<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995
Commission file No. 0-12969
TOUCHSTONE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3778226
_______________________________ ____________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 MAIN STREET, HUNTINGTON BEACH, CA 92648
_______________________________________ ____________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 969-7746
_________________
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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
___ ___
As of November 6, 1995 there were
7,339,118 shares of Common Stock outstanding
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The accompanying financial statements and notes thereto are condensed
and do not contain all information required by generally accepted
accounting principles to be included in a full set of financial
statements.
In the opinion of management, the financial statements reflect all
adjustments necessary for a fair presentation of the registrant's
financial position and results of operations. However, the results
of operations for the nine months ended September 30, 1995 are not
necessarily indicative of the results to be expected for the full year.
2
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TOUCHSTONE SOFTWARE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
A S S E T S
<S> <C>
Current assets:
Cash and cash equivalents $16,399,521
Investments 2,006,530
Income tax receivable 413,120
Accounts receivable, net 1,091,228
Inventories 451,181
Deferred tax asset 298,800
Prepaid expenses and other current assets 50,470
Employee advances 29,253
___________
Total current assets $20,740,103
Investments 114,000
Property, net 190,457
Software development costs, net 292,452
Other assets 33,261
___________
$21,370,273
___________
___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 765,834
Accrued payroll and related expenses 541,475
Accrued cooperative advertising costs 598,042
Other accrued liabilities 183,283
___________
Total current liabilities 2,088,634
Deferred tax liability 80,400
Deferred compensation 114,000
Deferred lease obligation 14,850
Shareholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares
authorized, none issued or outstanding
Common stock, $.001 par value, 20,000,000
shares authorized; 7,324,118 shares issued
and outstanding 7,324
Paid-in capital 18,191,622
Retained earnings 897,709
Notes receivable from sale of common stock (24,266)
___________
Net shareholders' equity 19,072,389
___________
$21,370,273
___________
___________
</TABLE>
See accompanying notes to financial statements.
3
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TOUCHSTONE SOFTWARE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
____ ____ ____ ____
<S> <C> <C> <C> <C>
Revenues:
Product sales $3,449,259 $1,580,870 $9,471,386 $4,039,458
Royalty income 67,424 68,786 226,704 227,271
__________ __________ __________ __________
Total revenues 3,516,683 1,649,656 9,698,090 4,266,729
Cost of Sales 916,975 498,130 2,821,583 1,408,474
__________ __________ __________ __________
Gross Profit 2,599,708 1,151,526 6,876,507 2,858,255
Operating expenses:
Sales and marketing 1,306,320 527,248 3,147,055 1,558,446
General and administrative 457,199 280,070 1,262,673 692,645
Research and development 170,726 107,627 443,997 243,068
__________ __________ __________ __________
Income from operations 665,463 236,581 2,022,782 364,096
Other income (expense), net 97,504 (14,824) 129,203 (25,943)
__________ __________ __________ __________
Income before provision
for income taxes 762,967 221,757 2,151,985 338,153
Provision for income taxes 284,000 24,600 812,300 37,700
__________ __________ __________ __________
Net income $ 478,967 $ 197,157 $1,339,685 $ 300,453
__________ __________ __________ __________
__________ __________ __________ __________
Net income per share $ .07 $ .04 $ .19 $ .06
__________ __________ __________ __________
Weighted average shares 7,267,000 5,147,000 6,909,000 4,847,000
__________ __________ __________ __________
__________ __________ __________ __________
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, 1995 September 30, 1994
__________________ __________________
<S> <C> <C>
Cash flow from operating activities:
Net income $ 1,339,685 $ 300,453
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation and amortization 267,138 305,309
Provision for doubtful accounts 98,600 42,500
Deferred lease obligation 14,850 (6,871)
Loss on sale of assets 947 -
Changes in operating assets and liabilities:
Accounts receivable 491,784 (575,840)
Inventories (62,001) 15,557
Prepaid expenses and other current assets (19,130) (9,461)
Employee advances (10,795) (5,838)
Other assets (18,326) 6,149
Accounts payable 62,310 102,166
Accrued liabilities 206,854 168,718
