<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1995
REGISTRATION NO. 33-94352
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TOUCHSTONE SOFTWARE CORPORATION
(Name of issuer in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 5190 95-3778226
(State or Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Classification Code Number) Identification Number)
Organization)
</TABLE>
2124 MAIN STREET, 2ND FLOOR, HUNTINGTON BEACH, CALIFORNIA 92648
(714) 969-7746
(Address and telephone number of principal executive offices and principal place
of business)
RONALD R. MAAS
2124 MAIN STREET, 2ND FLOOR, HUNTINGTON BEACH, CALIFORNIA 92648
(714) 969-7746
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES M. PHILLIPS, JR., ESQ. NICK E. YOCCA, ESQ.
JON R. HADDAN, ESQ. MICHAEL E. FLYNN, ESQ.
PHILLIPS & HADDAN STRADLING, YOCCA, CARLSON & RAUTH
4695 MACARTHUR COURT, SUITE 840 660 NEWPORT CENTER DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660 NEWPORT BEACH, CALIFORNIA 92660
(714) 752-6100 (714) 725-4000
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement under the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value (2).......... 2,300,000 $10.06 $23,138,000.00 $7,978.61
Representatives' Warrants (3)............... 200,000 .001 200.00 (3)
Common Stock (4)............................ 200,000 12.07 $2,414,000.00 832.42
Total Registration Fee...................... $8,811.03
<FN>
(1) Computed pursuant to Rule 457(c) on the basis of the average of the bid and
asked price for a share of the Common Stock on July 12, 1995, as reported
by Nasdaq, of which $7,596.96 has already been paid.
(2) Includes 300,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(3) To be issued to the Representatives of the several Underwriters. No fee is
required pursuant to Rule 457(g).
(4) Issuable upon exercise of the Representatives' Warrants. Pursuant to Rule
416, also includes such additional shares as may become issuable pursuant
to the anti-dilution provisions of the Representatives' Warrants.
</TABLE>
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Exhibit Index is located on sequentially numbered page .
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
Cross-Reference Sheet Showing Location in Prospectus of Part I Items of Form
SB-2 Registration Statement.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEMS AND HEADINGS LOCATION IN PROSPECTUS
------------------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover of Prospectus.............................. Facing Page; Cross-Reference Sheet; Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front and Outside Back Cover Page of Prospectus;
Additional Information.
3. Summary Information and Risk Factors.............. Prospectus Summary; Risk Factors.
4. Use of Proceeds................................... Use of Proceeds.
5. Determination of Offering Price................... Cover Page of Prospectus.
6. Dilution.......................................... Not Applicable.
7. Selling Security Holders.......................... Principal and Selling Shareholders.
8. Plan of Distribution.............................. Cover Page of Prospectus; Underwriting.
9. Legal Proceedings................................. Not applicable.
10. Directors, Executive Officers, Promoters and
Control Persons.................................. Management.
11. Security Ownership of Certain Beneficial Owners
and Management................................... Principal and Selling Shareholders.
12. Description of Securities......................... Description of Securities.
13. Interest of Named Experts and Counsel............. Legal Matters.
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Management -- Limitation of Directors' and Officers'
Liability and Indemnification.
15. Organization Within Last Five Years............... Business -- General.
16. Description of Business........................... Business.
17. Management's Discussion and Analysis or Plan of
Operations....................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations.
18. Description of Property........................... Business -- Properties.
19. Certain Relationships and Related Transactions.... Management -- Certain Transactions.
20. Market for Common Equity and Related Stockholder
Matters.......................................... Cover Page of Prospectus; Price Range of Common Stock.
21. Executive Compensation............................ Management -- Executive Compensation.
22. Financial Statements.............................. Selected Financial Data; Index to Financial Statements.
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. Not Applicable.
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 15, 1995
2,000,000 SHARES
[ LOGO ]
TOUCHSTONE SOFTWARE CORPORATION
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 1,200,000 shares are
being sold by TouchStone Software Corporation (the "Company") and 800,000 shares
are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders. The
Company's Common Stock is traded on The Nasdaq Small Cap Market under the symbol
"TSSW." Application has been made for inclusion of the Company's Common Stock on
The Nasdaq Stock Market upon consummation of this offering. On August 10, 1995,
the closing bid and asked prices for a share of the Company's Common Stock, as
reported by Nasdaq, were $11.63 and $12.13, respectively. See "Price Range of
Common Stock."
------------------------
See "Risk Factors" at page 5 of this Prospectus for a discussion of certain
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share...... $ $ $ $
Total (3)...... $ $ $ $
<FN>
(1) Excludes a non-accountable expense allowance payable to the representatives
(the "Representatives") of the several Underwriters and the value of
warrants to be issued to the Representatives to purchase up to 200,000
shares of Common Stock (the "Representatives' Warrants"). The Company and
the Selling Shareholders have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $ ,
including the Representatives' non-accountable expense allowance.
(3) Certain of the Selling Shareholders have granted the Underwriters a 45-day
option to purchase up to 300,000 additional shares of Common Stock on the
same terms and conditions as set forth above solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to the Company
and Proceeds to the Selling Shareholders would be $ , $ , $
and $ , respectively. See "Principal and Selling Shareholders" and
"Underwriting."
</TABLE>
The shares of Common Stock are being offered severally by the Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and certain other conditions. The Underwriters reserve the right to
reject any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the shares will be made at the
offices of Cruttenden Roth Incorporated, Irvine, California, on or about
, 1995.
------------------------
CRUTTENDEN ROTH PUNK, ZIEGEL & KNOELL
INCORPORATED
THE DATE OF THIS PROSPECTUS IS AUGUST , 1995.
<PAGE>
[ COLOR PHOTOGRAPHS
of the Registrant's packaging for its
set-up advisor, WINCHECK-CHECKMARK-IT, FASTMOVE!
and WIN'95 ADVISOR products. ]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TOUCHSTONE SOFTWARE CORPORATION, CHECKIT-REGISTERED TRADEMARK-,
WINCHECK-CHECKMARK-IT-TM-, SETUP ADVISOR-TM-, CHECK-CHECKMARK-IT PRO-TM-,
CHECK-CHECKMARK-IT PRO: DELUXE-TM-, ROADTECH-TM-, SUPERHUMAN SAMURAI COMPUTER
SAFETY FUN KIT-TM-, FASTMOVE!-TM-, AUTOHELP/CHECK-CHECKMARK-IT DIAGNOSTICS-TM-
AND WIN'95 ADVISOR-TM- are trademarks of the Company. This Prospectus also
refers to trademarks of companies other than TouchStone Software Corporation.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THERE HAS
BEEN NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, REPRESENTATIVE'S
WARRANTS, OUTSTANDING WARRANTS TO PURCHASE SHARES OF COMMON STOCK AND OPTIONS TO
PURCHASE SHARES OF COMMON STOCK GRANTED OR TO BE GRANTED UNDER THE COMPANY'S
STOCK OPTION PLANS.
THE COMPANY
TouchStone Software Corporation (the "Company") is a leading developer and
publisher of utility software used to set up, maintain and manage personal
computers. The Company's CHECK-CHECKMARK-IT family of products, including
WINCHECK-CHECKMARK-IT, identifies and assists in the resolution of system
conflicts, facilitates the installation of upgrades and accessories and
substantially reduces the time and cost typically associated with diagnosing
personal computer problems. The Company's WINCHECK-CHECKMARK-IT product for
Windows-based personal computers was listed as the top selling utility software
product on Ingram Micro, Inc.'s ("Ingram Micro's") May, June and July 1995
Retail Products Best Seller List and the Company's SETUP ADVISOR product was
listed as the next best selling utility software product on the July 1995 list.
WINCHECK-CHECKMARK-IT was also awarded a WINDOWS MAGAZINE 1995 WIN 100 Award and
a Top 100 ranking in the June 1995 issue of HOME PC Magazine. The Company's
FASTMOVE! product, which was introduced in March 1995, enables users of multiple
personal computers to transfer and synchronize data files between personal
computers, while simultaneously scanning for viruses. In July 1995, the Company
released WIN'95 ADVISOR, a utility software product that will permit users to
analyze their personal computer's compatibility with Microsoft Corporation's
("Microsoft's") new operating system, Windows 95, currently scheduled for
release on August 24, 1995.
During the last decade, the personal computer industry has grown rapidly.
The Software Publishers Association estimates that worldwide utility software
sales were approximately $847 million in 1994. Technological advances and
increased functionality, combined with lower pricing, have made personal
computers common for use in both homes and businesses. A market for
sophisticated utility software has evolved in response to the popularity of
multimedia systems utilizing technologically advanced features such as CD-ROM
drives and enhanced video, storage, animation and sound capability. In addition,
each major change of the operating system that runs a particular personal
computer may require the purchase of a new set of utility software to support a
new operating system, such as Windows 95. According to Dataquest, an industry
research firm, Microsoft is projected to sell at least 29.3 million copies of
its new Windows 95 operating system before the end of 1995.
The Company markets its products domestically through software distributors,
including Ingram Micro, Merisel Americas Inc. ("Merisel") and Tech Data
Corporation ("Tech Data"), for resale through the retail channel. The Company's
primary sales and marketing efforts in 1994 were directed at increasing demand
for products at the retail sales level and increasing the number of mall stores,
club stores and warehouse stores that carry the Company's products. Such efforts
have included using outside representatives to present the Company's products to
retail store employees, and using point-of-sale and other in-store displays in
such retail stores as CompUSA, Sam's Club, Micro Center, Egghead Software,
Computer City, Fry's Electronics, Office Depot, Best Buy and PriceCostco. The
Company estimates that the number of retail stores which carry the Company's
products increased from approximately 1,700 in 1993 to approximately 7,100 in
1995.
The Company's strategy is to leverage the technological advances and
increased functionality of the personal computer to expand its position as a
leading developer of quality utility software products for use in the home and
in businesses. The Company intends to implement this strategy by (i)
capitalizing on its brand name recognition and retailer success, (ii) exploiting
its software technology expertise, (iii) developing products for Windows 95,
(iv) expanding international distribution, (v) targeting corporate customers,
and (vi) pursuing strategic alliances and acquisitions.
Organized in 1982, the Company is a California corporation whose principal
executive offices are located at 2124 Main Street, Huntington Beach, California
92648, and its telephone number is (714) 969-7746.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 1,200,000 shares
Common Stock offered by
Selling Shareholders.................... 800,000 shares
Common Stock to be outstanding after
the offering............................ 7,120,468 shares (1)
Use of proceeds by the Company........... To finance new product development and existing product
enhancements, expand international distribution, establish
a direct sales force for corporate customers and for
general corporate purposes, which may include strategic
acquisitions of or investments in complementary
businesses, products or technologies.
Nasdaq symbol............................ TSSW
</TABLE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................................................. $ 3,470 $ 4,925 $ 7,202 $ 2,617 $ 6,181
Gross profit.............................................................. 2,491 3,261 4,886 1,707 4,276
Income from operations.................................................... 75 317 928 127 1,357
Net income................................................................ 41 308 800 103 861
Net income per common share............................................... $ .01 $ .06 $ .14 $ .02 $ .13
Weighted average shares outstanding....................................... 4,776 4,927 5,576 4,995 6,696
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................................. $ 2,201 $ 14,323
Total assets.................................................................................... 4,781 17,112
Long-term debt (3).............................................................................. 47 47
Shareholders' equity (4)........................................................................ 2,616 15,025
<FN>
------------------------
(1) Excludes 60,000 shares of Common Stock issued subsequent to June 30, 1995,
329,968 shares of Common Stock issuable upon exercise of outstanding
warrants, with exercise prices ranging from $.20 to $.50 per share, and
617,834 shares of Common Stock issuable in the future upon exercise of
options granted or to be granted under the Company's stock option plans.
See "Description of Securities -- Outstanding Warrants" and "Management --
Stock Option Plans."
(2) Adjusted to reflect the sale of 1,200,000 shares of Common Stock by the
Company in this offering at an assumed public offering price of $11.625 and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(3) See Note 3 of Notes to Financial Statements.
(4) Includes an aggregate of $208,883 payable to the Company pursuant to
promissory notes given by officers and employees of the Company in payment
of the purchase price of Common Stock issued under the Company's stock
purchase and option plans, all of which will be paid in full upon
consummation of this offering.
</TABLE>
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING ANY COMMON STOCK OFFERED HEREBY.
PRODUCT CONCENTRATION AND LIFE CYCLES; DEPENDENCE ON NEW PRODUCTS
During the last quarter of 1994 and the first six months of 1995,
approximately 64% and 72%, respectively, of the Company's operating revenues
were attributable to sales of WINCHECK-CHECKMARK-IT which is designed for users
of Microsoft's Windows operating system. The Company anticipates that this
product, the enhanced version of SETUP ADVISOR and the recently introduced
FASTMOVE! and WIN'95 ADVISOR products will account for a substantial portion of
the Company's revenues during the current year. A decline in the demand for
these products, whether as a result of competition or other factors, could have
a material adverse effect on the Company's results of operations and financial
condition. In addition, the markets for the Company's products are characterized
by rapidly changing technology, short product life cycles, extensive
competition, eroding profit margins, frequent new product introductions and
evolving industry standards. To meet these challenges, the Company invests
significant time and resources developing new products and researching and
testing their market acceptance. The length of time required to develop the
Company's products typically ranges from six to eighteen months. In the past,
the Company has experienced delays in the introduction of new products. The
Company depends on the successful development of new products, including
adaptations to new platforms, to replace revenues from products introduced in
prior years which have begun to decline. The Company also depends on upgrades of
existing products to lengthen the life cycle of, and increase the revenue
attributable to, such products. If the Company does not accurately anticipate
and successfully adapt its products to emerging personal computer platforms,
environments and technologies, or new products are not introduced when planned
or do not achieve anticipated revenues, the Company's operating results could be
materially adversely affected. There can be no assurance that the Company will
be able to introduce new products on schedule or that such new products will
achieve market acceptance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Product
Development."
DEPENDENCE ON MICROSOFT
The Company's success is highly dependent on the continued widespread use of
Microsoft's Windows operating system for personal computers. Although the
Windows operating system is currently used by many personal computer users,
other companies, including International Business Machines Corporation, have
developed or are developing other operating systems which compete and will
compete with Microsoft's Windows. In the event that any of these alternative
operating systems become widely accepted in the personal computer marketplace,
demand for the Company's WINCHECK-CHECKMARK-IT product could adversely be
affected, thereby affecting the Company's operating results. In addition,
Microsoft has announced that it intends to introduce a new operating system,
Windows 95, in August 1995. The Company recently released WIN'95 ADVISOR, a new
addition to its CHECK-CHECKMARK-IT product line designed to assist personal
computer users in determining whether their personal computers are compatible
with Windows 95. Microsoft has experienced unanticipated delays in its
introduction of Windows 95 and there can be no assurance that Windows 95 will be
introduced on schedule. Any further delay in the introduction of Windows 95 by
Microsoft could affect near-term sales of WIN'95 ADVISOR and a lack of market
acceptance of Windows 95 would have a material adverse effect on sales of WIN'95
ADVISOR and the Company's operating results.
In addition, the Company's strategy of developing products based on the
Windows and Windows 95 operating systems, and releasing these products
immediately prior to or at the time of Microsoft's release of new and upgraded
Windows and Windows 95 products, is substantially dependent on its ability to
gain pre-release access to, and to develop expertise in, current and future
versions of
5
<PAGE>
Windows and Windows 95. There can be no assurance as to the ability of the
Company to provide products compatible with future Windows or Windows 95
releases on a timely basis without the cooperation of Microsoft. See "Business
-- Product Development."
QUARTERLY FLUCTUATIONS; SEASONALITY
The Company's quarterly operating results may fluctuate significantly due to
a variety of factors, including changes in the Company's product and customer
mix, the number and timing of new product introductions by the Company or its
competitors, pricing pressures, general economic conditions and other factors.
