The pro forma financial information does
not give effect to any costs savings, which may result from the integration of
DSET and ISPSoft operations, nor are there any tax benefits that may result from
operating losses of ISPSoft.
DSET CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
As of September 30, 2001
Historical ProForma
----------------------------- --------------------------------
DSET(1) ISPSoft(1) Adjustments(3) Combined
------------- --------------- ---------------- ------------
ASSETS
Current assets:
Cash and cash equivalents................ $ 17,294,360 $ 133,365 $(3,150,000)(A) $ 14,277,725
Marketable securities.................... 1,071,011 -- -- 1,071,011
Accounts receivable...................... 839,341 -- -- 839,341
Income Taxes receivable.................. 396,851 -- -- 396,851
Prepaid licenses......................... 923,685 -- -- 923,685
Prepaid expenses and other current
assets................................. 836,625 22,548 (300,000)(C) 559,173
------------ ----------- ------------ -------------
Total current assets................. 21,361,873 155,913 (2,650,000) 18,867,786
Acquired technology, net................. -- -- 4,500,000(B) 4,500,000
Fixed assets, net........................ 2,421,391 348,902 -- 2,770,293
Goodwill, net............................ 28,507 -- 10,627,873(B) 10,656,380
Loans to ISPSoft Inc..................... 2,250,000 -- (2,250,000)(F) --
Other assets, net........................ 444,642 50,262 500,000(B) 994,904
------------ ----------- ------------ -------------
Total assets......................... $ 26,506,413 $ 555,077 $ 9,927,873 $ 36,989,363
============ =========== ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses............................... $ 3,790,827 $ 511,639 $ 1,400,000(C) $ --
-- -- 500,000(D) 6,202,466
Accrued restructuring expenses........... 2,464,782 -- -- 2,464,782
Deferred revenues........................ 3,030,343 -- -- 3,030,343
Dividend payable......................... -- 482,955 (482,955)(E) --
Current portion of notes payable......... 484,466 3,575,000 (2,250,000)(F) 1,809,466
Current portion of capital lease
obligation............................. 138,367 6,483 -- 144,850
------------ ----------- ------------ -------------
Total current liabilities............ 9,908,785 4,576,077 (832,955) 13,651,907
------------ ----------- ------------ -------------
Deferred rent............................... 538,613 -- -- 538,613
Capital lease obligation.................... 318,587 5,565 -- 324,152
------------ ----------- ------------ -------------
Total liabilities.................... 10,765,985 4,581,642 (832,955) 14,514,672
------------ ----------- ------------ -------------
Redeemable preferred stock.................. -- 4,000,000 (4,000,000)(G) --
Commitments and contingencies
Shareholders' equity:
Preferred stock.......................... -- 1,200,000 (1,200,000)(G) --
Common stock............................. 50,146,240 1,256,717 (1,256,717)(G) --
-- -- 6,378,076(H) --
-- -- 675,187(I) 57,199,503
Note receivable.......................... -- (135,000) -- (135,000)
Deferred stock compensation.............. (13,631) (458,095) (184,000)(B) --
458,095(G) (197,631)
Accumulated deficit...................... (34,208,959) (8,890,187) 8,890,187(G) (34,208,959)
Accumulated other comprehensive
income................................. 7,701 -- -- 7,701
less: Treasury stock..................... (190,923) (1,000,000) 1,000,000(G) (190,923)
------------ ----------- ------------ -------------
Total shareholders' equity........... 15,740,428 (8,026,565) 14,760,828 22,474,691
------------ ----------- ------------ -------------
Total liabilities and
shareholders' equity............... $ 26,506,413 $ 555,077 $ 9,927,873 $ 36,989,363
============ =========== ============ =============
See notes to Unaudited Pro Forma Financial Statements
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DSET CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2001
Historical ProForma
------------------------------ -------------------------------
DSET(1) ISPSoft(1) Adjustments(4) Combined
------------ ----------- -------------- ------------
Revenues:
License revenues..................... $ 2,337,019 $ -- $ -- $ 2,337,019
Service revenues..................... 5,709,521 -- -- 5,709,521
------------ ----------- --------- ------------
Total revenues................... 8,046,540 -- -- 8,046,540
------------ ----------- --------- ------------
Cost of revenues:
License revenues..................... 1,156,874 -- -- 1,156,874
Service revenues..................... 4,638,762 -- -- 4,638,762
------------ ----------- --------- ------------
Total cost of revenues........... 5,795,636 -- -- 5,795,636
------------ ----------- --------- ------------
Gross profit..................... 2,250,904 -- -- 2,250,904
------------ ----------- --------- ------------
Operating expenses:
Sales and marketing.................. 5,951,936 -- -- 5,951,936