_________ _________
Net cash provided by operating activities 2,371,916 342,842
Cash flow from investing activities:
Capitalized software development costs (284,316) (163,047)
Purchase of Investments (2,006,530) -
Purchases of property (136,208) (28,931)
_________ _________
Net cash used in investing activities (2,427,054) (191,978)
Cash flow from financing activities:
Net repayments under bank line of credit (300,000) (14,821)
Principal payments on notes payable (156,071) (28,801)
Principal payments under capital
lease obligations (4,124) (8,632)
Proceeds from exercise of stock warrants and
options and repayment on notes receivable 244,960 18,550
Interest accrued on notes receivable - (2,361)
Issuance of common stock, net 15,372,693 -
Other prepaid financing costs (1,000) (5,034)
_________ _________
Net cash used in financing activities 15,156,458 (41,099)
_________ _________
Net increase in cash and cash equivalents 15,101,320 109,765
Cash and cash equivalents, beginning of period 1,298,201 44,005
_________ _________
Cash and cash equivalents, end of period $16,399,521 $ 153,770
_________ _________
_________ _________
Supplemental cash flow information:
Interest paid $ 7,717 $ 21,085
_________ _________
_________ _________
Income taxes paid $ 1,020,701 $ 19,550
_________ _________
_________ _________
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(Unaudited)
1. GENERAL
The consolidated financial statements of the Company include the
financial statements of the Company's wholly-owned subsidiary, TouchStone
Europe Ltd., which commenced operations in the United Kingdom in July 1995.
These consolidated condensed financial statements have been prepared by
the Registrant, without audit, and include all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results
of operations for the three and nine month periods ended September 30, 1995
and 1994, the financial position at September 30, 1995, and the cash flows
for the nine months ended September 30, 1995 and 1994, 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, although the Registrant believes that the disclosures in such
financial statements are adequate to make the information presented not
misleading. These condensed financial statements should be read in
conjuction with the TouchStone Software Corporation financial statements
and notes thereto included in the TouchStone Software Corporation Annual
Report filed with the Securities and Exchange Commission on Form 10-KSB
for the year ended December 31, 1994.
EARNINGS PER SHARE
Certain shares reserved for outstanding common stock purchase warrants and
options have been considered common stock equivalents in computing net
income per share for the three and nine month periods ended September 30,
1995 and 1994.
2. ACCOUNTS RECEIVABLE
At September 30, 1995, the accounts receivable balance is presented net of
allowance for doubtful accounts, reseller rebate reserves, and product
return reserves of approximately $144,200, $1,068,100, and $1,602,800,
respectively.
3. PUBLIC OFFERING OF COMMON STOCK
On August 30, 1995, the Company successfully completed a public offering
of 2,300,000 shares of the Company's common stock, including 1,000,000
shares sold by certain shareholders of the Company. The net proceeds of
the offering, after deducting the underwriter's commissions and offering
costs, were approximately $15,286,000.
4. FINANCING ARRANGEMENTS
At September 30, 1995, the Company had a bank line of credit which allows
for borrowings up to $300,000, bears interest at the prime rate, as
reported by the Wall Street Journal, plus 1.5%, which matures May 5, 1996.
The prime rate at September 30, 1995 was 8.75%. Borrowings are
collateralized by substantially all Company assets and guaranteed by three
of the Company's executive officers. This borrowing facility requires the
Company to maintain a tangible net worth of not less than $1,300,000, a
ratio of total liabilities to tangible net worth of less than 2:1, and
minimum net income of $1 on an annual basis. This line of credit also
prohibits payment of dividends without prior approval of the bank, and
limits annual capital expenditures to $75,000. There were no borrowings
under this line of credit at September 30, 1995.
6
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TOUCHSTONE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(Unaudited)
5. TAXES
The provision for taxes of $24,600 and $37,700 for the three and nine
months ended September 30, 1994, was primarily related to California state
income taxes, net of federal benefit, and federal alternative minimum taxes.
The provision for taxes of $284,000 and $812,300 for the three and nine
months ended September 30, 1995, respectively, is primarily related to
federal income taxes and California state income taxes, net of federal
benefit.