Products are generally shipped as orders are received and, accordingly, the
Company has historically operated with relatively little backlog. As a result,
quarterly revenue will depend on the volume and timing of orders received during
a particular quarter, both of which are difficult to forecast. In addition, the
Company will continue to incur product development, marketing and promotional
expenses based upon management's expectations as to future sales. Since many of
these expenses are committed in advance, the Company generally is unable to
adjust spending in a timely manner to compensate for any unexpected shortfall in
sales. If operating revenues do not meet the Company's expectations in any given
quarter, operating results may be adversely affected. There can be no assurance
that the Company will be profitable in any particular quarter.
In addition, the software industry has seasonal elements. In recent years
the software industry has experienced decreased demand for software products in
the second and third quarters. These seasonal elements, together with the other
factors which impact quarterly results, can cause revenues and net income to
vary. The Company's business may be affected by these seasonal elements in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results."
DEPENDENCE ON DISTRIBUTION CHANNELS
The Company sells its products primarily through distributors for resale to
the retail channel. In 1993, three distributors, Ingram Micro, Inc.("Ingram"),
Merisel Americas Inc. ("Merisel") and Kenfil Distribution, accounted for
approximately 20.8%, 20.7% and 10.5%, respectively, of the Company's total
product sales. During the year ended December 31, 1994, Ingram, Merisel and Tech
Data Corporation ("Tech Data") accounted for approximately 59.0%, 8.7% and 6.3%
of the Company's product sales, respectively. Of the $1.7 million in net
accounts receivable reflected on the Company's June 30, 1995 balance sheet, a
total of approximately $1,210,000, or approximately 71.2% of total net accounts
receivable, was owed to the Company by Ingram. The loss of or reduction in
orders from Ingram could have a material adverse effect on the Company's
revenues and profitability. The Company depends upon the continued viability and
financial stability of these resellers and, indirectly, on the personal computer
industry. The Company's reseller customers generally offer products of several
different companies, including products which compete with those of the Company.
Accordingly, there is a risk that these resellers may give higher priority to
products of other suppliers and reduce their efforts to sell the Company's
products. In addition, any special distribution arrangements and product pricing
arrangements that the Company may implement in one or more distribution channels
for strategic purposes could adversely affect gross profit margins for its
products.
The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, there are an
increasing number of companies competing for access to these channels. Retailers
of the Company's products typically have a limited amount of shelf space and
promotional resources, and there is intense competition for high quality and
adequate levels of shelf space and promotional support from the retailers. To
the extent that the number of software products available in the marketplace
increases, this competition for shelf space may also increase. Since utilities
software
6
<PAGE>
typically constitutes a relatively small percentage of a retailer's sales
volume, there can be no assurance that such retailers will continue to purchase
the Company's products or provide the Company's products with high quality and
adequate levels of shelf space and promotional support. See "Business --
Distribution, Sales and Marketing."
COMPETITION
The utility software industry is intensely competitive and consumer demand
for particular software products may be adversely affected by the increasing
number of competitive products. The Company competes primarily against other
companies offering utility software, including software companies of varying
sizes and resources. In addition, there exists a number of large,
well-capitalized software development firms that could, should they choose to do
so, provide utility software in direct competition with the Company, as well as
a number of large companies which may be in the process of developing products
which compete, in whole or in part, with the Company's products. Each of these
firms and certain of the Company's existing competitors have substantially
greater financial, technical and marketing resources than the Company. Moreover,
there are no proprietary barriers to entry that could keep its competitors from
developing similar products or selling competing products in the Company's
markets. There is no assurance that the Company will be able to successfully
compete with such concerns. Increased competition may result in loss of shelf
space and reduction in consumer demand, or sell-through of the Company's
products, any of which could have a material adverse effect on the Company's
operating results.
In addition, the Company may face increasing pricing pressures from current
and future competitors and, accordingly, there can be no assurance that
competitive pressures will not require the Company to reduce its prices. In
particular, over time, the average selling prices for the Company's products may
decline as the market for these products becomes more competitive. Any material
reduction in the price of the Company's products would negatively affect gross
margins and would require the Company to increase unit sales in order to
maintain historic levels of sales. In addition, to the extent that Microsoft or
other companies incorporate applications comparable, or perceived as comparable,
to those offered by the Company into Windows, Windows 95 or other products (or
separately offer such products), sales of the Company's products could be
materially adversely affected, and there can be no assurance that any such
action by Microsoft or others would not render the Company's Windows or Windows
95 based products noncompetitive or obsolete. As a result, there can be no
assurance that such competitors will not develop products that are superior to
the Company's products or that achieve greater market acceptance. See "Business
-- Distribution, Sales and Marketing" and "Business -- Competition."
RISK OF PRODUCT RETURNS
The Company's business includes a substantial 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 distributors and
retailers, large shipments in anticipation of unrealized demand can lead to
overstocking by the Company's distributors or retailers and result in
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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
INTERNATIONAL OPERATIONS
The Company intends to use a substantial portion of the net proceeds from
this offering to expand the Company's international marketing and sales
activities. The Company's efforts to enhance the sale of its products to
international customers may be adversely affected by political and economic
conditions abroad. Protectionist trade legislation in either the United States
or foreign countries (such as a change in the current tariff structures, export
compliance laws or other trade policies) could
7
<PAGE>
adversely affect the Company's ability to sell its products in foreign markets.
Currency exchange fluctuations could adversely affect the Company's sales in
countries in which the Company conducts business in local currencies.
RELIANCE ON OUTSIDE RESOURCES
The Company relies upon independent contractors to perform a number of tasks
under the supervision of the Company, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company currently does not have long-term agreements with any of these third
parties. Although the Company believes that alternative resources exist or can
be obtained, a disruption of the Company's relationship with any of these third
party contractors could adversely affect the Company's results of operations
until replacement sources were established. In addition, any material changes in
product and service quality and pricing by these outside resources could
adversely affect the Company's results of operations. See "Business --
Duplication and Packaging."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements and other methods of protection common in the industry. Despite these
precautions, it may be possible for an unauthorized third party to copy or
reverse-engineer certain portions of the Company's products or to obtain and use
information that the Company regards as proprietary. Although the Company may
file copyright applications with respect to programs developed for the Company's
software products, there can be no assurance that any such copyrights would
provide meaningful protection to the Company or that the Company would be able
to afford the expense of any litigation which might be necessary to enforce its
rights. The Company licenses its products primarily under "shrink wrap" license
agreements that are not signed by licensees and therefore may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. The Company is aware that unauthorized copying
occurs within the software industry and if an extensive amount of unauthorized
copying of the Company's products were to occur, the Company's operating results
could be adversely affected. Although the Company's products have never been the
subject of infringement claims, there can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such assertion will not require the Company to enter into royalty
arrangements or result in costly litigation. See "Business Proprietary Rights."
MANAGEMENT OF GROWTH; UNCERTAINTY OF FUTURE ACQUISITIONS
The Company's business has grown rapidly during the past two years and such
growth has placed and, if sustained, will continue to place significant demands
on the Company's management and resources. It is likely that the Company will be
required to hire and train additional technical, marketing and administrative
personnel, implement additional operating and financial controls, install
additional reporting and management information systems for order processing,
system monitoring, customer service and financial reporting and otherwise
improve coordination between the design, development, duplication and packaging,
marketing, sales and finance functions. The Company's future operating results
will depend on management's ability to manage future growth and there can be no
assurance that efforts to manage future growth will be successful.
The success of the Company in accelerating its growth through strategic
acquisitions will depend upon the Company's ability to identify and acquire
complementary businesses, products or technologies. There can be no assurance
that the Company will be able to locate appropriate candidates that can be
acquired, outright or pursuant to product or technology licenses or other
arrangements, on favorable terms, if at all, or that acquired operations or
products will be integrated efficiently or prove profitable. The completion of
acquisitions may require sizable amounts of capital and is likely to involve the
diversion of management's attention from other business concerns. Moreover,
unexpected
8
<PAGE>
problems encountered in connection with any such acquisition could have a
material adverse effect on the Company. The Company could be forced to alter its
strategy in the future if appropriate candidates prove unavailable or too
costly.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon its executive officers, Larry W. Dingus, C.
Shannon Jenkins and Ronald R. Maas. The loss of any one of these key executive
officers could have a material adverse effect on the Company. Each of these
three key executive officers may voluntarily terminate his or her employment
with the Company at any time. The Company maintains a $500,000 key-person
insurance policy on the life of Ms. Jenkins and a $100,000 key-person insurance
policy each on the lives of Messrs. Dingus and Maas. There can be no assurance
that the proceeds from such insurance policies would be sufficient to compensate
the Company in the event of the death of a covered executive and these policies
do not cover the Company in the event that any executive becomes disabled or is
otherwise unable to render services to the Company. The continued success of the
Company is also dependent upon its ability to attract and retain highly
qualified software developers, marketing, sales and other personnel. Competition
for such personnel in the software industry is intense. There can be no
assurance that the Company will be able to recruit and retain such personnel.
See "Management."
CONTROL BY EXISTING MANAGEMENT
Following this offering, the current executive officers and directors of the
Company and their affiliates will continue to beneficially own approximately 24%
of the Company's outstanding Common Stock. Accordingly, the current officers and
directors of the Company will continue to have the ability to significantly
influence the outcome of elections of the Company's directors and other matters
presented to a vote of shareholders. See "Principal and Selling Shareholders."
LIMITED PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been only a limited public market for the
Common Stock of the Company. The Company's Common Stock was traded in the
over-the-counter market until May 19, 1995 when it was first approved for
trading on The Nasdaq Small Cap Market. As of August 10, 1995, there were
5,980,468 shares of the Company's Common Stock outstanding of which a total of
3,753,826 shares were held by non-affiliates of the Company. For the first six
months of 1995, the high and low bid quotations for a share of the Company's
Common Stock were $5.63 and $0.75, respectively. On August 10, 1995, the closing
bid and asked quotations for a share of the Common Stock, as reported by Nasdaq,
were $11.63 and $12.13, respectively. There can be no assurance that a more
active trading market for the Common Stock will develop or be sustained
following this offering. Moreover, the price at which shares are offered hereby
should not be considered an indication of any price at which the Company's
Common Stock may trade in the future. The market price of the Common Stock will
be subject to change as a result of market conditions and other factors and no
assurance can be given that the Common Stock can be resold at a price equal to
or greater than the purchase price paid by investors in this offering. The stock
markets have experienced extreme price and volume fluctuations during certain
periods. These broad market fluctuations and other factors may adversely affect
the market price of the Company's Common Stock. See "Price Range of Common
Stock."
SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES
All of the 2,226,642 shares of the Company's Common Stock currently held by
affiliates of the Company are "restricted securities" as that term is defined in
Rule 144 promulgated under the Securities Act of 1933, as amended ("Securities
Act"). These shares may be sold only in compliance with Rule 144, pursuant to an
effective registration statement or pursuant to an exemption from registration.
Sales of substantial amounts of the Company's Common Stock under Rule 144, or
otherwise, or even the potential for such sales, could have an adverse effect on
the market price of shares of the Company's Common Stock and could impair the
Company's ability to raise capital through the sale of its equity securities.
Officers and directors of the Company, who own a total of 2,506,292 shares of
the Company's Common Stock outstanding or issuable upon exercise of stock
9
<PAGE>
options, have agreed with the Representative not to sell any of their shares
(other than those shares to be sold by them as Selling Shareholders hereunder)
without the Representative's consent for a period of nine months after the
completion of this offering. See "Shares Eligible for Future Sale."
In addition to the shares of Common Stock that are currently outstanding, a
total of 947,802 shares of Common Stock have been reserved for issuance upon
exercise of options and warrants granted under the Company's stock option,
employee stock purchase and other similar plans. Currently, options and warrants
to acquire 905,301 shares of Common Stock at a weighted average exercise price
of $.59 per share, have been granted pursuant to such plans. The Company has
registered an aggregate of 636,334 shares of Common Stock issuable upon exercise
of outstanding options granted or to be granted under the Company's stock option
plans. See "Shares Eligible for Future Sale" and "Underwriting."
POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS
The Company is authorized to issue up to 3,000,000 shares of Preferred
Stock, par value $.001 per share. The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by the Company's shareholders, and
may include voting rights, preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions as determined by
the Board of Directors. Although the Company has no present plans to issue any
shares of Preferred Stock, the issuance of Preferred Stock in the future could
affect the rights of the holders of Common Stock and thereby reduce the value of
the Common Stock. In particular, specific rights granted to future holders of
Preferred Stock could be used to restrict the Company's ability to merge with or
sell its assets to a third party, thereby preserving control of the Company by
present owners. These provisions may also have the effect of delaying or
preventing changes in control or management of the Company which could adversely
affect the market price of the Company's Common Stock. See "Description of
Securities."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by it hereby, assuming a public offering price of $11.625 per share and
after deducting underwriting discounts and estimated offering expenses payable
by the Company, are estimated to be approximately $12,200,000. The Company will
not receive any proceeds from the sale of shares by the Selling Shareholders.
The Company expects to use approximately $2,500,000 of the net proceeds of
this offering to finance new product development and existing product
enhancements, approximately $1,000,000 of the net proceeds of this offering to
expand current European operations and increase international distribution of
the Company's products and approximately $1,500,000 of the net proceeds of this
offering for the establishment of a direct sales force for corporate customers
and advertising and promotion of the Company's products in the United States.
The balance of the net proceeds will be used for general corporate purposes to
support the Company's ongoing operations, including general administrative costs
and expenses.
In addition, the Company may use a portion of the balance of the net
proceeds of the offering to finance acquisitions of complementary businesses,
products or technologies if attractive opportunities arise. The Company has no
plans, commitments or agreements with respect to any such transactions at the
date of this Prospectus. There can no assurance that any such complementary
businesses, products or technologies are currently available or will be
available in the near future.
The Company has not determined the exact amounts it plans to expend on each
of such uses or the timing of such expenditures. The amounts actually expended
for each such use, if any, are at the discretion of the Company and may vary
significantly depending upon a number of factors, including
10
<PAGE>
future revenue growth and the amount of cash generated by the Company's
operations. To the extent the net proceeds of this offering are not utilized
immediately, they will be invested in United States government or governmental
agency securities or short-term insured certificates of deposit.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on The Nasdaq Small Cap Market on
May 19, 1995 under the symbol "TSSW." The following table sets forth the high
and low closing bid prices for a share of Common Stock, as reported by the
National Quotation Bureau for periods prior to May 19, 1995 and as reported by
Nasdaq for periods since May 19, 1995. Bid quotations represent high and low
prices quoted between dealers, do not include commissions, mark-ups or
mark-downs and for these reasons and the limited and sporadic trading volumes
which from time to time have been experienced, may not represent actual
transactions. Application has been made for inclusion of the Company's Common
Stock on The Nasdaq Stock Market upon consummation of this offering.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1993
First Quarter................................................................. $ .219 $ .060
Second Quarter................................................................ .219 .060
Third Quarter................................................................. .250 .125
Fourth Quarter................................................................ .500 .188
1994
First Quarter................................................................. .625 .250
Second Quarter................................................................ .375 .125
Third Quarter................................................................. .400 .250
Fourth Quarter................................................................ 1.563 .312
1995
First Quarter................................................................. 1.500 .750
Second Quarter................................................................ 5.625 1.063
Third Quarter (through August 10, 1995)....................................... 13.635 5.250
</TABLE>
On August 10, 1995, the closing bid and asked prices for a share of the
Common Stock, as reported by Nasdaq, were $11.63 and $12.13, respectively. As of
August 10, 1995, there were approximately 5,000 holders of record of the
Company's Common Stock.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future. Instead,
the Company intends to apply any earnings to the development and expansion of
its business. The terms of the Company's bank line of credit restrict the
payment of cash dividends.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1995 and as adjusted to reflect the receipt of net proceeds from the sale of the
1,200,000 shares of Common Stock offered hereby by the Company at an assumed
offering price of $11.625 per share.
