<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 June 30, 1995
Commission file No. 0-12969
TOUCHSTONE SOFTWARE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3778226
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(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 August 9, 1995 there were
5,980,468 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 six months ended
June 30, 1995 are not necessarily indicative of the results to
be expected for the full year.
2
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TOUCHSTONE SOFTWARE CORPORATION
CONDENSED BALANCE SHEET
JUNE 30, 1995
(Unaudited)
<TABLE>
<S> <C>
A S S E T S
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Current assets:
Cash and cash equivalents $1,759,060
Accounts receivable, net 1,651,452
Inventories 336,389
Deferred tax asset 298,833
Prepaid expenses and other current assets 31,902
Employee and director receivables 47,026
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Total current assets 4,124,662
Investments 114,000
Property, net 133,844
Software development costs, net 296,781
Deferred offering costs 77,451
Other assets 34,472
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$4,781,210
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 525,749
Accrued payroll and related expenses 480,046
Accrued cooperative advertising costs 447,529
Other accrued liabilities 450,561
Current portion of long-term debt 19,033
Obligations under capital leases 1,006
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Total current liabilities 1,923,924
Long-term debt 47,416
Deferred tax liability 80,374
Deferred compensation 114,000
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, 5,920,468 shares 5,920
Paid-in capital 2,430,041
Retained earnings 418,742
Notes receivable from sale of common stock (239,207)
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Net shareholders' equity 2,615,496
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$4,781,210
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----------
</TABLE>
See accompanying notes to financial statements.
3
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TOUCHSTONE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $3,261,232 $1,284,529 $6,022,127 $2,458,588
Royalty income 59,180 72,404 159,280 158,485
---------- ---------- ---------- ----------
Total revenues 3,320,412 1,356,933 6,181,407 2,617,073
Cost of Sales 1,154,830 490,988 1,904,608 910,344
---------- ---------- ---------- ----------
Gross Profit 2,165,582 865,945 4,276,799 1,706,729
Operating expenses:
Sales and marketing 980,326 557,417 1,840,735 1,031,198
General and administrative 407,183 197,973 805,474 412,575
Research and development 144,696 72,312 273,271 135,441
---------- ---------- ---------- ----------
Income from operations 633,377 38,243 1,357,319 127,515
Other income (expense), net 17,996 (5,867) 31,699 (11,118)
---------- ---------- ---------- ----------
Income before provision
for income taxes 651,373 32,376 1,389,018 116,397
Provision for income taxes 248,000 3,600 528,300 13,100
---------- ---------- ---------- ----------
Net income $ 403,373 $ 28,776 $ 860,718 $ 103,297
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share of
common stock outstanding $ .06 $ .01 $ .13 $ .02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares of common stock
used in computing net
income per share (in
thousands of shares) 6,765 4,807 6,696 4,995
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
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TOUCHSTONE SOFTWARE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months Six months
ended ended
June 30, 1995 June 30, 1994
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 860,718 $ 103,297
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 162,519 194,920
Provision for doubtful accounts 63,900 26,100
Amortization of deferred lease obligation -- (5,890)
Loss on disposal of assets 947 --
Changes in operating assets and liabilities:
Accounts receivable (33,740) (175,487)
Inventories 52,792 (10,485)
Prepaid expenses and other current assets (562) (17,617)
Employee and director receivables (28,568) 4,556
Other assets (19,320) (86)
Accounts payable (177,775) 95,063
Accrued liabilities 263,205 38,105
---------- ----------
Net cash provided by
operating activities 1,144,116 252,476
Cash flow from investing activities:
Capitalized software development costs (198,848) (90,149)
Purchases of property (65,023) (14,029)
---------- ----------
Net cash used in investing activities (263,871) (104,178)
Cash flow from financing activities:
Net repayments under bank line of credit (300,000) (89,821)
Principal payments on notes payable (89,622) (29,510)
Principal payments under capital
lease obligations (3,118) (6,870)
Proceeds from exercise of stock warrants and
options and repayment on notes receivable 51,805 2,712
Interest accrued on notes receivable -- (2,361)
Deferred offering costs (77,451) --
Other prepaid financing costs (1,000) (5,034)
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Net cash used in financing activities (419,386) (130,884)
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Net increase in cash and cash equivalents 460,859 17,414
Cash and cash equivalents, beginning of period 1,298,201 44,005
---------- ----------
Cash and cash equivalents, end of period $1,759,060 $ 61,419
---------- ----------
---------- ----------
Supplemental cash flow information:
Interest paid $ 6,179 $ 15,861
---------- ----------
---------- ----------
Income taxes paid $ 712,701 $ 14,600
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---------- ----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1995
(Unaudited)
1. GENERAL
The condensed financial statements included herein 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 six month
periods ended June 30, 1995 and 1994, the financial position at June
30, 1995, and the cash flows for the six months ended June 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 conjunction 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 six month periods ended June 30,
1995 and 1994.