During the three and nine months ended September 30, 1995, the Company
decreased its federal tax liability and increased additional paid-in
capital by approximately $412,000 and $496,300, respectively, as a result
of the exercise of certain non-qualified stock options.
6. STATEMENTS OF CASH FLOWS
Supplemental information concerning significant non-cash investing and
financing activities for the nine month periods ending September 30, 1994
and 1995, are presented below.
In June 1994, two Company officers who held approximately $29,000 of the
Company's subordinated debt received a total of 15,900 shares of the
Company's common stock in lieu of interest payments aggregating
approximately $3,500.
During the third quarter of 1994, the Company forgave a note receivable
from sale of common stock and related interest receivable of $1,000 due
from a consultant to the Company in lieu of fees.
In March 1995, the Company purchased equipment for $48,475 by exchanging
cash of $11,415 and executing a note payable in the amount of $37,060.
In March 1995, the Company forgave a note receivable from sale of common
stock and related interest receivable aggregating $3,377 from a consultant
to the Company in lieu of fees.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading developer and publisher of utility software for
personal computers. The Company recognized significant increases in revenues
and profitability during 1994 and for the first nine months of 1995,
attributable primarily to the April 1994 release of SetUp Advisor, a
Windows-based utility that helps users install modems, fax cards, sound
cards, CD-ROM drives and other devices in their personal computer systems.
Following the August 1994 introduction of WINCheck It, the "All-in-One
Problem Solver" for users of Microsoft's Windows operating system, the
Company's revenues and profitability grew at an accelerated rate during the
last five months of 1994 and the first quarter of 1995. Since the beginning
of 1995, the Company has introduced FASTMOVE!, software packaged with a cable
to assist users of multiple personal computers in transferring and
synchronizing data files while simultaneously scanning for viruses, and a new
version of SetUp Advisor that has been enhanced to address the needs of
personal computer users who intend to upgrade their personal computers to
multimedia systems. In July 1995, the Company began shipping WIN'95 Advisor,
which permits Windows users to analyze their personal computer's
compatibility with Microsoft's new operating system, Windows 95. In October
1995, the company began shipping an upgraded version of WINCheck It.
Additional, utilities for anticipated users of Windows 95 are currently under
development. There can, however, be no assurance that the Company will
continue to attain levels of revenue and profitability growth in future
periods that are comparable to those experienced in recent periods.
The Company sells its products domestically primarily through distributors
for resale to the retail channel. In 1994, three distributors accounted for
approximately 75% of the Company's product sales. These customers typically
order on an as-needed basis, and the Company operates with relatively little
backlog. Sales are recorded at the time products are shipped. However, as is
the case with other consumer product manufacturers, the Company's operations
in subsequent periods are subject to the risk of product returns through the
exercise by customers of contractual return rights or as a result of the
Company's strategic interest in assisting customers in balancing and updating
inventories. Certain of the Company's customer agreements also provide for
rebates to customers should the price of the Company's product decline
subsequent to shipment. 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 or price rebates to customers.
Furthermore, the risk of product returns or price rebates may increase if the
demand for the Company's products declines. Although the Company maintains
allowances for projected returns and price rebates, there can be no assurance
that actual levels of returns or rebates will not significantly exceed
amounts anticipated by the Company. During the three months ended September
30, 1995, the Company increased allowances for price rebates by approximately
$1.1 million in connection with the release of WIN'95 Advisor. The Company's
revenues consist of product sales and royalty income which, for the most
part, is derived from international sales of the Company's products under
agreements with co-publishers (principally those who sell Check It PRO in
France, Germany and the United Kingdom). It is anticipated that there will
be a decrease in royalty income as a percentage of total revenues in
connection with the Company's efforts to increase direct international sales
of its products.
Most of the Company's operating expenses relate directly to sales volume.