<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Long-term debt (less current portion)..................................................... $ 47 $ 47
--------- -----------
Commitments (1)
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 issued and
outstanding (2), 7,120,468 shares issued and outstanding as
adjusted (2)......................................................................... 6 7
Additional paid-in capital.............................................................. 2,430 14,629
Notes receivable from shareholders (3).................................................. (239) (30)
Retained earnings....................................................................... 419 419
--------- -----------
Total shareholders' equity.......................................................... 2,616 15,025
--------- -----------
Total capitalization.............................................................. $ 2,663 $ 15,072
--------- -----------
--------- -----------
<FN>
------------------------
(1) See Notes 4 and 10 of Notes to Financial Statements for a description of
the Company's lease obligations.
(2) Excludes 60,000 shares of Common Stock issued subsequent to June 30, 1995,
329,968 shares of Common Stock issuable upon exercise of outstanding
warrants, with exercise prices ranging from $.20 to $.50 per share, 617,834
shares of Common Stock issuable in the future upon exercise of options
granted or to be granted under the Company's stock option plans, and
200,000 shares of Common Stock issuable upon exercise of the
"Representatives' Warrants." See "Description of Securities -- Outstanding
Warrants," "Management -- Stock Option Plans" and "Underwriting."
(3) Includes amounts payable pursuant to promissory notes given by officers and
certain employees of the Company in payment of the purchase price for
shares of Common Stock under the Company's stock purchase and option plans.
See "Management -- Stock Option Plans; Stock Purchase Plans," "Management
-- Certain Transactions," and Note 5 of Notes to Financial Statements. All
of these promissory notes will be paid in full upon consummation of this
offering.
</TABLE>
12
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 has been
derived from the financial statements of the Company included elsewhere herein
which have been audited by Deloitte & Touche LLP, and should be read in
conjunction with those financial statements (including the notes thereto) and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein. The selected financial data set
forth below as of December 31, 1990, 1991 and 1992, and for the years ended
December 31, 1990 and 1991 are derived from audited financial statements not
included herein. The selected financial data as of June 30, 1994 and 1995 and
for the six month periods ended June 30, 1994 and 1995, has been derived from
the unaudited financial statements of the Company and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. The results of operations for the six months ended June 30, 1995
are not necessarily indicative of results to be expected for any future quarter
or the year ending December 31, 1995.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................................... $ 3,518 $ 3,650 $ 3,470 $ 4,925 $ 7,202 $ 2,617 $ 6,181
Cost of sales................................. 477 778 979 1,664 2,316 910 1,905
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................ 3,041 2,872 2,491 3,261 4,886 1,707 4,276
Sales and marketing expense................... 1,760 1,762 1,497 1,873 2,273 1,031 1,841
General and administrative expense............ 915 770 642 813 1,245 413 805
Research and development expense.............. 187 256 277 258 440 136 273
--------- --------- --------- --------- --------- --------- ---------
Income from operations........................ 179 84 75 317 928 127 1,357
Other income (expense), net................... (39) (20) (27) (29) (28) (11) 32
Provision (benefit) for income taxes.......... 7 14 7 (20) 100 13 528
--------- --------- --------- --------- --------- --------- ---------
Net income.................................... $ 133 $ 50 $ 41 $ 308 $ 800 $ 103 $ 861
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per common shares.................. $ .03 $ .01 $ .01 $ .06 $ .14 $ .02 $ .13
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of shares
outstanding.................................. 3,892 4,203 4,776 4,927 5,576 4,995 6,696
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).............. $ 137 $ 233 $ (168) $ 350 $ 1,446 $ 514 $ 2,201
Total assets.............................. 1,312 1,211 1,662 1,736 4,025 1,841 4,781
Long-term debt............................ 2 146 46 100 55 78 47
Notes receivable from shareholders........ (61) (71) (85) (74) (273) (79) (239)
Retained earnings (accumulated deficit)... (1,641) (1,591) (1,550) (1,242) (442) (1,139) 419
Shareholders' equity...................... 329 406 435 755 1,615 862 2,616
</TABLE>
13
<PAGE>
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 CHECK-CHECKMARK-IT 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 WINCHECK-CHECKMARK-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. On July 24, 1995, the
Company began shipping WIN'95 ADVISOR, which will permit 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, totaling over $1.7
million, for its WIN'95 ADVISOR, specifically 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
CHECK-CHECKMARK-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 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
14
<PAGE>
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 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.
RESULTS OF OPERATIONS
The following table sets forth certain statement of income data as a
percentage of total revenues for the periods indicated:
PERCENTAGE OF TOTAL REVENUES
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales....................................... 96.5% 95.3% 95.7% 93.9% 97.4%
Royalty income...................................... 3.5 4.7 4.3 6.1 2.6
--------- --------- --------- --------- ---------
100.0 100.0 100.0 100.0 100.0
Cost of sales......................................... 28.2 33.8 32.2 34.8 30.8
--------- --------- --------- --------- ---------
Gross profit........................................ 71.8 66.2 67.8 65.2 69.2
Sales and marketing expense........................... 43.1 38.0 31.6 39.4 29.8
General and administrative expense.................... 18.5 16.5 17.3 15.8 13.0
Research and development expense...................... 8.0 5.2 6.1 5.2 4.4
--------- --------- --------- --------- ---------
Income from operations................................ 2.2 6.5 12.8 4.8 22.0
Other income/expense.................................. .8 .7 .3 .4 .5
--------- --------- --------- --------- ---------
Income before taxes................................... 1.4 5.8 12.5 4.4 22.5
Provision/benefit for income taxes.................... .2 .5 1.4 .5 8.6
--------- --------- --------- --------- ---------
Net income............................................ 1.2% 6.3% 11.1% 3.9% 13.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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 WINCHECK-CHECKMARK-IT 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
WINCHECK-CHECKMARK-IT, FASTMOVE! and WIN'95 ADVISOR 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, 1995. 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
15
<PAGE>
six months ended June 30, 1995. This increase was primarily attributable to a
change in product mix resulting from the introduction of WINCHECK-CHECKMARK-IT
and FASTMOVE!, which have lower costs per unit than CHECK-CHECKMARK-IT
PRO:DELUXE, which represented a substantial portion of the Company's sales
during the second quarter of 1994. Such cost 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 expense declined as a percentage of total
revenues from 39.4% during the six months ended June 30, 1994 to 29.8% for 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% during the six months ended June 30,
1994 to 13.0% during the six months ended June 30, 1995.
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. This 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. This decrease was 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 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.
COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993
REVENUES. Total revenues for the year ended December 31, 1994 were
$7,202,000, an increase of $2,277,000, or 46.2%, compared to $4,925,000 for the
year ended December 31, 1993. This increase was attributable to sales during the
last five months of the year of WINCHECK-CHECKMARK-IT, which was released in
August 1994. As a result, product sales for the year ended December 31, 1994
increased by $2,200,000, or 46.9%, over 1993 product sales despite declining
sales of older products.
16
<PAGE>
Royalty income was $308,000 for the year ended December 31, 1994, an
increase of $76,000, or 32.8%, compared to $232,000 for the year ended December
31, 1993. However, the 1994 increases in royalty income did not match the rate
of growth in product sales (most of which are domestic) experienced during the
year. Consequently, royalty income decreased as a percentage of total revenues
from 4.7% in 1993 to 4.3% in 1994.
GROSS PROFIT. Gross profit for 1994 was $4,886,000, an increase of
$1,625,000, or 49.8%, compared to $3,261,000 for the year ended December 31,
1993. The increase in gross profit as a percentage of product sales realized
during the past year, from 69.5% in 1993 up to 70.9% in 1994, was attributable
primarily to a change in sales mix resulting from the release of
WINCHECK-CHECKMARK-IT in late 1994. WINCHECK-CHECKMARK-IT has lower materials
and software costs per unit than does CHECK-CHECKMARK-IT PRO:DELUXE which
comprised a larger portion of the Company's product sales during the first nine
months of 1994. Gross profits also increased as a percentage of total revenues
from 66.2% in 1993 to 67.8% in 1994. Included in cost of sales are amortization
of software development costs ($367,000 in 1994, as compared to $296,000 in
1993) and royalties paid to other software development companies ($166,000 in
1994 and $139,000 in 1993) under various agreements.
SALES AND MARKETING EXPENSE. Sales and marketing expense for 1994 was
$2,273,000, an increase of $400,000, or 21.4%, compared to $1,873,000 for 1993.
This increase was attributable primarily to the promotional and merchandising
expenditures incurred in connection with the release of WINCHECK-CHECKMARK-IT.
In addition, salaries and related costs increased during 1994 as the Company
decided to perform certain marketing functions in-house, as opposed to using
outside services. These increased costs were partially offset by reductions in
consulting and other fees paid to third party service providers. Sales and
marketing expense, however, decreased as a percentage of total revenues from
38.0% in 1993 to 31.6% in 1994. This decrease was attributable primarily to the
significant increase in revenue in 1994 resulting from sales during the last
five months of 1994 of WINCHECK-CHECKMARK-IT.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
1994 was $1,245,000 an increase of $432,000 or 53.1%, compared to $813,000 for
1993. The 1994 expenses included the accrual of the minimum of $50,000 in
license royalties payable to DIC Entertainment in connection with the Company's
SUPERHUMAN SAMURAI COMPUTER SAFETY FUN KIT, a product whose sales have not
materialized as anticipated and are not expected to contribute significantly to
future sales. Excluding the effect of this accrual, general and administrative
expenses in 1994 increased by 46.8% over the 1993 level. Similarly, general and
administrative expense increased as a percentage of total revenues from 16.5% in
1993 to 17.3% in 1994. The primary reason for this increase was higher profit
sharing bonuses ($406,000 for the year ended December 31, 1994, compared to
$134,000 for the year ended December 31, 1993) which were paid as a result of
the significant increase in profits in 1994. Additionally, as sales increased
significantly in 1994, the provision for doubtful accounts increased above
amounts provided for the year ended December 31, 1993.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1994
was $440,000, an increase of $182,000, or 70.5%, compared to $258,000 for 1993.
Research and development expense also increased as a percentage of total
revenues from 5.2% in 1993 to 6.1% in 1994. This increase reflects the hiring of
additional programmers and management personnel in 1994 in order to assist in
the development and release of new products. The additional payroll costs were
somewhat offset by a decline in consultants' fees in 1994 from 1993 levels.
INCOME FROM OPERATIONS. As a result of the foregoing, income from
operations for 1994 was $928,000, an increase of $611,000, or 192.7%, compared
to $317,000 in 1993.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for 1994 was
11% compared to a benefit of 7% in 1993. The 1994 effective rate was less than
the statutory rate primarily due to the elimination of the valuation allowance
on deferred tax assets resulting from current taxable income and the expected
utilization of net operating loss carryforwards.
17
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992
REVENUES. Total revenues for the year ended December 31, 1993 were
$4,925,000, an increase of $1,455,000, or 41.9%, compared to $3,470,000 for the
year ended December 31, 1992. This increase was attributable to sales of the
Company's CHECK-CHECKMARK-IT PRO series of products which were introduced during
the year. Sales of the CHECK-CHECKMARK-IT PRO series of products were partially
offset by declining sales of CHECK-CHECKMARK-IT LAN and CHECK-CHECKMARK-LIST,
products that were discontinued during the year in order to focus the Company's
resources on the development and marketing of the CHECK-CHECKMARK-IT PRO series
of products. As a result, product sales for the year ended December 31, 1993
increased by $1,344,000, or 40.1%, over 1992 product sales. Royalty income was
$232,000 in 1993, an increase of $110,000, or 90.2%, compared to $122,000 in
1992. Royalty income also increased as a percentage of total revenues from 3.5%
in 1992 to 4.7% in 1993.
GROSS PROFIT. Gross profit for 1993 was $3,261,000, an increase of
$770,000, or 30.9%, compared to $2,491,000 for the year ended December 31, 1992.
The decrease in gross profit as a percentage of product sales realized during
the year, from 74.4% in 1992 to 69.5% in 1993, and the corresponding decrease in
gross profits as a percentage of total revenues, from 71.8% in 1992 to 66.2% in
1993, reflect the change in sales mix as sales of CHECK-CHECKMARK-IT PRO
products, which have a greater cost per unit than the Company's other products,
accounted for a greater percentage of total product sales. Included in cost of
sales are amortization of software development costs ($296,000 in 1993, as
compared to $95,700 in 1992) and royalties paid to other software development
companies ($139,000 in 1993, as compared to $226,000 in 1992).
SALES AND MARKETING EXPENSE. Sales and marketing expense for 1993 was
$1,873,000, an increase of $376,000, or 25.1%, compared to $1,497,000 for 1992.
The increase in 1993 sales and marketing expense was attributable primarily to
higher advertising and other promotional costs incurred to launch the
CHECK-CHECKMARK-IT PRO series of products and the hiring of a director of sales.
However, sales and marketing expense decreased as a percentage of total revenues
from 43.1% in 1992 to 38.0% in 1993. This decrease was attributable primarily to
the 1993 increase in product sales, which more than offset the increase in
general and administrative expense.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
1993 was $813,000, an increase of $171,000 or 26.7%, compared to $642,000 for
1992. The primary reason for this increase was higher profit sharing bonuses
($134,000 for the year ended December 31, 1993, compared to $15,000 for the year
ended December 31, 1992) which were paid as a result of the significant increase
in profits in 1993. However, general and administrative expense decreased as a
percentage of total revenues from 18.5% in 1992 to 16.5% in 1993. This decrease
was attributable primarily to the 1993 increase in product sales, which more
than offset the increase in general and administrative expense.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1993
was $258,000, a decrease of $19,000, or 6.9%, compared to $277,000 for 1992. In
addition, research and development expense decreased as a percentage of total
revenues from 8.0% in 1992 to 5.2% in 1993.
INCOME FROM OPERATIONS. As a result of the foregoing, income from
operations for 1993 was $317,000, an increase of $242,000, or 322.7%, compared
to $75,000 in 1992. This increase was attributable to the increases in revenue
and gross profits experienced in 1993 which, combined with reductions in
marketing and selling expense and research and development expense as a
percentage of total revenue, more than offset slight increases in general and
administrative expense as a percentage of total revenue.
PROVISION (BENEFIT) FOR INCOME TAXES. In 1992, the Company accrued state
income tax, but did not realize any benefit from federal net operating loss
carryforwards until 1993, when the Company adopted SFAS 109, "Accounting for
Income Taxes." Consequently, the Company realized a benefit for the year ended
December 31, 1993, whereas the Company's income from operations was partially
taxed (at an effective tax rate of 14.6%) for the year ended December 31, 1992.
18
<PAGE>
QUARTERLY RESULTS
The Company's quarterly operating results may fluctuate significantly due to
a variety of factors, including changes in the Company's product and customer
mix, the introduction of new products by the Company or its competitors, pricing
pressures, general economic conditions and other factors. Since the Company's
customers presently order on an as-needed basis, the Company operates with
relatively little backlog and substantially all of its total revenues in each
quarter will result from orders received in that quarter. Therefore, quarterly
revenue will depend on the volume and timing of orders shipped during a quarter,
which are difficult to forecast. In addition, it can be expected that the
Company will continue to incur product development, marketing and promotional
expenses based upon management's expectations as to future sales. Since many of
these expenses are committed in advance, the Company generally is unable to
adjust spending in a timely manner to compensate for any unexpected shortfall in
sales. If operating revenues do not meet the Company's expectations in any given
quarter, operating results may be adversely affected. There can be no assurance
that the Company will be profitable in any given quarter.
In addition, sales of software are seasonal. The Company's revenues in the
fourth quarter of each year are typically higher than revenues in the other
three quarters of the year. This seasonality may create variations in the
Company's quarterly results from year to year.
As discussed above, the increases in revenue for the three months ended
March 31, 1995 and June 30, 1995, respectively, as compared to revenues
generated during the comparable periods of 1994 were attributable to sales of
the Company's WINCHECK-CHECKMARK-IT product that was first released in August
1994. The introduction of WINCHECK-CHECKMARK-IT also significantly affected the
Company's operating results during the third and fourth quarters of 1994.