2. ACCOUNTS RECEIVABLE
At June 30, 1995, the accounts receivable balance is presented net of
allowance for doubtful accounts, reseller rebate reserves, and product
return reserves of approximately $125,500, $1,096,100, and $569,400,
respectively.
3. DEFERRED OFFERING COSTS
On July 17, 1995, the Company filed a Form SB-2 Registration Statement
with the Securities and Exchange Commission in connection with its
proposed public offering of 1,800,000 shares of the Company's Common
Stock. Of the 1,800,000 shares of Common Stock proposed to be offered,
1,000,000 shares are being sold by the Company, and 800,000 shares are
being sold by certain shareholders of the Company. Costs incurred with
the preparation of the Form SB-2 Registration Statement have been
deferred, and will be offset against proceeds from the sale of the
proposed shares.
4. FINANCING ARRANGEMENTS
At June 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 June 30, 1995 was 9.0%. 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 June 30, 1995.
6
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TOUCHSTONE SOFTWARE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1995
(Unaudited)
5. TAXES
The provision for taxes of $3,600 and $13,100 for the three and six
months ended March 31, 1994, respectively, was primarily related to
California state income taxes, net of federal benefit, and federal
alternative minimum taxes.
The provision for taxes of $248,000 and $528,300 for the three and six
months ended June 30, 1995, respectively, is primarily related to
federal income taxes and California state income taxes, net of federal
benefit.
During the three months ended June 30, 1995, the Company decreased its
federal tax liability and increased additional paid-in capital by
$84,231 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 six month periods ending June 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.
In March 1995, the Company purchased property 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
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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 1993 and the first seven months of 1994,
attributable primarily to the introduction in 1992 of CheckXIt PRO for
DOS-based personal computers and 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 WINCheckXIt, 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. On July 24, 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, which is
scheduled for release in August 1995. In July 1995, the Company received a
single order from Ingram Micro, totalling over $1.7 million, for its WIN'95
Advisor, specially packaged for Sam's Club. 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. 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. Furthermore, the risk of
product returns may increase if the demand for the Company's products
declines. Although the Company maintains allowances for projected returns,
there can be no assurance that actual levels of returns will not
significantly exceed amounts anticipated by the Company. 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 CheckXIt 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 following
this offering to correspond with the Company's efforts to increase direct
international sales of its products.