Cost of sales includes the cost of blank diskettes, software duplication,
packaging materials and user manuals, in addition to amortization of software
development costs, royalties paid to other software development companies
under various agreements and inventory obsolescence reserves. Sales and
marketing expense consists primarily of salaries and commissions paid to the
Company's sales, customer service and technical support personnel and
expenditures for retail product merchandising and promotions. In addition to
the base salaries of employees in general administration, general and
administrative expense includes amounts paid to all of the Company's
personnel under the Company's annual bonus plans that are based upon the
Company's overall levels of quarterly net income. Certain of the Company's
products can be expected to have short product life cycles, characterized by
decreases in retail prices as a given product's life cycle advances. In
8
<PAGE>
order for the Company to maintain satisfactory gross margins, the Company
will need to introduce new products to offset declining margins associated
with older products. Research and development expense consists primarily of
salaries and related benefits paid to computer programmers to research and
design new software products. Research and development expense during 1993
and 1994 and the nine months ended September 30, 1995 was approximately
$258,000, $440,000 and $444,000, respectively. In addition to amounts
expensed for research and development activities, salaries paid to the
Company's software programmers and fees paid to outside software development
consulting firms for further development and enhancement after technological
feasibility of a product has been established are capitalized in accordance
with SFAS 86. During 1993, 1994 and the nine months ended September 30,
1995, approximately $194,000, $169,000 and $284,000, respectively, of such
costs were capitalized. As described above, royalties paid to third party
software developers ($139,000 in 1993, $166,000 in 1994 and $282,000 for the
nine months ended September 30, 1995) are included in cost of sales. When
these expenditures are added to amounts expensed and capitalized in
connection with the Company's research and development activities, the
resulting totals represent 12.0% of total revenue in 1993, 11.1% in 1994 and
10.5% for the nine months ended September 30, 1995.
The following information should be read in conjunction with the unaudited
financial statements included herein. All dollar amounts presented have been
rounded to the nearest thousand, and all percentages are approximate.
RESULTS OF OPERATIONS
The following table sets forth certain statement of income data as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
1995 1994 1995 1994
____ ____ ____ ____
<S> <C> <C> <C> <C>
Revenues:
Product sales 98.1% 95.8% 97.7% 94.7%
Royalty income 1.9 4.2 2.3 5.3
_____ _____ _____ _____
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 26.1 30.2 29.1 33.0
____ ____ ____ ____
Gross profit 73.9 69.8 70.9 67.0
Sales and marketing 37.1 32.0 32.4 36.5
General and administrative 13.0 17.0 13.0 16.3
Research and development 4.9 6.5 4.6 5.7
____ ____ ____ ____
Income from operations 18.9 14.3 20.9 8.5
Other income (expense), net 2.8 (0.9) 1.3 (0.6)
____ ____ ____ ____
Income before taxes 21.7 13.4 22.2 7.9
Provision for income taxes 8.1 1.5 8.4 0.9
____ ____ ____ ____
Net income 13.6% 11.9% 13.8% 7.0%
____ ____ ____ ____
____ ____ ____ ____
</TABLE>
9
<PAGE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Revenues
Total revenues for the three months ended September 30, 1995 were $3,517,000,
an increase of $1,867,000, or 113.2%, compared to $1,650,000 for the same
period in 1994. This increase was attributable to increased sales of the
Company's WINCheck It product which was first released in August 1994, and
sales of WIN'95 Advisor, released in July 1995. Sales of these products more
than offset declining sales of older products. The Company expects that
sales of WINCheck It and WIN'95 Advisor will contribute a substantial portion
of total revenues during 1995.
For the three months ended September 30, 1995, royalty income was $67,000, a
decrease of $2,000, or 2.9%, compared to $69,000 for the three months ended
September 30, 1994. Royalty income continued to decline as a percentage of
total revenues, from 4.2% during the three months ended September 30, 1994 to
1.9% during the three months ended September 30, 1995.