Research and product development..... 8,595,005 2,319,176 19,000(K) 10,933,181
General and administrative........... 4,383,867 2,017,068 100,000(J) --
-- -- 19,000(K) 6,519,935
Bad debt expense..................... 986,708 -- -- 986,708
Amortization of goodwill and other
intangibles........................ 273,581 -- -- 273,581
Restructuring and other charges...... 14,789,014 -- -- 14,789,014
------------ ----------- --------- ------------
Total operating expenses......... 34,980,111 4,336,244 138,000 39,454,355
------------ ----------- --------- ------------
Operating loss................... (32,729,207) (4,336,244) (138,000) (37,203,451)
Interest expense and other income
(expense)............................ (26,043) (116,924) -- (142,967)
Interest income and realized gains
and losses on marketable
securities........................... 1,363,045 14,647 (167,000)(L) 1,210,692
------------ ----------- --------- ------------
Loss before income taxes................ (31,392,205) (4,438,521) (305,000) (36,135,726)
Provision for income taxes.............. 252,200 -- -- 252,200
------------ ----------- --------- ------------
Net loss................................ $(31,644,405) $(4,438,521) $(305,000) $(36,387,926)
============ =========== ========= ============
Dividends on Series B preferred stock... -- (256,410) 256,410(M) --
------------ ----------- --------- ------------
Net loss applicable to common
stockholders......................... $(31,644,405) $(4,694,931) $ (48,590) $(36,387,926)
============ =========== ========= ============
Net loss per common share-- basic and
diluted.............................. $ (10.90) $ (7.02)
============ ============
Weighted average number of common
shares and common equivalent
shares outstanding................... 2,903,228 5,184,372
============ ============
See notes to Unaudited Pro Forma Financial Statements
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DSET CORPORATION
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
Historical ProForma
------------------------------ -------------------------------
DSET(1) ISPSoft(1) Adjustments(4) Combined
------------ ----------- -------------- -------------
Revenues:
License revenues.............. $ 32,850,731 $ -- $ -- $ 32,850,731
Service revenues.............. 14,191,535 -- -- 14,191,535
------------ ----------- --------- ------------
Total revenues............ 47,042,266 -- -- 47,042,266
------------ ----------- --------- ------------
Cost of revenues:
License revenues.............. 3,990,728 -- -- 3,990,728
Service revenues.............. 11,131,206 -- -- 11,131,206
------------ ----------- --------- ------------
Total cost of revenues.... 15,121,934 -- -- 15,121,934
------------ ----------- --------- ------------
Gross profit.................. 31,920,332 -- -- 31,920,332
------------ ----------- --------- ------------
Operating expenses:
Sales and marketing........... 12,128,855 -- -- 12,128,855
Research and product
development................. 18,467,309 1,704,631 57,000(K) 20,228,940
General and administrative.... 6,925,389 1,294,543 400,000(J) --
-- -- 57,000(K) 8,676,932
Bad debt expense and other
charges..................... 13,378,237 -- -- 13,378,237
Amortization of goodwill and
other intangibles........... 418,736 -- -- 418,736
Restructuring and other
charges..................... 2,248,100 -- -- 2,248,100
------------ ----------- --------- ------------
Total operating expenses.. 53,566,626 2,999,174 514,000 57,079,800
------------ ----------- --------- ------------
Operating loss............ (21,646,294) (2,999,174) (514,000) (25,159,468)
(Interest expense and other
income (expense).............. (182,857) -- -- (182,857)
Interest income and realized
gains and losses on
marketable securities......... 2,114,159 87,004 (223,000)(L) 1,978,163
------------ ----------- --------- ------------
Loss before income taxes......... (19,714,992) (2,912,170) (737,000) (23,364,162)
(Benefit) from income taxes...... (902,631) -- -- (902,631)
------------ ----------- --------- ------------
Net loss......................... $(18,812,361) $(2,912,170) $(737,000) $(22,461,531)
============ =========== ========= ============
Dividends on Series B preferred
stock......................... -- (226,545) 226,545(M) --
------------ ----------- --------- ------------
Net loss applicable to common
stockholders.................. $(18,812,361) $(3,138,715) $(510,455) $(22,461,531)
============ =========== ========= ============
Net loss per common share--
basic and diluted............. $ (6.61) $ (4.38)
============ ============
Weighted average number of
common shares and common
equivalent shares outstanding.. 2,846,959 5,128,103
============ ============
See notes to Unaudited Pro Forma Financial Statements
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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. These columns reflect the historical financial position and results of
operations of DSET and ISPSoft.