Most of the Company's operating expenses are tied 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 pre-tax 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 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
8
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research and design new software products. Research and development expense
during 1993 and 1994 and the six months ended June 30, 1995 was approximately
$258,000, $440,000 and $273,000, 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 six months ended June 30, 1995,
approximately $194,000, $169,000 and $199,000, respectively, of such costs
were capitalized. As described above, royalties paid to third party software
developers ($139,000 in 1993, $116,000 in 1994 and $274,000 for the six
months ended June 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 11.5% of total revenue in 1993, 10.4% in 1994 and 12.1% for the six
months ended June 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 Six months
ended June 30, ended June 30,
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales 98.2% 94.7% 97.4% 93.9%
Royalty income 1.8 5.3 2.6 6.1
------ ------ ------ ------
Total revenues 100.0 100.0 100.0 100.0
Cost of Sales 34.8 36.2 30.8 34.8
------ ------ ------ ------
Gross Profit 65.2 63.8 69.2 65.2
Operating expenses:
Sales and marketing 29.5 41.1 29.8 39.4
General and administrative 12.2 14.6 13.0 15.8
Research and development 4.4 5.3 4.4 5.2
------ ------ ------ ------
Income from operations 19.1 2.8 22.0 4.8
Other income (expense), net 0.5 -0.4 0.5 -0.4
------ ------ ------ ------
Income before provision
for income taxes 19.6 2.4 22.5 4.4
Provision for income taxes 7.5 0.3 8.5 0.5
------ ------ ------ ------
Net income 12.1% 2.1% 13.9% 3.9%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1995 AND 1994
REVENUES
Total revenues for the three months ended June 30, 1995 were $3,320,000, an
increase of $1,963,000, or 144.7%, compared to $1,357,000 for the same period
in 1994. This increase was attributable to increased sales of the Company's
WINCheckXIt product which was first released in August 1994, and sales of
FastMove!, released in March 1995. Sales of these products more than offset
declining sales of older products. The Company expects that sales of
WINCheckXIt and FastMove! will contribute a substantial portion of total
revenues during 1995.
9
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For the three months ended June 30, 1995, royalty income was $59,000, a
decrease of $13,000, or 18.1%, compared to $72,000 for the three months ended
June 30, 1994. Royalty income continued to decline as a percentage of total
revenues, from 5.3% during the three months ended June 30, 1994 to 1.8%
during the three months ended June 30, 1995.
GROSS PROFIT
Gross profit for the three months ended June 30, 1995 was $2,166,000, an
increase of $1,300,000, or 150.1%, compared to $866,000 for the same period in
1994. Gross profit as a percentage of total revenues increased from 63.8%
during the three months ended June 30, 1994 to 65.2% for the three months
ended June 30, 1995. This increase was primarily attributable to a change in
product mix resulting from the introduction of WINCheckXIt and FastMove!,
which have lower costs per unit than CheckXIt PRO:Deluxe, which represented a
substantial portion of the Company's sales during the second quarter of 1994.
Such costs savings were somewhat offset by higher royalty costs paid to
other software development companies ($233,000, as compared to $22,000 in the
three months ended June 30, 1994), primarily incurred in connection with the
Company's FastMove! product, and by higher freight costs ($102,000, as
compared to $20,000 in the three months ended June 30, 1994), resulting from
increased product sales and higher freight-in costs for certain product
components. Also included in cost of sales for the three months ended June
30, 1995 was amortization of software development costs ($63,000, as compared
to $91,000 in the three months ended June 30, 1994).
SALES AND MARKETING EXPENSE
Sales and marketing expense for the three months ended June 30, 1995 was
$980,000, an increase of $423,000, or 75.9%, compared to $557,000 for the
three months ended June 30, 1994. This increase was primarily attributable
to increased promotional and merchandising expenditures for the Company's
products associated with its enhanced retail strategy. Additionally, 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 $423,000 higher
during the three months ended June 30, 1995 than in the three months ended
June 30, 1994, sales and marketing expenses declined as a percentage of total
revenues from 41.1% during the three months ended June 30, 1994 to 29.5%
during the three months ended June 30, 1995. This decrease was due to the
substantial increase in sales volume experienced during the second quarter of
1995.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the three months ended June 30, 1995
was $407,000, an increase of $209,000, or 105.6%, compared to $198,000 for
the three months ended June 30, 1994. As a result of the increases in
product sales and operating profits realized by the Company during the three
months ended June 30, 1995, the Company's employees were paid higher profit
sharing bonuses, and the provision for doubtful accounts increased. However,
as a percentage of total revenues, general and administrative expenses
declined from 14.6% to 12.3% during the three months ended June 30, 1994 to
the three months ended June 30, 1995, respectively.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense for the three months ended June 30, 1995 was
$145,000, an increase of $73,000, or 101.4%, compared to $72,000 during the
three months ended June 30, 1994. The increase was attributable primarily to
the hiring of additional programmers and increased use of outside programmers
during 1995 to develop new products. However, research and development
expense decreased as a percentage of total revenues from 5.3% for the three
months ended June 30, 1994 to 4.4% for the three months ended June 30, 1995,
attributable primarily to the substantial increase in sales volume
experienced during the second quarter of 1995.