Gross Profit
Gross profit for the three months ended September 30, 1995 was $2,600,000, an
increase of $1,448,000, or 125.7%, compared to $1,152,000 for the same period
in 1994. Gross profit as a percentage of total revenues increased from 69.8%
during the three months ended September 30, 1994 to 73.9% for the three
months ended September 30, 1995. This increase was primarily attributable to
a change in product mix resulting from sales of WINCheck It and WIN'95
Advisor, which have lower costs per unit than Check It PRO:Deluxe, which
represented a substantial portion of the Company's sales during the third
quarter of 1994. Such costs savings were somewhat offset by higher freight
costs ($91,000, as compared to $12,000 in the three months ended September
30, 1994), resulting from increased product sales and higher freight-out
costs incurred with the release of WIN'95 Advisor, and increased reserves for
inventory obsolescence ($52,000, compared to $16,000 in the three months
ended September 30, 1994). Also included in cost of sales for the three
months ended September 30, 1995 was amortization of software development
costs ($90,000, as compared to $101,000 in the three months ended September
30, 1994).
Sales and Marketing Expense
Sales and marketing expense for the three months ended September 30, 1995 was
$1,306,000, an increase of $779,000, or 147.8%, compared to $527,000 for the
three months ended September 30, 1994. This increase was primarily
attributable to increased promotional and merchandising expenditures for the
Company's products associated with its enhanced retail strategy. Additional
promotional costs were incurred in the third quarter of 1995 in connection
with the introduction of WIN'95 Advisor. Further, in order to support the
substantial increase in sales volume experienced in 1995, the Company was
required to add sales, customer service and technical support personnel. Due
to these additional expenditures, sales and marketing expenses increased as a
percentage of total revenues from 32.0% in the three months ended September
30, 1994 to 37.1% during the three months ended September 30, 1995.
General and Administrative Expense
General and administrative expense for the three months ended September 30,
1995 was $457,000, an increase of $177,000, or 63.2%, compared to $280,000
for the three months ended September 30, 1994. As a result of the increases
in product sales and operating profits realized by the Company during the
three months ended September 30, 1995, the Company's employees were paid
higher profit sharing bonuses, and the provision for doubtful accounts
increased. Additionally, accounting and public reporting costs increased as
a result of the Company's successful public offering of common stock.
However, as a percentage of total revenues, general and administrative
expenses declined from 17.0% to 13.0% during the three months ended September
30, 1994 to the three months ended September 30, 1995, respectively.
Research and Development Expense
Research and development expense for the three months ended September 30,
1995 was $171,000, an increase of $63,000, or 58.3%, compared to $108,000
during the three months ended September
10
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30, 1994. The increase was attributable primarily to the hiring of
additional programmers during 1995 to develop new products. However,
research and development expense decreased as a percentage of total revenues,
from 6.5% for the three months ended September 30, 1994 to 4.9% for the
three months ended September 30, 1994, attributable primarily to the
substantial increase in sales volume experienced during the third quarter of
1995.
Income from Operations
As a result of the foregoing, income from operations for the three months
ended September 30, 1995 was $665,000, an increase of $428,000, or 181.3%,
compared to $237,000 for the three months ended September 30, 1994.
Other Income (Expense), Net
During the three months ended September 30, 1994, the Company's interest
expense exceeded its interest revenue by $15,000. As the Company's cash
resources improved in 1995, primarily as a result of the increased sales
volume and the successful completion of its public offering of common stock,
the Company's interest revenue exceeded interest expense in the three months
ended September 30, 1995, by approximately $98,000, as the Company was able
to reduce debt and increase interest-bearing investments in 1995.
Provision for Income Taxes
The Company's effective tax rate for the three months ended September 30,
1995 was 37.2%, as compared to an 11.1% effective tax rate for the three
months ended September 30, 1994. The increase in the effective tax rate is
attributable to the complete utilization during 1994 of all net operating
loss carry forwards previously available to the Company.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
Revenues
Total revenues for the nine months ended September 30, 1995 were $9,698,000,
an increase of $5,431,000, or 127.3%, compared to $4,267,000 for the same
period in 1994. This increase was attributable to increased sales of the
Company's WINCheck It product, which was first released in August 1994, sales
of FastMove!, released in March 1995, and sales of WIN'95 Advisor, released
in July 1995. Sales of these products more than offset declining sales of
older products.
The Company released an upgraded version of WINCheck It in October 1995, and
expects sales of WINCheck It to contribute a substantial portion of total
revenues during the remainder of 1995.