The following table sets forth certain quarterly financial data for each of
the four quarters in 1993 and 1994 and the first two quarters of 1995 that has
been derived from unaudited financial statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------
FISCAL 1993 FISCAL 1994 FISCAL 1995
--------------------------------------- --------------------------------------- ------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1993 1993 1993 1993 1994 1994 1994 1994 1995 1995
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales.......... $ 1,174 $ 1,197 $ 1,069 $ 1,253 $ 1,174 $ 1,285 $ 1,581 $ 2,853 $ 2,761 $ 3,261
Royalty income......... 19 75 65 72 86 72 69 81 100 59
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
1,193 1,272 1,134 1,325 1,260 1,357 1,650 2,934 2,861 3,320
Cost of sales............ 357 503 390 414 419 491 498 907 750 1,155
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Gross profit............. 836 769 744 911 841 866 1,152 2,027 2,111 2,165
Sales and marketing
expense................. 453 487 403 529 474 557 527 715 860 980
General and
administrative
expense................. 211 187 188 227 215 198 280 552 398 407
Research and development
expense................. 76 47 61 74 63 72 108 197 129 145
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Income from operations... 96 48 92 81 89 39 237 564 724 633
Other, net............... (13 ) (6 ) (3 ) (8 ) (5 ) (7 ) (15 ) (3 ) 13 19
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Income before taxes...... 83 42 89 73 84 32 222 561 737 652
Income tax (benefit)
provision............... 8 (8 ) -- (20 ) 9 3 25 62 280 248
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Net income............... $ 75 $ 50 $ 89 $ 93 $ 75 $ 29 $ 197 $ 499 $ 457 $ 404
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Net income per share..... $ .02 $ .01 $ .02 $ .01 $ .01 $ .01 $ .04 $ .08 $ .07 $ .06
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Weighted average number
of shares outstanding... 4,449 4,508 4,506 4,927 5,116 4,807 5,147 5,576 6,570 6,765
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
</TABLE>
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through 1993, the Company was required to supplement cash flow from
operations with funds provided by investors and bank loans to finance the
development of its business. Although total revenue and net income increased
substantially in 1993, cash flow from operating activities decreased to $75,000
for such year as the Company made substantial investments in accounts receivable
and inventories to accommodate its growth. During 1994, the Company was able to
finance its operations and growth primarily through cash generated from
operations of $1,268,000, supplemented by net borrowings of $210,000 under its
bank line of credit and $45,000 received from the sale of Common Stock. This
ability continued during the first six months of 1995 when the Company generated
$1,144,000 in cash from operations and was able to repay all outstanding bank
borrowings.
During 1993, the Company invested $194,000 in capitalized software
development, made debt repayments totaling $222,000 and purchased $12,000 of
property and equipment. During 1994, the Company used $169,000 of its cash
resources to invest in capitalized software development. An additional $199,000
was used for this purpose during the six months ended June 30, 1995. During 1994
and the first six months of 1995, the Company also repaid debt and capital lease
obligations aggregating $393,000, purchased $65,000 of office equipment and paid
loan costs of $6,000.
On April 27, 1995, the Company entered into a new credit line facility which
provides for borrowings up to $300,000 and expires on May 5, 1996. Borrowings
under this line of credit bear interest at 1.5% over the prime rate as reported
by the Wall Street Journal (an effective rate of 10.5% at June 30, 1995).
Borrowings are collateralized by substantially all of the Company's assets and
guaranteed by the Company's three executive officers. The Company is required to
maintain a minimum tangible net worth of approximately $1,300,000, a ratio of
total liabilities to tangible net worth of less than 2 to 1 and minimum net
income of $1 on an annual basis. The 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 outstanding under the line of
credit at June 30, 1995.
Primarily as a consequence of the increase in sales volume experienced
during 1994 and the first six months of 1995, the Company's working capital has
increased from $350,000 at December 31, 1993 to $1,446,000 at December 31, 1994
and $2,201,000 at June 30, 1995. Over the same period of time, the Company's
cash and cash equivalents at year end grew from $44,000 at December 31, 1993 to
$1,298,000 at December 31, 1994. As of June 30, 1995, the Company had cash and
cash equivalents of $1,759,000.
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 this 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.
Significant additional dilution may be incurred by investors in this offering as
a result of additional financings.
20
<PAGE>
BUSINESS
GENERAL
TouchStone Software Corporation (the "Company") is a leading developer and
publisher of utility software used to set up, maintain and manage personal
computers. The Company's CHECK-CHECKMARK-IT family of products, including
WINCHECK-CHECKMARK-IT, identifies and assists in the resolution of system
conflicts, facilitates the installation of upgrades and accessories and
substantially reduces the time and cost typically associated with diagnosing
personal computer problems. The Company's WINCHECK-CHECKMARK-IT product for
Windows-based personal computers was listed as the top selling utility software
product on Ingram Micro, Inc.'s ("Ingram Micro's") May, June and July 1995
Retail Products Best Seller List and the Company's SETUP ADVISOR product was
listed as the next best selling utility software product on the July 1995 list.
WINCHECK-CHECKMARK-IT was also awarded a WINDOWS MAGAZINE 1995 WIN 100 Award and
a Top 100 ranking in the June 1995 issue of HOME PC Magazine. The Company's
FASTMOVE! product, which was introduced in March 1995, enables users of multiple
personal computers to transfer and synchronize data files between personal
computers, while simultaneously scanning for viruses. In July 1995 the Company
released WIN'95 ADVISOR, a utility software product that will permit users to
analyze their personal computer's compatibility with Microsoft Corporation's
("Microsoft's") new operating system, Windows 95, currently scheduled for
release on August 24, 1995.
The Company markets its products domestically through software distributors,
including Ingram Micro, Merisel Americas Inc. ("Merisel") and Tech Data
Corporation ("Tech Data"), for resale through the retail channel. The Company's
primary sales and marketing efforts in 1994 were directed at increasing demand
for products at the retail sales level and increasing the number of mall stores,
club stores and warehouse stores that carry the Company's products. Such efforts
have included using outside representatives to present the Company's products to
retail store employees, and using point-of-sale and other in-store displays in
such retail stores as CompUSA, Sam's Club, Micro Center, Egghead Software,
Computer City, Fry's Electronics, Office Depot, Best Buy and PriceCostco. The
Company estimates that the number of retail stores which carry the Company's
products increased from approximately 1,700 in 1993 to approximately 7,100 in
1995.
INDUSTRY OVERVIEW
During the last decade, the personal computer industry has grown rapidly.
The Software Publishers Association estimates that worldwide utility software
sales were approximately $847 million in 1994. Technological advances and
increased functionality, combined with lower pricing, have made personal
computers common for use in both homes and businesses. A market for
sophisticated utility software has evolved in response to the popularity of
multimedia systems utilizing technologically advanced features such as CD-ROM
drives and enhanced video, storage, animation and sound capability. In addition,
each major change of the operating system that runs a particular personal
computer may require the purchase of a new set of utility software to support a
new operating system, such as Windows 95. According to Dataquest, an industry
research firm, Microsoft is projected to sell at least 29.3 million copies of
its new Windows 95 operating system before the end of 1995.
21
<PAGE>
STRATEGY
The Company's strategy is to leverage the technological advances and
increased functionality of the personal computer to expand its position as a
leading developer and publisher of quality utility software products for use in
the home and in businesses. Key elements of the Company's business strategy are
as follows:
CAPITALIZE ON BRAND NAME RECOGNITION AND RETAILER SUCCESS. The Company
intends to leverage its brand name recognition to introduce new products into
its distribution channel which supplies the retail market. The Company's
merchandising strategy is intended to encourage retailers to carry the Company's
product lines by allowing retailers to achieve relatively high revenues and
margins from shelf space allocated to the Company's products. The Company
believes that the consistent sell-through of new and existing products reflects
its success in achieving a reputation for product quality, customer satisfaction
and retailer support.
EXPLOIT SOFTWARE TECHNOLOGY EXPERTISE. The Company has dedicated
substantial time and effort to the development of its proprietary program
libraries from which most of its current products have been derived. These
efforts and the resulting "core" technology are critical in enabling the Company
to maintain a competitive advantage, improve quality and consistency and bring
products to market quickly. The Company's product planning team is focused on
market research and the development of product specifications that will enable
the Company to exploit opportunities presented by technological and other
changes in the personal computer industry.
DEVELOP PRODUCTS FOR WINDOWS 95. The Company believes that the release of
Windows 95 by Microsoft will generally require personal computer users, who
upgrade to Windows 95, to replace their current utility software, as such
software is not expected to be compatible with Windows 95. In addition to
releasing versions of its current utility products which will be modified to be
compatible with Windows 95, the Company expects to release new products which
also make use of the new features incorporated into Windows 95.
EXPAND INTERNATIONAL DISTRIBUTION. The Company believes that international
markets provide a significant opportunity for the Company to increase sales of
its products and the Company is making a concerted effort to expand its
international operations. In July 1995, the Company established a subsidiary in
the United Kingdom from which the Company's European sales and marketing efforts
will be directed. The Company intends to implement its domestic marketing
strategy through its European subsidiary to expand its international
distribution. In June and July 1995, the Company completed the translation of
WINCHECK-CHECKMARK-IT into the French, German and Russian languages. The Company
is also evaluating further expansion into Asia, Latin America and Australia.
TARGET CORPORATE CUSTOMERS. The Company intends to establish a sales staff
dedicated to marketing its products to large corporate customers in multiple
user packages. Presently, the Company has not addressed this market but rather
has focused primarily on individual retail customers. The Company believes that
a sales staff focused on corporate customers could substantially increase sales
of its products, and that an intensive investment of resources in developing
this capability will have a positive long range impact on the future growth of
the Company.
PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. The Company will continue to
pursue strategic alliances that, through the addition of development,
distribution or financial resources, would allow the Company to develop, publish
and market utility software products into broader markets. The Company currently
has a strategic alliance with Trend Micro Devices ("Trend"), an international
utility software developer and publisher, which developed the Company's
FASTMOVE! product that the Company is currently publishing for domestic
distribution. In addition, it is anticipated that the Company will seek to
accelerate its growth through strategic acquisition of complementary businesses,
products or technologies. The Company, however, has no plans, commitments or
agreements with respect to any such transactions at the date of this Prospectus.
22
<PAGE>
PRODUCTS
The following table sets forth selected products currently offered by the
Company:
<TABLE>
<CAPTION>
INITIAL
RELEASE TYPICAL
PRODUCT TITLE DESCRIPTION DATE RETAIL PRICE
---------------------- ----------------------------------------------------------------------------- ----------- -------------
<S> <C> <C> <C>
WIN'95 ADVISOR This Windows-based utility tests a personal computer system for Windows 95 July 1995 $29.95
suitability and generates a customized preparation checklist identifying
steps that must be taken, including hardware upgrades, before Windows 95 is
installed. WIN'95 ADVISOR also creates an installation options batch file
which automates the installation of Windows 95 and includes other utilities
used to prepare the system ahead of time.
WINCHECK-CHECKMARK-IT This Windows-based utility (i) diagnoses personal computer problems, (ii) August 1994 $49.95
frees up disk space, (iii) restores critical system files and startup
information, (iv) analyzes system performance, (v) consolidates Windows
memory fragments, (vi) tests hardware reliability and (vii) removes unneeded
Windows applications.
FASTMOVE! This Windows- and DOS-based file transfer utility is packaged with a cable to March 1995 $49.95
enable a user to quickly synchronize two personal computers with up-to-date
files and scan for viruses.
SETUP ADVISOR This Windows-based utility helps users install modems, fax cards, sound April 1994 $24.95
cards, CD-ROM drives and other devices by combining a library of device setup
data with accurate system information and analysis tools. SetUp Advisor is
used to collect system information, analyze compatibility and recommend
installation settings.
CHECK-CHECKMARK-IT This DOS-based utility provides a comprehensive package of tools to June 1993 $149.95
PRO:DELUXE troubleshoot common personal computer problems. It includes a Deluxe Tool Kit
with serial and parallel loopback plugs, 5.25" and 3.5" Mini Spiral alignment
disks that test high and low density disk drives for mechanical problems and
the ROADTECH Portable Diagnostic Kit.
AUTOHELP/ This utility is a diagnostic software package available only to hardware May 1995 Not available
CHECK-CHECKMARK-IT manufacturers on an OEM basis and is "bundled" as part of a personal computer at retail
DIAGNOSTICS system. This product helps customers perform remote diagnostics and upload
the results to a manufacturer's technical support staff. Hewlett-Packard is
the first personal computer manufacturer to license AUTOHELP/CHECK-
CHECKMARK-IT DIAGNOSTICS for use on the HP Multimedia 6100 line of home
computers.
</TABLE>
23
<PAGE>
PRODUCT DEVELOPMENT
The Company believes that significant investment in research and development
is required in order to remain competitive, accelerate the rate of product
introductions, incorporate new technologies and sustain the quality of its
products. In addition to engineering and quality assurance, the Company's
research and development activities include the identification and validation of
a product's potential commercial success, as well as the incorporation of new
technologies in new products. The Company incurs significant expense in
preparing market research information and reviewing product specifications. In
addition, the Company works closely with hardware and software manufacturers to
anticipate user problems with new hardware and software. These efforts and the
resulting "core" technology are critical in enabling the Company to maintain a
competitive advantage, improve quality and consistency and bring products to
market quickly.
The product planning and development process begins with research and
analysis by both the marketing and research and development groups. The project
team typically consists of six to ten people. The Company's products require
varying degrees of development time which frequently depend on the general
complexity of the product. The typical length of research and development time
ranges from six to 18 months. Prior to release, each product undergoes careful
quality assurance testing that involves useability testing with external
evaluators and a technical review of each component of the final product and
testing on various hardware platforms. The Company endeavors, with the
assistance of personal computer hardware, software and peripheral suppliers, to
identify potential conflicts and other factors that could lead to problems with
personal computers due to incompatibility with evolving technology. The Company
then rapidly adapts its "core" technology to develop products, or enhance
existing ones, designed to assist the user in resolving the problem or adapting
to new technological environments. The Company's strategy of developing products
based on the Windows and Windows 95 operating systems and releasing these
products immediately prior to or at the time of Microsoft's release of new and
upgraded Windows and Windows 95 products is substantially dependent on its
ability to gain pre-release access to, and develop expertise in, current and
future versions of Windows and Windows 95. The Company is currently an
authorized "beta" site for Microsoft's Windows 95 operating system.
In early 1995, the Company introduced an enhanced version of SETUP ADVISOR,
which provides a number of additional features designed to assist Windows users
in upgrading their personal computer systems to attain multimedia and other
enhanced capabilities. In July 1995, the Company released WIN'95 ADVISOR, which
has been designed to assist current Windows users in determining if and how
their current systems must be modified if they anticipate installing and using
Microsoft's new Windows 95 operating system. The Company also is developing new
versions of its existing products for sale to Windows 95 users. As of August 10,
1995, the Company had two new products under development, both of which are
scheduled to be released in 1996.
The Company has worked with other, often smaller, companies to develop
software that can be marketed and sold by the Company. These arrangements have
permitted the Company to expand its product offerings without incurring all of
the risks and costs of new product development. Typically, the agreements
between the Company and these third parties provide for joint development at
shared cost, or that the Company will reimburse the developer for costs incurred
through royalties to be paid by the Company as products are sold. The Company
also seeks to identify products developed by others that can be published by the
Company, for marketing and sale under the Company's name and trademarks and
through the Company's established channels of distribution. The FASTMOVE!
product introduced by the Company in March 1995 was originally developed by a
third party software developer, Trend Micro Devices, Inc., and was subsequently
modified by the Company. The Company will continue to pursue strategic alliances
that, through the addition of development, distribution or financial resources,
will allow the Company to develop and publish utility software products into
broader markets.
24
<PAGE>
During 1993 and 1994 and the first six months of 1995, royalty expenses were
$139,000, $116,000 and $274,000, respectively. Research and development expense
during 1993 and 1994 and the first six months of 1995 was approximately
$258,000, $440,000 and $273,000, respectively. In addition, the Company
capitalized costs of approximately $194,000, $169,000 and $199,000 during 1993,
1994 and the first six months of 1995, respectively, for the development of new
software products and the enhancement of existing products.