INCOME FROM OPERATIONS
As a result of the foregoing, income from operations for the three months
ended June 30, 1995 was $633,000, an increase of $595,000, or 1,565.8%,
compared to $38,000 for the three months ended June 30, 1994.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the three months ended June 30, 1995 was
38.1%, as compared to an 11.1% effective tax rate for the three months ended
June 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.
10
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COMPARISON OF SIX MONTHS ENDED JUNE 30, 1995 AND 1994
REVENUES
Total revenues for the six months ended June 30, 1995 were $6,181,000, an
increase of $3,564,000, or 136.2%, compared to $2,617,000 for the same period
in 1994. This increase was attributable to increased sales of the Company's
WINCheckXIt product which was first released in August 1994, and sales of
FastMove!, released in March 1995. Sales of these products more than offset
declining sales of older products. The Company expects that sales of
WINCheckXIt and FastMove! will contribute a substantial portion of total
revenues during 1995.
For the six months ended June 30, 1995, royalty income was $159,000, an
increase of $1,000, or .6%, compared to $158,000 for the six months ended
June 30, 1994. Royalty income continued to decline as a percentage of total
revenues, from 6.1% during the six months ended June 30, 1994 to 2.6% during
the six months ended June 30, 1995.
GROSS PROFIT
Gross profit for the six months ended June 30, 1995 was $4,277,000, an
increase of $2,570,000, or 150.6%, compared to $1,707,000 for the same period
in 1994. Gross profit as a percentage of total revenues increased from 65.2%
during the six months ended June 30, 1994 to 69.2% for the six months ended
June 30, 1995. This increase was primarily attributable to a change in
product mix resulting from the introduction of WINCheckXIt and FastMove!,
which have lower costs per unit than CheckXIt PRO:Deluxe, which represented a
substantial portion of the Company's sales during the second quarter of 1994.
Such costs savings were somewhat offset by higher royalty costs paid to
other software development companies ($274,000, as compared to $48,000 in the
six months ended June 30, 1994), primarily incurred in connection with the
Company's FastMove! product, and by higher freight costs ($145,000, as
compared to $34,000 in the six months ended June 30, 1994), resulting from
increased product sales and higher freight-in costs for certain product
components. Also included in cost of sales for the six months ended June 30,
1995 was amortization of software development costs ($138,000, as compared to
$176,000 in the six months ended June 30, 1994).