For the nine months ended September 30, 1995 and 1994, royalty income
remained flat, at $227,000. Royalty income continued to decline as a
percentage of total revenues, from 5.3% during the nine months ended
September 30, 1994 to 2.3% during the nine months ended September 30, 1995.
Gross Profit
Gross profit for the nine months ended September 30, 1995 was $6,877,000, an
increase of $4,019,000, or 140.6%, compared to $2,858,000 for the same period
in 1994. Gross profit as a percentage of total revenues increased from 67.0%
during the nine months ended September 30, 1994 to 70.9% for the nine months
ended September 30, 1995. This increase was primarily attributable to a
change in product mix resulting from the introduction of WINCheck It,
FastMove!, and WIN'95 Advisor, which have lower costs per unit than Check It
PRO:Deluxe, which represented a substantial portion of the Company's sales
during 1994. Such cost savings were somewhat offset by higher royalty costs
paid to other software development companies ($282,000, as compared to
$69,000 in the nine months ended September 30, 1994), primarily incurred in
connection with the Company's FastMove! product, and by higher freight costs
($237,000, as compared to $62,000 in the nine months ended September 30,
1994), resulting from increased product sales and higher freight-in costs for
certain product components. Provisions for inventory obsolescence were also
increased, from $53,000 in the nine months ended September 30, 1994 to
$125,000 in the nine months ended September 30, 1995. Also included in cost
of sales for the nine months ended September 30, 1995 was amortization of
software
11
<PAGE>
development costs ($228,000, as compared to $277,000 in the nine months ended
September 30, 1994).
Sales and Marketing Expense
Sales and marketing expense for the nine months ended September 30, 1995 was
$3,147,000, an increase of $1,589,000, or 102.0%, compared to $1,558,000 for
the nine months ended September 30, 1994. This increase was primarily
attributable to increased promotional and merchandising expenditures for the
Company's products associated with its enhanced retail strategy. Additional
promotional costs were incurred with the release of FastMove! in March 1995
and with the release of WIN'95 Advisor in July 1995. Further, in order to
support the substantial increase in sales volume experienced in 1995, the
Company was required to add sales, customer service and technical support
personnel. Although sales and marketing expense was $1,589,000 higher during
the nine months ended September 30, 1995 than in the comparable 1994 period,
sales and marketing expenses declined as a percentage of total revenues from
36.5% during the nine months ended September 30, 1994 to 32.5% during the
nine months ended September 30, 1995. This decrease was due to the
substantial increase in sales volume experienced during the nine months ended
September 30, 1995.
General and Administrative Expense
General and administrative expense for the nine months ended September 30,
1995 was $1,263,000, an increase of $570,000, or 82.3%, compared to $693,000
for the nine months ended September 30, 1994. As a result of the increases in
product sales and operating profits realized by the Company during the nine
months ended September 30, 1995, the Company's employees were paid higher
profit sharing bonuses, and the provision for doubtful accounts increased.
Additionally, accounting and public reporting costs increased due to the
Company's listing on the NASDAQ exchange and the successful completion of its
public offering of common stock. However, as a percentage of total revenues,
general and administrative expenses declined from 16.3% to 13.0% during the
nine months ended September 30, 1994 to the nine months ended September 30,
1995, respectively.
Research and Development Expense
Research and development expense for the nine months ended September 30, 1995
was $444,000, an increase of $201,000, or 82.7%, compared to $243,000 during
the nine months ended September 30, 1994. The increase was attributable
primarily to the hiring of additional programmers, and increased use of
outside programmers during the first six months of 1995, to develop new
products. However, research and development expense decreased as a
percentage of total revenues from, 5.7% for the nine months ended September
30, 1995 to 4.6% for the nine months ended September 30, 1994, attributable
primarily to the substantial increase in sales volume experienced during
1995.
Income from Operations
As a result of the foregoing, income from operations for the nine months
ended September 30, 1995 was $2,023,000, an increase of $1,659,000, or
455.7%, compared to $364,000 for the nine months ended September 30, 1994.