DISTRIBUTION, SALES AND MARKETING
The Company markets its products domestically through software distributors
for resale to the retail sales channel. In 1994, one major customer, Ingram
Micro, accounted for approximately 59% of product sales. In 1993, three major
customers, Ingram Micro, Merisel and Kenfil, accounted for an aggregate of
approximately 52% of product sales. Distribution agreements that were renewed in
1994 included those with Ingram Micro, Merisel and Tech Data. Licensed end-users
of the Company's products include individual personal computer owners,
government agencies, utilities, educational institutions, software development
companies, computer products manufacturers and others.
The Company's primary marketing and sales efforts in 1994 were directed at
increasing demand for products at the retail sales level and increasing the
number of mall stores, club stores and warehouse stores which carry the
Company's products. A key component of this strategy includes using outside
representatives to present the Company's products to store employees in such
retail stores as CompUSA, Sam's Club, Micro Center, Egghead, Computer City,
Fry's Electronics, Office Depot, Best Buy and PriceCostco. In addition, the
Company engaged in a variety of merchandizing promotions, such as end-caps,
shelf-talkers, in-store posters and rebate coupons in order to increase sales.
The Company also has improved its product packaging to better attract attention
of retail consumers to the Company's products directly "on the shelf."
Management estimates the number of retail stores which carry the Company's
products increased from approximately 1,700 in 1993 to approximately 7,100 in
1995 as a result of these efforts.
The Company also uses media advertising, direct mail, attendance at industry
trade shows, press releases and direct contacts through its marketing and sales
force as other means of generating new sales. Additionally, the Company
participates in retail promotions to obtain sales and marketing advantages at
the retail level by providing allowances to certain distributors which are
passed through to the retailer. The Company also participates in cooperative
advertising programs directly with certain distributors and retailers whereby
the Company receives marketing advantages through advertisements, brochures and
catalogs initially paid for by the distributors. The Company provides for
expenses related to these programs in amounts established in the individual
distributor agreements.
Internationally, the Company markets its products through distributors
and/or co-publisher arrangements. Co-publisher arrangements usually provide the
Company with royalties based on sales of products by the co-publisher in a
specific geographical or foreign language market. The Company publishes
translated its WINCHECK-CHECKMARK-IT products in French by A.B. Soft, in German
by Markt Und Technik and in Russian by Connections East, and Trend will soon be
publishing translated versions of WINCHECK-CHECKMARK-IT for distribution in
China and Japan. The Company also has independent sales representatives in
Canada and Australia. The Company recently established a subsidiary in the
United Kingdom from which the Company's sales and marketing efforts will be
directed. The Company intends to implement its domestic marketing strategy
through its European subsidiary to expand its international distribution. The
Company is also evaluating further expansion into Asia, Latin America and
Australia.
The Company's sales force currently consists of seven people based in the
Company's office and one person based in the Company's subsidiary's United
Kingdom office, all of whom receive salaries, commissions and/or incentive bonus
compensation. In addition, the Company maintains an in-house
25
<PAGE>
marketing department that handles most of the design and development of the
Company's product packaging, advertisements and promotional items. The Company
intends to hire additional sales and marketing personnel and develop a corporate
sales team specializing in corporate customers.
DUPLICATION AND PACKAGING
The Company's product manuals are printed by United Business Systems, Inc.,
whose primary service is reproduction of manuals and brochures. Substantially
all of the Company's products are duplicated and packaged by Encryption
Technology Corporation, a software manufacturing operation. Promotion
Distribution Services provides the fulfillment services for all of the Company's
mail order and upgrade offers. The Company believes its relations with these
suppliers are good. Although the Company believes that alternative resources
exist or can be obtained, a disruption of the Company's relationship with any of
these third party contractors could adversely affect the Company's results of
operations until replacement sources were established. In addition, any material
changes in product and service quality and pricing by these outside resources
could adversely affect the Company's results of operations. The Company has
attempted to mitigate the risk of any such disruption by maintaining certain
levels of "safety stock" inventories and the limited use of "second source"
vendors.
COMPETITION
The utility software industry is intensely competitive. Consumer demand for
particular software products may be adversely affected by the increasing number
of competitive products. The Company competes primarily against other companies
offering utility software. Although many companies larger than the Company have
the resources and technical ability to develop, market and distribute products
similar to those offered by the Company, the Company's management believes that
competition in the "problem-solving" software utility market is somewhat
fragmented. The Company is aware of other companies which have developed or are
in the process of developing products which may compete in whole or in part with
the Company's products, including Microsoft, Symantec, DiagSoft, Inc., Landmark
Research, Quarterdeck and others.
The Company believes that competition in the computer software industry is
largely based on adaptation to a particular market segment, availability of an
integrated set of products, relationships with distributors and retailers and
selection of appropriate distribution channels. The Company believes its focus
on the utilities segment of the market, emphasis on product quality and
accuracy, the momentum of its current Windows products, the joint promotion of
its products with software retailers and sales to leading distributors make it
competitive in each of these areas.
PROPRIETARY RIGHTS
Under existing law, software products have been difficult to patent, and
copyright laws offer only limited protection. Where feasible and appropriate,
the Company seeks common law copyright protection through the use of copyright
notices. The Company has filed and received federal trademark registrations for
the Company's stylized logo and "CHECKIT." The Company regards its software
product line as proprietary and primarily relies upon trade secret laws and
third party nondisclosure agreements, as well as restrictions incorporated in
its software product license agreements, for protection. The Company believes
that trademark and copyright protection are less significant to the Company's
success than factors such as the knowledge, ability and experience of the
Company's personnel, research and development, brand name recognition and
product loyalty. Nevertheless, it may be possible for competitors of the Company
to copy aspects of its product line.
The Company is aware that unauthorized copying by end-users affects many
companies within the software industry and if a significantly greater amount of
unauthorized copying were to occur, the Company's operating results could be
adversely affected. However, policing unauthorized use of the Company's products
is difficult. While the Company is unable to determine the extent to which
software piracy of its products exists, software piracy can be expected to be a
persistent problem.
26
<PAGE>
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. As the number
of software products in the industry increases and the functionality of these
products further overlaps, software developers may become increasingly subject
to infringement claims. There can be no assurances that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products or that any such assertion may not require the
Company to enter into royalty arrangements or result in costly litigation.
EMPLOYEES
On August 10, 1995, the Company had 49 employees, of which 12 were involved
in sales and marketing, 12 in product planning and development, 14 in customer
support, 3 in production, shipping and receiving, and 8 in general
administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be good.
PROPERTIES
The Company currently leases 10,000 square feet of office space in
Huntington Beach, California. The square footage under lease will increase to
15,000 square feet over the five year term of the lease. The annual rent payment
under this lease is currently $138,000.
27
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
------------------------------ --- --------------------------------------------------------------------------------
<S> <C> <C>
Larry W. Dingus 51 Chairman of the Board and Secretary
C. Shannon Jenkins 48 President, Chief Executive Officer and Director
Ronald R. Maas 49 Executive Vice President, Chief Financial Officer and General Manager, and
Director
Kenneth C. Welch III 38 Director
Richard W. Brail 54 Director
Sigmund A. Fidyke III 41 Vice President of Development
Donald C. Watters 38 Vice President of Sales
</TABLE>
Mr. Dingus has served as Chairman of the Company's Board of Directors since
the Company was founded in September 1982, and has served as Secretary of the
Company since 1989. He resigned as President of the Company on February 15,
1988, and as Chief Executive Officer of the Company on February 16, 1989, posts
he had held since September 1982.
Ms. Jenkins has served as President of the Company since March 1988. On
February 16, 1989, she also became Chief Executive Officer. She served as the
Company's Vice President of Marketing from September 1982 until January 1986,
when she became the Company's Executive Vice President, and since September 1982
she has also served as a Director of the Company.
Mr. Maas joined the Company in 1991 as Vice President of Finance and
Operations and Chief Financial Officer. In 1993, Mr. Maas was promoted to
Executive Vice President and General Manager of the Company, and was elected to
the Company's Board of Directors. Prior to joining the Company, Mr. Maas served
from March 1990 through January 1991 as the Controller of Bell & Howell Quintar
Company, a manufacturer of computer peripheral equipment.
Mr. Welch has been a director of the Company since August 1993. From
September 1985 to the present, he has worked as an independent software
consultant in the Washington, D.C. area. From September 1982 to May 1985, he
served as the Company's Vice President of Development, and was a Director of the
Company from September 1982 to August 1986.
Mr. Brail joined the Company's Board of Directors in April 1995. He has been
the President and Chief Executive Officer of Best Golf, Inc. since September
1994. From July 1991 to May 1994, Mr. Brail served as the President of Helio
Computers, Inc. of Irvine, California. From 1985 until 1991, he provided
services to the Company and other computer companies as the owner of a computer
sales and marketing company.
In addition to its executive officers, the following individuals are
considered to be key employees of the Company:
Sigmund A. Fidyke III joined the Company in December 1993 as Vice President
of Development. From 1985 until December 1993, he was the majority owner and had
served as the President of Custom Software, Inc., a software development firm
with which the Company contracted from time to time.
Donald C. Watters joined the Company in July 1992 as Director of Sales, and
was promoted to Vice President of Sales on January 1, 1994. From January 1992 to
July 1992, Mr. Watters was the Regional Territory Manager for Certus
International. From 1987 to 1992, he was employed as the Manager of Distributor
Sales for California Software Products, Inc.
28
<PAGE>
BOARD OF DIRECTORS
During the last fiscal year, the Company's Board of Directors held three
regular and two special meetings and otherwise took action by written consent.
The Board has established an Executive Committee comprised of Mr. Dingus, Ms.
Jenkins and Mr. Maas. Among other things, the Executive Committee determines the
persons entitled to participate in stock option, bonus and other similar plans.
The Board has also established an Audit Committee comprised of Messrs. Dingus,
Welch and Brail, which meets to consult with the Company's independent auditors
concerning their engagement and audit plan, and thereafter concerning the
auditor's report and management letter and with the assistance of the
independent auditors, also monitors the adequacy of the Company's internal
accounting controls. The Board has not established separate compensation or
nominating committees. Rather, the Board of Directors meets as a whole to
determine the compensation of corporate officers and nominate the individuals to
be proposed by the Board of Directors for election as directors of the Company.
Each non-employee director is paid an annual retainer of $1,200 plus $300
per each board meeting attended and each board committee meeting attended for
each committee of which they are a member. The Company has and will continue to
pay the expenses of its non-employee directors incurred in attending Board
meetings. In October 1994, the Company issued warrants to purchase 20,000 shares
of Common Stock, at the exercise price of $.50 per share, to each of Mr. Welch
and Ernest W. Baumgardner, formerly a director of the Company, for serving on
the Company's Board of Directors. No additional compensation is paid to any of
the employee directors.
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation for
services in all capacities paid or accrued for the fiscal years indicated by the
Company to each of the executive officers identified above.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ $ #
------------------------------------------------------------ ---- ------- ------ ------------
<S> <C> <C> <C> <C>
C. Shannon Jenkins, 1994 112,400 89,657 104,000
President, Chief Executive 1993 100,000 17,641(1) 80,000
Officer and Director 1992 109,000 6,081 101,000
Larry W. Dingus, 1994 95,333 78,683 104,000
Chairman of the 1993 86,000 15,370(1) 80,000
Board of Directors 1992 90,000 6,753 109,334
Ronald R. Maas, 1994 83,800 47,449 64,000
Executive Vice President 1993 78,300 8,376(1) 78,000
and Director 1992 72,800 4,172 87,333
<FN>
------------------------
(1) Amounts reported for 1993 and 1994 exclude bonuses paid in 1994, including
$20,960 paid to Ms. Jenkins, $18,340 paid to Mr. Dingus, $11,480 paid to
Mr. Maas.
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of its three
executive officers, Mr. Dingus, Ms. Jenkins and Mr. Maas, that automatically
renews on January 1 of each year and provides that, upon termination of
employment with the Company for any reason other than "cause," the executive
officer will continue to receive compensation at the level in effect on the date
of termination of employment for the remainder of the year or nine months,
whichever is longer. In the
29
<PAGE>
event that the termination of employment of any of the executive officers occurs
following a change in control of the Company, the exercisability of all stock
options and warrants held by the terminated officer will automatically be
accelerated and the purchase price of all shares of the Company's Common Stock
issuable upon exercise of such options and warrants can be paid by the
terminated executive pursuant to a promissory note due and payable in two years.
BONUS PLAN
For each of the years ended December 31, 1992, 1993 and 1994, the Company's
Board of Directors established a plan to provide additional incentive to
management. Under such plan, the Company's executive officers, including
directors who are also employees, and other key employees of the Company
received bonuses based upon the Company's profitability in addition to their
base cash compensation.
The Company has also established a bonus plan for the year ending December
31, 1995 (the "1995 Bonus Plan"). Under the 1995 Bonus Plan, participants
selected by the Board of Directors will be eligible to receive bonuses
determined quarterly based upon the Company's net income after taxes for the
quarter, with 60% of the earned bonus payable following the end of the quarter.
The 40% balance of the earned bonus will be deferred until the end of the year,
and then will be payable only if the Company's net income would still be in
excess of $250,000, assuming all deferred bonus payments were made. The maximum
payable to all participants in the 1995 Bonus Plan, as a group, is that amount
which equals 18.5% of the Company's pre-tax income for any quarter or the full
year, as appropriate. Each of the executive officers of the Company identified
above was selected as a participant in the 1995 bonus plan for each of the first
two quarters of 1995.
STOCK OPTION PLANS
On August 5, 1988, the Company adopted a non-qualified stock option plan
(the "1988 Plan"). Options to purchase a total of 166,667 shares of Common Stock
may be granted under the 1988 Plan to provide incentive for non-employee
directors, technical advisors, vendors and consultants of the Company, its
subsidiaries or affiliates. Options granted under the 1988 Plan are not intended
to qualify as incentive stock options. As of December 31, 1994, options to
purchase an aggregate of 12,500 shares of Common Stock, at an exercise price of
$.20 per share, were outstanding under the 1988 Plan. Since December 31, 1994
options to purchase 39,000 shares of Common Stock at an exercise price of $5.00
per share have been granted under the 1988 Plan to a public relations firm. As
of the date of this prospectus there are no shares available for grant under the
1988 Plan.
In 1991, the Company adopted stock option plans (collectively, the "1991
Plan") pursuant to which options can be granted to purchase up to an aggregate
of 1,175,000 shares of the Company's Common Stock. The 1991 Plan provides for
the grant of both incentive and non-qualified options. Incentive stock options
can be granted only to employees, including executive officers, of the Company,
while non-qualified stock options can be granted to employees, non-employee
directors, officers, consultants, vendors, customers and others expected to
provide significant services to the Company. At July 31, 1995, options to
purchase an aggregate of 48,833 shares of Common Stock were outstanding under
the 1991 Plan and 37,501 shares were available for issuance upon exercise of
options that may be granted under the 1991 Plan.
In 1994, the Company's Board of Directors adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to 550,000 shares of
the Company's Common Stock may be granted. Unless and until the 1994 Plan is
approved by the Company's shareholders, only non-qualified options can be
granted under the 1994 Plan to employees, including executive officers, non-
employee directors, consultants, vendors, customers and others expected to
provide significant services to the Company. On October 31, 1994, the Company
granted options under the 1994 Plan to purchase an aggregate of 435,000 shares
of Common Stock, at $.50 per share, to a total of 15 key employees, including
executive officers. Since December 31, 1994, options to purchase an additional
100,000 shares of Common Stock, at prices ranging from $.85 to $1.85 per share,
have been granted under the 1994 Plan, including options to purchase 10,000
shares, at $1.00 per share, granted to
30
<PAGE>
Mr. Brail upon joining the Company's Board of Directors in April 1995. As of the
date of this Prospectus, 5,000 shares are available for issuance upon exercise
of options that may be granted under the 1994 Plan.