2. For the purpose of these pro forma financial statements, equity
consideration has been calculated based on Emerging Issues Task Force
("EITF") 99-12, "Accounting for Formula Arrangements under EITF 95-19".
For this calculation, DSET used the average market price for a few days
before and after the merger was agreed to and announced, June 26, 2001.
Common shares of ISPSoft at September 30, 2001 (including the preferred stock 24,847,073
on an as-converted to common stock basis)..................................
Common stock exchange ratio per share......................................... 0.086844
---------------
Equivalent DSET common shares................................................. 2,157,837
DSET common stock to be issued to holders of Series B Preferred Stock......... 123,306
---------------
Total DSET common shares to be issued.................................. 2,281,143
DSET common stock share price based on the average closing price based on a
few days before and after the merger was agreed to and announced........... $ 2.796
---------------
Sub-total-- DSET common stock equity consideration..................... $ 6,378,076
ISPSoft common stock options to be replaced by DSET stock options............. 2,781,010
DSET common stock exchange ratio per share.................................... .086844
---------------
DSET common stock options resulting from the conversion of ISP common stock
options in the merger...................................................... 241,483
Estimated fair value per option............................................... $ 2.796
---------------
Sub-total-- DSET common stock options equity consideration............. $ 675,187
Cash consideration............................................................ $ 1,000,000
Liability for earn-out payments............................................... $ 500,000
Estimated professional fees................................................... $ 1,700,000
---------------
Sub-total-- Estimated payments......................................... $ 10,253,263
Net liabilities of ISPSoft.................................................... $ 2,083,610
Additional liabilities through consummation date.............................. $ 2,150,000
Assumption of Lucent Promissory Note.......................................... $ 400,000
Assumption of Signal Lake Promissory Note..................................... $ 400,000
Assumption of other Notes..................................................... $ 525,000
---------------
Sub-total-- Net liabilities of ISPSoft................................. $ 5,558,610
Total Consideration.................................................... $ 15,811,873
Pro forma adjustments relating to:
Acquired technology........................................................... $ (4,500,000)
Covenant not to compete....................................................... $ (500,000)
Deferred stock compensation................................................... $ (184,000)
---------------
Preliminary goodwill.......................................................... $ 10,627,873
---------------
Upon closing of the merger, the total consideration will be allocated to
the specific identifiable tangible and intangible assets and liabilities
of ISPSoft after the completion of third-party appraisals during the
allocation period specified by Statement of Financial Accounting
Standards No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." A preliminary allocation of the purchase price
has been made to certain identifiable tangible and intangible assets
based on information available to the management of DSET at the date of
the preparation of the accompanying pro forma financial statements. The
final purchase accounting allocation may also include certain charges to
net income relating to acquired technology.
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3. The following adjustments were made to the balance sheet as of September
30, 2001 to give effect to the transaction:
A) Cash consideration to be paid by DSET.
B) To record the acquired technology, goodwill, covenant not to
compete and deferred stock compensation.
C) Estimated professional fees to financial advisors, legal counsel
and accountants totaling $1.7 million of which $300,000 has been
incurred through September 30, 2001 and recorded in prepaid
expenses and other current assets.
D) Additional consideration in cash or shares expected to be paid
based on future sales from ISPSoft products. In accordance with
EITF 00-19, this is recorded as a liability due to the fact that
the number of shares to be issued as of the announcement date is
unknown.
E) Elimination of ISPSoft dividends accrued on Series B Preferred
Stock as these amounts will be converted to DSET common stock.
F) Elimination of amounts advanced by DSET to ISPSoft.
G) Elimination of the historical equity accounts of ISPSoft.
H) Total common stock equity consideration.
I) Total common stock options consideration.
4. The following adjustments were made to the income statement for the
nine-months ended September 30, 2001 and for the year ended December 31,
2000 to give effect to the transaction:
J) Amortization of the covenant not to compete is based on the
contractual useful life of fifteen months.
K) Amortization of deferred stock compensation is based upon the
vesting schedule of ISPSoft stock options that will be converted
to DSET stock options in the merger.
L) Reduction of interest income for the cash portion of the
purchase price, assuming an effective interest rate of 6% per
annum, which represents the average short-term interest earned
on the Company's investment balances.
M) Elimination of ISPSoft preferred stock dividends.
5. DSET has the option of issuing more shares to ISPSoft in order to qualify
for a tax-free reorganization credit. This determination will be made at
the consummation of the merger. In addition, DSET has the option of
settling the earn-out in shares (as opposed to cash settlement). This
determination will be made if and when such earn-out obligation is
incurred. As a result, the above pro forma EPS calculation may decrease
based on the number of additional shares that DSET issues to the
shareholders of ISPSoft.
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