Other Income (Expense), Net
During the nine months ended September 30, 1994, the Company's interest
expense exceeded its interest revenue by $26,000. As the Company's cash
resources improved in 1995, primarily as a result of the increased sales
volume and the successful completion of its public offering of common stock,
the Company's interest revenue exceeded interest expense in the nine months
ended September 30, 1995, by $129,000, as the Company was able to reduce debt
and increase interest-bearing investments in 1995.
Provision for Income Taxes
The Company's effective tax rate for the nine months ended September 30, 1995
was 37.7%, compared to an 11.1% effective tax rate for the nine months ended
September 30, 1994. The increase in the effective tax rate is attributable
to the complete utilization during 1994 of all net operating loss
carryforwards previously available to the Company.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1995, the Company used its cash
resources primarily for investments in debt securities totaling $2,007,000.
The Company also repaid debt and capital lease obligations aggregating
$460,000, invested $284,000 in software development and purchased equipment
totaling $136,000. These expenditures were funded primarily from proceeds
from sales of common stock and repayments on notes receivable aggregating
$15,618,000, and cash generated from operating activities of $2,372,000.
During the nine months ended September 30, 1994, the Company used its cash
resources primarily to invest $163,000 in software development.
Additionally, the Company repaid debt aggregating $52,000 and purchased
office equipment totaling $29,000. The Company used cash generated from
operations of $343,000 to fund these expenditures, as well as $19,000
received from common stock issuances and subscriptions.
On August 30, 1995, the Company successfully completed a public offering of
common stock which resulted in net proceeds to the Company of $15,285,000,
after deducting underwriter's commission and offering costs. These net
proceeds, combined with the substantial increase in sales volume and
profitability as further discussed in ""Results of Operations'' above, have
increased the Company's working capital from $1,447,000 at December 31, 1994
to $18,651,000 at September 30, 1995. Cash and cash equivalents have
increased from $1,298,000 at December 31, 1994 to $16,400,000 at September
30, 1995.
In addition to its cash and working capital resources, the Company also has a
bank line of credit which allows for borrowings up to $300,000, bears
interest at the prime rate, as reported by the Wall Street Journal, plus
1.5%, which matures May 5, 1996. The prime rate at September 30, 1995 was
8.75%. Borrowings are collateralized by substantially all Company assets and
guaranteed by three of the Company's executive officers. This borrowing
facility requires the Company to maintain a tangible net worth of not less
than $1,300,000, a ratio of total liabilities to tangible net worth of less
than 2:1, and minimum net income of $1 on an annual basis. This line of
credit also prohibits payment of dividends without prior approval of the
bank, and limits annual capital expenditures to $75,000. There were no
borrowings under this line of credit at September 30, 1995.
The Company plans to use its cash resources to finance new product
development and existing product enhancements, expand internationally,
establish a direct sales force for corporate customers, and for general
corporate purposes. The execution of such plans may include strategic
acquisitions of or investments in complementary businesses, products or
technologies. To the extent that the Company's resources are insufficient to
finance the Company's working capital requirements, the Company will be
required to raise additional funds through equity or debt financings. There
can be no assurance that additional equity or debt financing will be
available if needed, or, if available, will be on terms favorable to the
Company or its shareholders. Management believes that the Company's existing
cash resources and anticipated cash flows from operations, and periodic
borrowings under the line of credit, will be sufficient to fund the Company's
operations at currently anticipated levels.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Pursuant to a registration statement on form SB-2 which became
effective on August 25, 1995 under The Securities Act of 1933, the
Company issued and sold an aggregate of 1,300,000 shares of common
stock under a public offering
Item 6. Exhibits and Reports on Form 8-K.
a. Not applicable.
b. No reports on form 8-K have been filed at September 30, 1995.
14
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOUCHSTONE SOFTWARE CORPORATION
(Registrant)
/s/ C. Shannon Jenkins Chief Executive Officer,
___________________________________________ President and Director
C. Shannon Jenkins Dated: November 6, 1995
/s/ Ronald R. Maas Executive Vice President, General
___________________________________________ Manager, Chief Financial Officer,
Ronald R. Maas Dated: November 6, 1995 Principal Accounting Officer
and Director
15
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