The following table sets forth certain information regarding options granted
by the Company during the fiscal year ended December 31, 1994 to the executive
officers of the Company identified above:
OPTIONS GRANTED IN FISCAL YEAR 1994
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME OF OPTIONEE GRANTED (#) (1)(2) IN FISCAL YEAR PRICE ($/SH) DATE
--------------------------------------------- ------------------- ----------------------- ------------- ----------
<S> <C> <C> <C> <C>
C. Shannon Jenkins........................... 4,000 0.9% $ 0.31 05/09/96
50,000 11.2 0.50 10/31/97
50,000 11.2 0.50 10/31/97
Larry W. Dingus.............................. 4,000 0.9 0.31 05/09/96
50,000 11.2 0.50 10/31/97
50,000 11.2 0.50 10/31/97
Ronald R. Maas............................... 4,000 0.9 0.31 05/09/96
30,000 6.7 0.50 10/31/97
30,000 6.7 0.50 10/31/97
</TABLE>
The following table sets forth information regarding options exercised
during the year ended December 31, 1994 by the executive officers of the Company
identified above, as well as the aggregate value of unexercised options held by
such individuals at December 31, 1994:
AGGREGATED OPTION EXERCISES LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END ($) (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------------- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. Shannon Jenkins............... 286,000 $ 40,170 50,000 50,000 $ 26,500 $ 26,500
Larry W. Dingus.................. 297,668 40,503 50,000 50,000 26,500 26,500
Ronald R. Maas................... 169,333 21,070 30,000 30,000 15,900 15,900
<FN>
------------------------
(1) Calculated based on the closing bid quotation for a share of the Company's
Common Stock on December 31, 1994, which was $1.03 per share.
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In August 1994, the Company's Board of Directors adopted an employee stock
purchase plan pursuant to which an aggregate of 260,900 shares of Common Stock
were sold to a total of 21 employees, including 20,000 shares purchased by each
of Mr. Dingus, Ms. Jenkins and Mr. Maas. Each participating employee was
entitled to purchase, for cash, promissory notes, or through semi-monthly
payroll deductions, up to 20,000 shares of Common Stock at $.22 per share, which
price was equal to 85% of the most recent bid price per share of the Common
Stock. In addition, each participant received a warrant to purchase, at any time
prior to August 14, 1997, one additional share of Common Stock, at the same
price per share, for every share purchased under the employee stock purchase
plan. In 1994, Mr. Dingus, Ms. Jenkins and Mr. Maas each purchased 20,000 shares
of the Company's Common Stock by providing non-interest bearing notes to the
Company in the principal amount of $4,400 each. These notes are payable in
monthly installments through August 1995, when the entire principal amount of
each is due and payable.
31
<PAGE>
CERTAIN TRANSACTIONS
In 1991, Mr. Dingus participated in the Company's $200,000 subordinated debt
financing, providing the Company with a personal loan of $10,000 for two years
at 15% interest and receiving options to purchase a total of 3,334 shares of the
Company's Common Stock at an average price of $.20 per share. In 1992, Mr.
Dingus, a member of his family and Mr. Maas participated in the Company's
$45,000 subordinated note financing, lending the Company $15,000, $20,000 and
$10,000, respectively. In consideration of these loans, Messrs. Dingus and Maas
were granted warrants to purchase 5,000 and 3,333 shares of Common Stock,
respectively, at $.30 per share. Additionally, in connection with the Company's
bank line of credit, Mr. Dingus and Mr. Maas were required to accept only
payments of interest from November 1993 until May 1, 1994 by virtue of the
subordination provisions of their subordinated notes. In consideration for the
Company's failure to make principal payments when due, Mr. Dingus was issued
11,120 shares of Common Stock and Mr. Maas was issued 4,810 shares of Common
Stock. At December 31, 1994, the principal amounts due Messrs. Dingus and Maas
under these subordinated notes were approximately $15,800 and $6,800,
respectively. All of these amounts were paid in March 1995.
During the years ended December 31, 1993 and 1994, Mr. Dingus, Ms. Jenkins
and Mr. Maas were each granted options to purchase a total of 30,000 of the
Company's Common Stock in consideration for their guarantees of borrowings under
the Company's bank line of credit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Management -- Stock Option Plans."
In August 1994, three-year warrants to purchase an aggregate of 56,733
shares of Common Stock at $.26 per share were issued to holders of outstanding
stock options who agreed to exercise their options at an earlier date than
otherwise required, including warrants to purchase 14,883, 14,300, 8,467 and
2,000 shares issued to Mr. Dingus, Ms. Jenkins, Mr. Maas and Mr. Welch,
respectively.
During the year ended December 31, 1994, Mr. Dingus, Ms. Jenkins and Mr.
Maas gave the Company promissory notes in the respective principal amounts of
$46,357, $43,349 and $28,244 as payment of the purchase price for 297,668,
286,000 and 169,333 shares of the Company's Common Stock, respectively, acquired
upon exercise of stock options. Certain of these notes originally bore interest
at the rate of 8% per annum and were due and payable in August 1995, while other
bore interest at the annual rate of 3.5% and were not payable until August 1998.
Prior to the end of 1994, the interest rate on the 8% notes was reduced to 3.5%
per annum, and the maturity of those notes was extended to August 1998. Each of
these promissory notes will be paid in full upon consummation of this offering.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company must indemnify its officers
and directors, and may indemnify its employees and other agents, to the fullest
extent permitted by California law. California law provides that directors of a
California corporation will not be personally liable for monetary damages for
breach of the fiduciary duties as directors except for liability as a result of
their duty of loyalty to the company for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, unlawful
payments of dividends or stock transactions, unauthorized distributions of
assets, loans of corporate assets to an officer or director, unauthorized
purchase of shares, commencing business before obtaining minimum capital, or any
transaction from which a director derived an improper benefit. Such limitations
do not affect the availability of equitable remedies such as injunctive relief
or rescission. At present, there is no pending litigation or proceeding
involving any director, officer, employee, or agent of the Company where
indemnification will be required or permitted. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to officers,
directors or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
32
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 10, 1995 by each director
and executive officer of the Company, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, each of the
Selling Shareholders, and all directors and executive officers of the Company as
a group. The table also sets forth the maximum number of shares to be offered
hereby for the account of each Selling Shareholder, and the number and
percentage of the outstanding shares of Common Stock to be beneficially owned by
each Selling Shareholder after completion of this offering, assuming all shares
offered hereby are in fact sold. Except as otherwise indicated below, the
Company believes that each person listed below has sole voting and investment
power with respect to the shares owned, subject to applicable community property
laws. The address of each person listed is 2124 Main Street, Huntington Beach,
California 92648.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO OFFERING (1) NUMBER OF AFTER THE OFFERING (1)
NAME OF BENEFICIAL OWNER ------------------------ SHARES THAT ------------------------
OR IDENTITY OF GROUP NUMBER PERCENT MAY BE SOLD NUMBER PERCENT
------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Larry W. Dingus (2)................................... 879,957 14.7% 243,000 636,957 8.8%
C. Shannon Jenkins (2)................................ 879,518 14.6 243,000 636,518 8.8
Ronald R. Maas (2).................................... 426,610 7.1 121,000 305,610 4.2
Kenneth C. Welch III (2).............................. 310,574 5.2 82,000 228,574 3.2
Donald C. Watters (2)................................. 249,871 4.2 70,000 179,871 2.5
Sigmund A. Fidyke III (2)............................. 138,750 2.3 41,000 97,750 1.4
Richard W. Brail (2).................................. 10,000 * 0 10,000 *
All Selling Shareholders as a group
(6 persons).......................................... 2,884,913 46.0 800,000 2,084,913 27.7
All executive officers and directors as
a group (5 persons) (3).............................. 2,506,292 40.4 689,000 1,817,292 24.4
<FN>
------------------------
* Less than one percent.
(1) Percentages shown include shares which each named shareholder has the right
to acquire within 60 days from the date of this Prospectus. All shares of
Common Stock which a named shareholder has the right to so acquire upon
exercise of stock options are deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by such shareholder, but are
not deemed to be outstanding for the purpose of computing the percentage of
Common Stock owned by any other shareholder.
(2) Includes shares issuable upon exercise of outstanding options and stock
purchase warrants, including 84,883 shares in the case of Mr. Dingus,
84,300 shares in the case of Ms. Jenkins, 58,467 shares in the case of Mr.
Maas, 42,000 shares in the case of Mr. Welch, 43,500 shares in the case of
Mr. Watters, 43,750 shares in the case of Mr. Fidyke, and 10,000 shares in
the case of Mr. Brail. See "Management -- Stock Option Plans"; "Employee
Stock Purchase Plan" and "Certain Transactions."
(3) Includes an aggregate of 279,650 shares issuable upon exercise of
outstanding options.
</TABLE>
33
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.001 par value per share, of which 5,980,468 shares were issued
and outstanding as of August 10, 1995, and 3,000,000 shares of Preferred Stock,
$.001 par value per share, none of which have been issued or are outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders and to cumulate votes in the
election of directors. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." Upon the liquidation,
dissolution, or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
being sold by the Company in this offering will be, when issued and delivered,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the State of California, but without further action by the
Company's shareholders, to provide for the issuance of Preferred Stock in one or
more series, to establish from time to time the number of shares to be included
in each such series, to fix the designations, powers, preferences and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the shareholders. The Board of Directors
may authorize and issue Preferred Stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of Common
Stock. In addition, the issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Preferred Stock.
OUTSTANDING WARRANTS
As of August 10, 1995, there were outstanding warrants to purchase an
aggregate of 329,968 shares of Common Stock at exercise prices ranging from $.20
to $.50 per share. Included are warrants to purchase 34,883, 34,300 and 28,467
shares issued to Mr. Dingus, Ms. Jenkins and Mr. Maas, respectively, as
described under "Management -- Employee Stock Purchase Plan." Also included are
warrants to purchase 22,000 shares Common Stock issued to Mr. Welch and warrants
to purchase 10,000 shares retained by Mr. Baumgardner, a former member of the
Company's Board of Directors who exercised other warrants to purchase 36,833
shares in May 1995. See "Management -- Board of Directors" and "-- Certain
Transactions." Additional participants in the Company's stock purchase plan held
warrants to purchase an aggregate of 120,900 shares of Common Stock, and
warrants to purchase 82,168 shares of Common Stock are held by individuals who
loaned money to the Company and independent contractors for services provided
and to be provided to the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer, Incorporated, 938 Quail Street, Suite 101, Lakewood, CO
80215.
34
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 7,180,468 shares of
Common Stock outstanding. All of the 2,000,000 shares sold in this offering (and
any shares sold by the Selling Shareholders upon exercise of the Underwriters'
over-allotment option) will be freely transferable by persons other than
"affiliates" of the Company (as that term is defined under the Securities Act)
without restriction or further registration under the Securities Act.
The remaining outstanding shares of Common Stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption contained in
Rule 144. In the absence of agreements with the Representative, approximately
3,700,000 of such shares have met the two year holding period requirement under
Rule 144 and could begin to be sold on the 91st day following the offering.
However, pursuant to the terms of the Underwriting Agreement, the Representative
has required that the Common Stock owned by officers, directors and other
holders, as well as Common Stock obtained by them upon exercise of stock
options, may not be sold until nine months from the date of this Prospectus
without the prior written consent of the Representative.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least two years is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least three years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above.
In addition to the shares of Common Stock that are currently outstanding, a
total of 617,834 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Company's stock option plans, and options
to acquire 575,333 shares of Common Stock at a weighted average exercise price
of $.78 per share have been granted pursuant to such plans. In July 1995, the
Company registered an aggregate of 636,334 shares of Common Stock for issuance
upon exercise of outstanding options granted or to be granted under the
Company's stock option plans. Warrants to purchase an additional 329,968 shares
of Common Stock, at a weighted average exercise price of $.27 per share, have
also been issued to employees in connection with the Company's employee stock
purchase plan and to various consultants who provide services to the Company.
See "Management -- Stock Option Plan." Pursuant to the terms of the Underwriting
Agreement referenced above, shares underlying certain options granted may be
resold on the 91st day after the date of this Prospectus pursuant to Rule 701
promulgated under the Securities Act.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing shareholders could adversely affect prevailing market prices.
35
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Cruttenden Roth Incorporated
and Punk, Ziegel & Knoell, L.P. (the "Representatives"), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company and the Selling Shareholders the number of shares of
Common Stock indicated below opposite their respective names at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions and that the
Underwriters are committed to purchase all of such shares (other than the Common
Stock covered by the over-allotment option as described below), if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Cruttenden Roth Incorporated.....................................................................
Punk, Ziegel & Knoell, L.P.......................................................................
Total........................................................................................
-----------
-----------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain securities dealers at such
price less a concession of not more than $ per share, and that the
Underwriters and such dealers may reallow to other dealers, including the
Underwriters, a discount not in excess of $ per share. After the public
offering, the public offering price and concessions and discounts may be changed
by the Representatives. No change in such terms shall change the amount of
proceeds to be received by the Company and the Selling Shareholders as set forth
on the cover page of this Prospectus.
Certain of the Selling Shareholders have granted an option to the
Representatives, exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to an additional 300,000 shares of Common Stock at
the public offering price set forth on the cover page of this Prospectus less
the underwriting discounts and commissions. The Representatives may exercise
this option only to cover over-allotments, if any. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase a percentage of such additional shares approximately
equal to the percentage of shares it was obligated to purchase from the Company
pursuant to the Underwriting Agreement.
The Representatives have informed the Company and the Selling Shareholders
that they do not expect any sales of the shares of Common Stock offered hereby
to be made to discretionary accounts by the Underwriters.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of 2% of the offering proceeds of all shares sold by the Company and
the Selling Shareholders. However, to the extent the over-allotment option is
exercised, the 2% non-accountable expense allowance with respect to these shares
will be paid by the Selling Shareholders. To date, the Company has paid $30,000
of the non-accountable expense allowance to the Representatives. The
Representatives' expenses in excess of the non-accountable expense allowance,
including their legal expenses, will be
36
<PAGE>
borne by the Representatives. To the extent that the expenses of the
Representatives are less than the non-accountable expense allowance, the excess
shall be deemed to be compensation to the Representatives.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute to payments the Underwriters may be required to make in respect
thereof. The Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
The Company has agreed to sell to the Representatives, for $200, warrants
(the "Representatives' Warrants") to purchase up to 200,000 shares of Common
Stock at an exercise price per share equal to 120% of the public offering price
per share. The Representatives' Warrants are exercisable for a period of four
years beginning one year from the date of this Prospectus, and are not
transferable for a period of one year except to officers of the Representatives
or any successor to the Representatives. In addition, the Company has granted
certain rights to the holders of the Representatives' Warrants to register the
Common Stock underlying the Representatives' Warrants under the Securities Act.
The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representatives, the Company and the United States Securities and Exchange
Commission, Los Angeles, California. See "Additional Information."