SALES AND MARKETING EXPENSE
Sales and marketing expense for the six months ended June 30, 1995 was
$1,841,000, an increase of $810,000, or 78.6%, compared to $1,031,000 for the
six months ended June 30, 1994. This increase was primarily attributable to
increased promotional and merchandising expenditures for the Company's
products associated with its enhanced retail strategy. Additionally, 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 $810,000 higher
during the six months ended June 30, 1995 than in the six months ended June
30, 1994, sales and marketing expenses declined as a percentage of total
revenues from 39.4% during the six months ended June 30, 1994 to 29.8% during
the six months ended June 30, 1995. This decrease was due to the substantial
increase in sales volume experienced during the six months ended June 30,
1995.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the six months ended June 30, 1995 was
$805,000, an increase of $392,000, or 94.9%, compared to $413,000 for the six
months ended June 30, 1994. As a result of the increases in product sales
and operating profits realized by the Company during the six months ended
June 30, 1995, the Company's employees were paid higher profit sharing
bonuses, and the provision for doubtful accounts increased. However, as a
percentage of total revenues, general and administrative expenses declined
from 15.8% to 13.0% during the six months ended June 30, 1994 to the six
months ended June 30, 1995, respectively.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense for the six months ended June 30, 1995 was
$273,000, an increase of $138,000, or 102.2%, compared to $135,000 during the
six months ended June 30, 1994. The increase was attributable primarily to
the hiring of additional programmers and increased use of outside programmers
during 1995 to develop new products. However, research and development
expense decreased as a percentage of total revenues from 5.2% for the six
months ended June 30, 1994 to 4.4% for the six months ended June 30, 1995,
attributable primarily to the substantial increase in sales volume
experienced during the second quarter of 1995.
11
<PAGE>
INCOME FROM OPERATIONS
As a result of the foregoing, income from operations for the six months ended
June 30, 1995 was $1,357,000, an increase of $1,229,000, or 960.2%, compared
to $128,000 for the six months ended June 30, 1994.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the six months ended June 30, 1995 was
38%, compared to an 11.3% effective tax rate for the six months ended
June 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.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1995, the Company used its cash
resources primarily to repay debt and capital lease obligations aggregating
$393,000. Additionally, the Company invested $199,000 in software
development, and purchased office equipment and made leasehold improvements
totaling $65,000. The Company also incurred costs of $77,000 to prepare its
Registration Statement for the proposed sale of common stock. These
expenditures were funded primarily from cash generated from operations of
$1,144,000.
During the six months ended June 30, 1994, the Company used its cash
resources primarily to repay debt and capital lease obligations aggregating
$126,000. The Company also invested $90,000 in software development, and
purchased office equipment of $14,000. The Company used cash generated from
operations of $252,000 to fund these expenditures.
Due substantially to the increased sales volume as further discussed in
"Results of Operations" above, the Company's working capital has increased
from $1,445,900 at December 31, 1994 to $2,201,000 at June 30, 1995. Cash
and cash equivalents has increased from $1,298,000 at December 31, 1994 to
$1,759,000 at June 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 June 30, 1995 was 9.0%.
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 June 30, 1995.
Management believes that the Company's existing cash resources and
anticipated cash flows from operations, when combined with the net proceeds
to the Company from its common stock offering and periodic borrowings under
the line of credit, will be sufficient to fund the Company's operations at
currently anticipated levels. To the extent that such amounts 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.
12
<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.
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K.
a. Not applicable.
b. No reports on form 8-K have been filed at June 30, 1995.
13
<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: August 11, 1995
/s/ Ronald R. Maas Executive Vice President,
---------------------------------------------- General Manager, Chief
Ronald R. Maas Dated: August 11, 1995 Financial Officer, Principal
Accounting Officer and Director
14
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,759,060
<SECURITIES> 0
<RECEIVABLES> 1,651,452
<ALLOWANCES> 0
<INVENTORY> 336,389
<CURRENT-ASSETS> 4,124,662
<PP&E> 114,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,781,210
<CURRENT-LIABILITIES> 1,923,924
<BONDS> 0
<COMMON> 5,920
0
0
<OTHER-SE> 2,609,576
<TOTAL-LIABILITY-AND-EQUITY> 4,781,210
<SALES> 0
<TOTAL-REVENUES> 3,320,412
<CGS> 1,154,830
<TOTAL-COSTS> 2,687,035
<OTHER-EXPENSES> (17,996)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 651,373
<INCOME-TAX> 248,000
<INCOME-CONTINUING> 403,373
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403,373
<EPS-PRIMARY> .06
<EPS-DILUTED> 0
</TABLE>