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Shares offered hereby under California law will be passed upon for the Company
by Phillips & Haddan, Newport Beach, California. Certain legal matters will be
passed upon for the Underwriters by Stradling, Yocca, Carlson & Rauth, Newport
Beach, California.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31, 1994, included in
this Prospectus and the Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement, and are included in reliance upon
such reports of such firm given upon their authority as experts in auditing and
accounting.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional Office located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and the Chicago Regional Office located at Northwestern Atrium
Center, 500 West Madison Street, Chicago Illinois 60661-2511 and copies of all
or any part thereof may be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Balance Sheets
December 31, 1993 and 1994, and June 30, 1995 (unaudited)................................................ F-3
Statements of Income
Years ended December 31, 1992, 1993 and 1994, and six months ended June 30, 1994 and 1995 (unaudited).... F-4
Statements of Shareholders' Equity
Years ended December 31, 1992, 1993 and 1994, and six months ended June 30, 1995 (unaudited)............. F-5
Statements of Cash Flows
Years ended December 31, 1992, 1993 and 1994, and six months ended June 30, 1994 and 1995 (unaudited).... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
TouchStone Software Corporation:
We have audited the accompanying balance sheets of TouchStone Software
Corporation as of December 31, 1993 and 1994 and the related statements of
income, shareholders' equity and cash flows for each of three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of TouchStone Software Corporation as of
December 31, 1993 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
February 3, 1995
F-2
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994
-------------- -------------- JUNE 30,
1995
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 44,005 $ 1,298,201 $ 1,759,060
Accounts receivable, net....................................... 892,497 1,681,612 1,651,452
Inventories.................................................... 238,986 389,180 336,389
Deferred tax asset............................................. 298,800 298,833
Prepaid expenses and other current assets...................... 29,209 31,340 31,902
Employee and director advances................................. 14,981 18,458 47,026
-------------- -------------- --------------
Total current assets......................................... 1,219,678 3,717,591 4,124,662
Property, net.................................................... 49,568 54,607 133,844
Software development costs, net.................................. 433,948 235,868 296,781
Deferred tax asset............................................... 17,300
Other assets..................................................... 15,678 16,830 225,923
-------------- -------------- --------------
$ 1,736,172 $ 4,024,896 $ 4,781,210
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank.......................................... $ 89,821 $ 300,000 $
Accounts payable............................................... 311,410 703,524 525,749
Accrued payroll and related expenses........................... 172,523 524,157 480,046
Accrued cooperative advertising costs.......................... 96,075 228,157 447,529
Other accrued liabilities...................................... 125,826 447,601 450,561
Current portion of long-term debt.............................. 63,105 64,096 19,033
Obligations under capital leases............................... 10,468 4,124 1,006
-------------- -------------- --------------
Total current liabilities.................................... 869,228 2,271,659 1,923,924
Long-term debt................................................... 99,526 54,875 47,416
Deferred tax liability........................................... 80,400 80,374
Obligations under capital leases................................. 4,124
Deferred lease obligation........................................ 6,871
Due to affiliate................................................. 1,499 2,597
Other............................................................ 114,000
Commitments......................................................
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;
issued and outstanding, 4,446,304 shares at December 31 1993,
5,833,469 shares at
December 31, 1994 and 5,920,468 at June 30, 1995.............. 2,071,150 5,833 5,920
Additional paid-in capital..................................... 2,324,111 2,430,041
Common stock subscribed........................................
Notes receivable from sale of common stock..................... (74,175) (272,603) (239,207)
Retained earnings (accumulated deficit)........................ (1,242,051) (441,976) 418,742
-------------- -------------- --------------
Total shareholders' equity................................... 754,924 1,615,365 2,615,496
-------------- -------------- --------------
$ 1,736,172 $ 4,024,896 $ 4,781,210
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1992 1993 1994 1994 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales....................... $ 3,348,511 $ 4,692,849 $ 6,893,447 $ 2,458,588 $ 6,022,127
Royalty income...................... 121,749 231,674 308,054 158,485 159,280
------------- ------------- ------------- ------------- -------------
Total revenues.................... 3,470,260 4,924,523 7,201,501 2,617,073 6,181,407
Cost of sales......................... 979,073 1,663,969 2,315,740 910,344 1,904,608
------------- ------------- ------------- ------------- -------------
Gross profit...................... 2,491,187 3,260,554 4,885,761 1,706,729 4,276,799
Operating expenses:
Sales and marketing................. 1,497,299 1,872,557 2,273,188 1,031,198 1,840,735
General and administrative.......... 642,154 813,458 1,244,516 412,575 805,474
Research and development............ 277,222 257,697 440,477 135,441 273,271
------------- ------------- ------------- ------------- -------------
Income from operations............ 74,512 316,842 927,580 127,515 1,357,319
Other income (expense), net........... (26,490) (29,119) (28,005) (11,118) 31,699
------------- ------------- ------------- ------------- -------------
Income before provision (benefit) for
income taxes......................... 48,022 287,723 899,575 116,397 1,389,018
Provision (benefit) for income
taxes................................ 7,000 (20,000) 99,500 13,100 528,300
------------- ------------- ------------- ------------- -------------
Net income............................ $ 41,022 $ 307,723 $ 800,075 $ 103,297 $ 860,718
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share.................. $ 0.01 $ 0.06 $ 0.14 $ 0.02 $ 0.13
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average shares............... 4,776,000 4,927,000 5,576,000 4,995,000 6,696,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (AUDITED),
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
NOTES
RETAINED RECEIVABLE
COMMON STOCK EARNINGS FROM SALE TOTAL
-------------------------- PAID-IN (ACCUMULATED OF COMMON SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) STOCK EQUITY
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Jan. 1, 1992 4,425,470 $ 2,067,900 $ $ (1,590,796) $ (71,425) $ 405,679
Stock options exercised................. 8,334 1,250 (1,250)
Collection of notes receivable.......... 395 395
Interest accrued........................ (12,315) (12,315)
Net income.............................. 41,022 41,022
------------ ------------ ------------ ------------ ----------- ------------
Balance Dec. 31, 1992................... 4,433,804 2,069,150 (1,549,774) (84,595) 434,781
Collection of notes receivable.......... 15,436 15,436
Interest accrued........................ (5,016) (5,016)
Stock options exercised................. 12,500 2,000 2,000
Net income.............................. 307,723 307,723
------------ ------------ ------------ ------------ ----------- ------------
Balance Dec. 31, 1993................... 4,446,304 2,071,150 (1,242,051) (74,175) 754,924
Recapitalization........................ (2,066,704) 2,066,704
Collection of notes receivable.......... 36,309 36,309
Interest accrued........................ (2,361) (2,361)
Issuance of shares for services
received............................... 17,930 18 4,487 4,505
Stock options exercised................. 61,966 62 13,092 13,154
Notes received for options and warrants
exercised.............................. 1,307,269 1,307 239,828 (232,376) 8,759
Net income.............................. 800,075 800,075
------------ ------------ ------------ ------------ ----------- ------------
Balance Dec. 31, 1994................... 5,833,469 5,833 2,324,111 (441,976) (272,603) 1,615,365
UNAUDITED
Collection of notes receivable.......... 33,396 33,396
Stock options exercised................. 86,999 87 21,699 21,786
Tax benefit from stock option
exercises.............................. 84,231 84,231
Net income.............................. 860,718 860,718
------------ ------------ ------------ ------------ ----------- ------------
Balance June 30, 1995................... 5,920,468 $ 5,920 $ 2,430,041 $ 418,742 $ (239,207) $2,615,496
------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------
1992 1993 1994 1994 1995
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 41,022 $ 307,723 $ 800,075 $ 103,297 $ 860,718
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization........................ 153,189 408,621 404,897 194,920 162,519
Change in deferred income taxes...................... 6,200 (20,000) (201,100)
Provision for doubtful accounts...................... 10,821 10,000 72,600 26,100 63,900
Amortization of deferred lease obligation............ (2,506) (11,779) (6,871) (5,890)
(Gain) loss on sale of assets........................ (6,417) 947
Issuance of stock for compensation and interest...... 3,320 4,505
Interest expense in connection with stock
issuances........................................... 8,759
Changes in operating assets and liabilities:
Accounts receivable.................................. 207,632 (635,555) (861,715) (175,487) (33,740)
Inventories.......................................... (37,000) (44,228) (150,194) (10,485) 52,792
Prepaid expenses and other current assets............ 22,885 (13,008) (2,131) (17,617) (562)
Employee and director receivables.................... 615 (7,775) (3,477) 4,556 (28,568)
Other assets......................................... 4,644 12,397 (540) (86) (19,320)
Accounts payable..................................... 117,662 18,079 392,114 95,063 (177,775)
Accrued and other liabilities........................ 72,284 53,197 810,588 38,105 263,205
----------- ----------- ------------ ----------- ------------
Net cash provided by operating activities.......... 597,448 74,575 1,267,510 252,476 1,144,116
Cash flows from investing activities:
Capitalized software development costs................. (408,990) (193,630) (168,730) (90,149) (198,848)
Purchases of property.................................. (15,929) (11,661) (14,380) (14,029) (65,023)
Payments received for the sale of a product line....... 15,060 17,468
Cash payments on behalf of affiliate................... (34,856) (138)
Cash received on sale of equipment..................... 1,500
----------- ----------- ------------ ----------- ------------
Net cash flow used in investing activities......... (444,715) (186,461) (183,110) (104,178) (263,871)
Cash flows from financing activities:
Net borrowings (repayments) under bank line of
credit................................................ 105,000 (95,179) 210,179 (89,821) (300,000)
Principal payments on notes payable.................... (2,348) (99,528) (66,783) (29,510) (89,622)
Principal payments under capital lease obligations..... (23,696) (27,038) (10,468) (6,870) (3,118)
Proceeds from exercise of stock warrants and options
and repayment on notes receivable..................... 395 6,894 45,463 2,712 51,805
Interest accrued on notes receivable................... (12,315) (5,016) (2,361) (2,361)
Proceeds from long-term borrowings..................... 45,000
Deferred ofering costs................................. (77,451)
Other prepaid financing costs.......................... (4,896) (5,498) (6,234) (5,034) (1,000)
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in) financing
activities........................................ 107,140 (225,365) 169,796 (130,884) (419,386)
Net increase (decrease) in cash and cash equivalents..... 259,873 (337,251) 1,254,196 17,414 460,859
Cash and cash equivalents, beginning of period........... 121,383 381,256 44,005 44,005 1,298,201
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents, end of period................. $ 381,256 $ 44,005 $ 1,298,201 $ 61,419 $ 1,759,060
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Supplemental cash flow information:
Interest paid.......................................... $ 51,137 $ 51,396 $ 26,153 $ 15,861 $ 6,179
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Income taxes paid...................................... $ 3,620 $ $ 22,555 $ 14,600 $ 712,701
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
TouchStone Software Corporation ("TouchStone" or the "Company") designs,
develops, sells on credit terms and supports a line of computer problem-solving
utility software and supporting products which simplify personal computer (PC)
installation, support and maintenance.
UNAUDITED INFORMATION
The information set forth in these financial statements as of June 30, 1995
and for the six-month periods ended June 30, 1994 and 1995, is unaudited. This
information reflects all adjustments, consisting only of normal recurring
adjustments, that, in the opinion of management, are necessary to present fairly
the financial position and results of operations of the Company for these
periods. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full fiscal year.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of cost, using the first-in, first-out
method, or market, and consist mainly of finished goods and packaging supplies.
PROPERTY
Property is stated at cost and depreciated using the straight-line method
based on the estimated useful lives of the related assets (three to five years).
Leasehold improvements are amortized over the useful life or the term of the
lease, which ever is shorter.
SOFTWARE DEVELOPMENT COSTS
Research and development expenses resulting from the design, development and
testing of new software and software maintenance and enhancement costs are
expensed as incurred, until technological feasibility has been established.
Thereafter, certain costs such as coding and testing are capitalized in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for Costs of Computer Software to be Sold, Leased or Otherwise Marketed, until
the product is available for sale. Capitalized expenses were approximately
$409,000, $194,000 and $169,000 for the years ended December 31, 1992, 1993 and
1994, respectively, and $90,000 and $199,000 for the six-month periods ended
June 30, 1994 and 1995, respectively.
Capitalized software development costs are amortized using the straight-line
method, commencing when the related products are available for sale, over the
estimated useful lives of the related products which range from 18 to 24 months.
Amortization of software development costs was approximately $81,500, $296,000
and $367,000 for the years ended December 31, 1992, 1993 and 1994, respectively,
and $176,400 and $138,000 for the six-month periods ended June 30, 1994 and
1995, respectively.
Software development costs are presented in the accompanying balance sheets
net of accumulated amortization of $484,411, $670,234 and $754,651 at December
31, 1993, December 31, 1994, and June 30, 1995, respectively.
F-7
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets include approximately $77,500 of deferred offering costs
incurred in connection with the Company's secondary common stock offering at
June 30, 1995. Such costs will be offset against the proceeds of such offering
if successful. If unsuccessful, such costs will be expensed.
REVENUE RECOGNITION
Product sales to distributors and retail customers are recorded upon
delivery of the related software in accordance with Statement of Position 91-1,
Software Revenue Recognition. The Company records an accrual for estimated
returns at the time of product shipment based on historical experience.
Royalties are recognized as income when minimum payments specified in the
royalty agreements become due, or as the related products are sold by the
licensee.
COOPERATIVE ADVERTISING
The Company offers cooperative advertising programs to its distributors
whereby the Company's products receive market visibility through ads, brochures,
and catalogs paid for by the distributors. Approved expenditures can be deducted
by the distributors from amounts due to the Company. Cooperative advertising
costs are accrued at the maximum rates allowed under the respective distribution
agreements and are charged to expense when product sales are recognized as
revenue.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
NET INCOME PER SHARE
Net income per share is computed using the weighted average common and
common equivalent shares outstanding. Common equivalent shares include warrants
and options to purchase common stock.
2. BALANCE SHEET DETAIL
ACCOUNTS RECEIVABLE
Accounts receivable included in the accompanying balance sheets is presented
net of the following allowances and reserves:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- ----------- JUNE 30,
1995
-------------
(UNAUDITED)
<S> <C> <C> <C>
Allowance for doubtful accounts................................ $ 55,000 $ 113,000 $ 125,500
Reseller rebate reserves....................................... 22,900 461,000 1,096,100
Product return reserves........................................ 78,500 257,000 569,400
----------- ----------- -------------
$ 156,400 $ 831,000 $ 1,791,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
F-8
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
2. BALANCE SHEET DETAIL (CONTINUED)
PROPERTY
Property consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- ----------- JUNE 30,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment and furniture............................................. $ 277,456 $ 314,959 $ 344,073
Automobiles................................................................ 47,487 47,487 95,962
Leasehold improvements..................................................... 11,456 11,456 24,533
----------- ----------- -----------
336,399 373,902 464,568
Less accumulated depreciation and amortization............................. (286,831) (319,295) (330,724)
----------- ----------- -----------
$ 49,568 $ 54,607 $ 133,844
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
3. FINANCING ARRANGEMENTS
BANK LINE OF CREDIT
Note payable to bank in the accompanying balance sheets represents
borrowings under a $300,000 bank line of credit, based upon eligible
receivables, as defined. Borrowings bear interest at rates of 10.5%, 11.25%, and
10.5% at December 31, 1993 and December 31, 1994, and June 30, 1995,
respectively, and are collateralized by substantially all Company assets. All
outstanding borrowings under the bank line of credit were repaid in April 1995.
Borrowings under the line of credit were guaranteed by three of the Company's
executive officers and one member of the Company's Board of Directors. The line
of credit agreement contains certain restrictive covenants, the most significant
of which relate to minimum tangible net worth, debt to tangible net worth and
current ratio requirements. The Company was in compliance with such covenants at
December 31, 1993 and 1994, and June 30, 1995.
On April 27, 1995, the line of credit was replaced with another borrowing
facility. The new line of credit allows for borrowings up to $300,000, bears
interest at the prime rate, as reported by the Wall Street Journal, plus 1.5%,
and matures May 5, 1996. The prime rate at June 30, 1995 was 9.0%. Borrowings
will be 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.
F-9
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
3. FINANCING ARRANGEMENTS (CONTINUED)
LONG TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- ----------- JUNE 30,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated notes payable to private investors, bearing interest at 15%,
repaid in 1995. .......................................................... $ 102,132 $ 54,608 $
Subordinated notes payable to private investors, bearing interest at 12%;
repaid in 1995. .......................................................... 38,690 27,323
Note payable to General Motors Acceptance Corp., collateralized by
automotive equipment, bearing interest at 10.25%, due in monthly
installments of $521 to April 1998. ...................................... 21,809 17,596 15,323
Notes payable to bank, collateralized by computer equipment, bearing
interest at 12.5%, due in monthly installments of $233 and $409 to May
1997 and July 1997 respectively. ......................................... 19,444 15,591
Note payable to bank, collateralized by automotive equipment, bearing
interest at 7.8%, due in monthly installments of $750 to March 2000. ..... 35,534
----------- ----------- -----------
Total...................................................................... 162,631 118,971 66,448
Less current portion....................................................... (63,105) (64,096) (19,032)
----------- ----------- -----------
$ 99,526 $ 54,875 $ 47,416
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Maturities of long-term debt at December 31, 1994 are $64,096 in 1995,
$43,082 in 1996, $9,752 in 1997 and $2,041 in 1998.
Certain warrants and options to purchase shares of common stock were issued
in connection with the issuance in 1993 of subordinated notes payable to private
investors, including the Company's Chairman of the Board of Directors; a family
member of the Company's chairman; a Director and the Company's Chief Financial
Officer (Note 7). At December 31, 1993 and 1994, the principal amounts due the
Director, the Company's chairman, his family member and the Company's Chief
Financial Officer were approximately $33,880 and $12,300; $20,383 and $15,800;
$16,650 and $10,400; and $8,816 and $6,800, respectively. All of these amounts
were repaid by March 1995.
4. COMMITMENTS
At December 31, 1994, the Company was obligated under non-cancelable
operating leases for its office facility and office equipment as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1995................................................................... $ 109,567
1996................................................................... 27,528
1997................................................................... 13,856
1998................................................................... 5,642
-----------
$ 156,593
-----------
-----------
</TABLE>
F-10
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
4. COMMITMENTS (CONTINUED)
In 1992, 1993, 1994, and 1995, the Company sublet a portion of its office
space. This sublease required monthly payments of $700 and was canceled March
31, 1995. Rent expense for all operating leases totaled approximately $136,000,
$142,000 and $141,000 for the years ended December 31, 1992, 1993 and 1994,
respectively, and $74,000 and $59,000 for the six-month periods ended June 30,
1994 and 1995, respectively, all net of sublease income.
On April 1, 1995 the Company entered into a five year lease for
approximately 10,000 square feet in the first year increasing to approximately
15,000 square feet by the third year. The Company's commitment for this lease is
$103,500, $175,125, $187,500, and $187,500 for 1995, 1996, 1997, and 1998
respectively.
The Company has entered into various agreements with outside consulting
firms for the development of specialized applications utilized in the Company's
software products. Generally, the Company pays the software developers a
percentage royalty based on actual product sales. One royalty agreement executed
in 1994 provided that TouchStone pay minimum royalties of $50,000, which the
Company accrued at December 31, 1994. The Company recorded total royalty expense
of approximately $226,000, $139,000 and $166,000 for the years ended December
31, 1992, 1993 and 1994, respectively, and $47,700 and $233,100 for the
six-month periods ended June 30, 1994 and 1995, respectively.
5. SHAREHOLDERS' EQUITY
1983 INCENTIVE STOCK OPTION PLAN
During 1983, the Company adopted an incentive stock option plan (the 1983
ISOP "Plan") which provides that options to purchase up to 329,399 shares of the
Company's common stock may be granted to key officers, directors or other
employees at not less than fair market value at the date of grant. In addition,
stock appreciation rights may be granted under the Plan. Options granted under
the Plan vest immediately and are for periods not exceeding ten years from date
of grant. The 1983 ISOP Plan expired May 31, 1993.
1988 NON-QUALIFIED STOCK OPTION PLAN
On August 5, 1988, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "1988 NQ-Plan"). The 1988 NQ-Plan authorizes a total of
166,667 shares of Common Stock designed as an incentive for non-employee
directors, technical advisors, vendors and consultants of the Company. The 1988
NQ-Plan is administered by the Non-Qualified Stock Option Committee of the Board
of Directors which determines the recipients of options, the exercise price of
the options, and the number of shares subject to each option. This plan expires
August 5, 1998. At June 30, 1995, 39,000 shares were available under the 1988
NQ-Plan for future grant.
THE 1991 INCENTIVE STOCK OPTION AND NON-QUALIFIED STOCK OPTION PLANS
In January 1992, the Company's stockholders approved additional incentive
stock option and non-qualified stock option plans (the "1991 ISOP-Plan" and the
"1991 NQ-Plan") which provide for additional grants of options to purchase up to
an aggregate of 1,175,000 shares of the Company's common stock. These plans
expire December 13, 2000. At June 30, 1995, an aggregate amount of 38,501 shares
were available for grant under the 1991 ISOP-Plan and the 1991 Non-Qualified
Plan.
THE 1994 STOCK OPTION PLAN
In 1994, the Company's Board of Directors adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to 550,000 shares of
the Company's Common Stock may be
F-11
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
granted. Unless and until the 1994 Plan is approved by the Company's
shareholders, only non-qualified options can be granted under the 1994 Plan to
employees, including executive officers, non-employee directors, consultants,
vendors, customers and others expected to provide significant services to the
Company. On October 31, 1994, the Company granted options under the 1994 Plan to
purchase an aggregate of 435,000 shares of Common Stock, at $.50 per share, to a
total of 15 key employees, including executive officers. Since December 31,
1994, options to purchase an additional 110,000 shares of Common Stock, at
prices ranging from $.85 to $1.85 per share, have been granted under the 1994
Plan, including options to purchase 10,000 shares, at $1.00 per share, for each
of the outside directors, Mr. Welch and Mr. Brail. In February 1995, the Company
granted an option to purchase a total of 60,000 shares to a public relations
firm. These options are exercisable at $.85 per share, the fair market value at
date of grant, and expire September 30, 1995. At June 30, 1995, all of these
options were outstanding and exercisable.
In 1994, the Company approved an employee stock purchase plan. The plan
allowed individual employees to purchase, prior to October 31, 1994, up to
20,000 shares of the Company's common stock at 85% of the fair market value at
the date of purchase and receive a warrant to purchase an equal number of common
shares at the same price. Such warrants were exercisable immediately and expire
August 14, 1997. Employees purchased an aggregate of 260,900 shares under this
plan in 1994.
F-12
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
All options under the above plans were granted at fair market value at the
date of issuance. Stock option activity for these plans, along with common stock
warrant activity, for the years ended December 31, 1992, 1993, and 1994, and for
the six-month period ended June 30, 1995 was as follows:
<TABLE>
<CAPTION>
1983 1991 1994
ISOP 1988 ISOP 1991 OPTION
PLAN NQ-PLAN PLAN NQ-PLAN PLAN WARRANTS
--------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1, 1992...... 11,668 67,167 539,000 37,169
Granted................................... 12,334 190,166
Lapsed....................................
Exercised................................. (8,334)
Canceled..................................
--------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1992................. 15,668 67,167 539,000 190,166 37,169
Granted................................... 413,000 66,000
Lapsed.................................... (23,000) (23,000)
Exercised................................. (12,500)
Canceled.................................. (51,000)
--------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1993................. 15,668 44,167 901,000 243,666 14,169
Granted................................... 87,000 9,000 435,000 442,633
Lapsed.................................... (11,667) (41,667) (3,334)
Exercised................................. (15,668) (20,000) (883,000) (173,000) (16,667)
Canceled.................................. (75,000)
--------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1994................. 0 12,500 30,000 37,999 435,000 436,801
UNAUDITED
Granted................................... 110,000
Exercised................................. (10,000) (2,500) (17,666) (56,833)
--------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1995..................... 0 2,500 27,500 20,333 545,000 379,968
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
Options exercisable, June 30, 1995........ 0 2,500 22,500 20,333 327,500 347,468
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
Price range of outstanding options, June $.19 to $.19 to $ .50 to $.20 to
30, 1995................................. n/a $.20 $.22 $.30 $1.85 $.50
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
</TABLE>
1994 and 1993 grants under the 1991 ISOP-Plan and the 1991 NQ-Plan included
20,000 and 120,000 options, respectively, to various officers and directors in
connection with their guarantee of borrowings under the Company's bank line of
credit (Note 3).
All options exercised in 1993 were by Pelican Associates, Inc. ("Pelican"),
an entity that is owned by certain officers of the Company. The purchase price
of these shares was offset against amounts owed to Pelican by the Company (Note
9).
F-13
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE FROM SALE OF COMMON STOCK
Amounts due from sale of common stock or exercise of options consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1993 1994 1995
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes receivable, bearing interest at 3.5% per annum,
principal and interest due in August 1998.............. $ 58,475 $ 220,068 $ 218,984
Notes receivable, non-interest bearing, due in monthly
installments through August 1995....................... 36,359 6,424
--------- ----------- -----------
58,475 256,427 225,408
Interest receivable..................................... 15,700 16,176 13,799
--------- ----------- -----------
$ 74,175 $ 272,603 $ 239,207
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
During 1994, the due date of notes receivable aggregating $48,484 plus
accrued interest was extended from August 1995 to August 1998.
RECAPITALIZATION
During 1994, the Company amended its Articles of Incorporation to change its
common stock from no par to a $.001 par value.
In May 1990, the Company effected a 150 to 1 reverse stock split by approval
of the Company's Board of Directors. This reverse stock split was approved by a
majority vote of the Company's stockholders in 1994. All share and per share
amounts included herein reflect the reverse split.
6. SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company operates primarily in the U.S. and European markets in a single
segment that is the design, development, manufacture and sale of
computer-related software products. Its customers generally consist of large
software distributors as well as PC end-users. Amounts receivable from customers
are generally not secured.
In 1994, one customer who is a distributor accounted for approximately 59%
of product sales (approximately 56.5% of total revenue). Two customers accounted
for approximately 46% and 12% of product sales during the six-month period ended
June 30, 1994 (approximately 44% and 11% of total revenue, respectively). In
addition, two customers accounted for approximately 64% and 10% of product sales
during the six month period ended June 30, 1995 (approximately 62% and 10% of
total revenue, respectively). International product sales were approximately
$777,600, $493,000, $670,000, $239,000 and $409,000 during the years ended
December 31, 1992, 1993, 1994 and the six-month periods ended June 30, 1994 and
1995, respectively, and accounted for approximately 23.2%, 10.5%, 9.7%, 9.7% and
6.8% of total product sales respectively.
In 1993, three major customers accounted for approximately 20.8%, 20.7% and
10.5% of total product sales (approximately 19.8%, 19.7% and 9.9% of total
revenues).
In 1992, four major customers accounted for approximately 20.7%, 15.4%,
11.6% and 10.7% of the Company's product sales (approximately 19.9%, 14.8%,
11.1% and 10.2% of total revenues).
F-14
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
7. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS 109, Accounting for
Income Taxes. This statement requires the recognition of deferred tax assets and
liabilities for the future consequences of events that have been recognized in
the Company's financial statements or tax returns. The measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and the tax bases
of the Company's assets and liabilities result in a deferred tax asset, SFAS 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------------------- ----------------------
1992 1993 1994 1994 1995
--------- ---------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................................... $ $ 1,000 $ 129,000 $ 2,600 $ 403,300
State............................................. 800 11,000 171,600 10,500 125,000
--------- ---------- ------------ --------- -----------
800 12,000 300,600 13,100 528,300
Deferred:
Federal........................................... (49,000) (113,700)
State............................................. 6,200 17,000 (87,400)
--------- ---------- ------------ --------- -----------
6,200 (32,000) (201,100)
--------- ---------- ------------ --------- -----------
Total provision (benefit)........................... $ 7,000 $ (20,000) $ 99,500 $ 13,100 $ 528,300
--------- ---------- ------------ --------- -----------
--------- ---------- ------------ --------- -----------
</TABLE>
A reconciliation of the provision (benefit) for income taxes compared to the
U.S. statutory rate (35% in 1994 and 1995, 34% in 1992 and 1993) for the years
ended December 31, 1992, 1993 and 1994, and for the six months ended June 30,
1994 and 1995, is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------- -----------------------
1992 1993 1994 1994 1995
--------- ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income taxes at statutory rates................. $ 16,300 $ 97,800 $ 314,900 $ 40,700 $ 486,200
State taxes, net of federal benefit............. 2,900 18,500 55,700 7,300 84,000
Deductible temporary differences for which no
benefit was previously recognized.............. 2,600 (68,600) (8,900)
Utilization of net operating loss carryovers.... (16,000)
Change in valuation allowance................... (131,800) (196,100)
Other........................................... 1,200 (4,500) (6,400) (26,000) (41,900)
--------- ------------ ------------ ---------- -----------
Provision (benefit) for income taxes............ $ 7,000 $ (20,000) $ 99,500 $ 13,100 $ 528,300
--------- ------------ ------------ ---------- -----------
--------- ------------ ------------ ---------- -----------
</TABLE>
F-15
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
7. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994
------------ ------------
<S> <C> <C>
Research and development.......................................... $ (174,600) $ (102,100)
Credit carryforwards.............................................. 15,400
Depreciation...................................................... 6,300
------------ ------------
Net non-current deferred tax liabilities........................ (174,600) (80,400)
Accrued vacation.................................................. 7,800 21,200
Inventory and bad debt reserves................................... 79,700 409,600
State taxes....................................................... 3,800 33,900
Depreciation...................................................... 5,300
Loss carryforwards................................................ 395,300
Credit carryforwards.............................................. 62,000
------------ ------------
Deferred tax assets............................................. 553,900 464,700
Deferred tax valuation allowance................................ (362,000) (165,900)
------------ ------------
191,900 298,800
------------ ------------
Net deferred tax asset.......................................... $ 17,300 $ 218,400
------------ ------------
------------ ------------
</TABLE>
No material changes in the deferred tax balance occurred during the six
months ended June 30, 1994 and June 30, 1995.
The net change in the valuation allowance for the deferred tax asset was a
decrease of $131,800 and $196,100 for the years ended December 31, 1993 and
1994, respectively, related to benefits arising primarily from the utilization
of net operating loss carryforwards. At December 31, 1994, the Company had
general business tax credit carryforwards for federal purposes of approximately
$15,400, of which $11,400 expire in 2000 and $4,000 expire in 2004.
In the six months ended June 30, 1995 the Company decreased its tax
liability and increased additional paid-in capital by $84,231 as a result of tax
benefits resulting from certain non-qualified stock option and warrant
exercises.
8. STATEMENTS OF CASH FLOWS
Supplemental information concerning significant non-cash investing and
financing activities for the years ended December 31, 1992, 1993 and 1994, and
for the six months ended June 30, 1995, are presented below.
In June 1993, Pelican exercised options to purchase 12,500 shares of the
Company's common stock at $.16 per share. The purchase price of these shares was
offset against amounts owed to Pelican by the Company.
In 1993, the Company acquired property for approximately $24,000 in exchange
for a note payable and a used automobile.
During 1993, the Company forgave a note receivable from sale of common stock
and related interest receivable aggregating $3,320 due from an officer of the
Company in lieu of cash compensation.
F-16
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
8. STATEMENTS OF CASH FLOWS (CONTINUED)
In 1994, 1993, and in the six months ended June 30, 1995, the Company
forgave notes receivable from sale of common stock and related interest
receivable aggregating $4,000, $5,222, and $3,377, respectively, due from a
consultant to the Company in lieu of fees.
In 1994, the Company issued 2,000 shares of the Company's common stock to an
officer of the Company in lieu of cash compensation of $1,000.
In 1994, two Company officers who held approximately $22,550 of the
Company's subordinated debt received a total of 15,930 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.
9. TRANSACTIONS WITH RELATED PARTIES
The Company has agreements with Pelican for the development and marketing of
a PC certification software product. These agreements provide for royalty
payments by the Company to Pelican based on actual product sales. The net amount
due to Pelican under these agreements at December 31, 1993, December 31, 1994,
and June 30, 1995, after offsetting certain advances to Pelican by TouchStone,
was $1,499, $2,597 and none, respectively.
Beginning in 1993 the Company incurred royalties payable to a software
programming company whose majority shareholder is a TouchStone officer
aggregating $6,000 and $67,000 during the years ended December 31, 1993 and 1994
respectively, and approximately $8,000 and $27,000 during the six months ended
June 30, 1994 and 1995 respectively.
The Company incurred interest expense in connection with notes payable to
related parties of $17,850, $17,676 and $8,578 for the years ended December 31,
1992, 1993 and 1994, respectively, and $5,091 and $1,741 for the six months
ended June 30, 1994 and 1995, respectively.
The Company recorded interest income in connection with notes receivable
from related parties of $16,109, $4,087 and $1,890 for the years ended December
31, 1992, 1993 and 1994, respectively, and none for the six months ended June
30, 1994 and 1995.
In April 1995, the Company made a $23,000 loan to a member of the Board of
Directors. This loan bears interest at 8% per annum, and is repayable by
December 31, 1995.
10. SUBSEQUENT EVENTS (UNAUDITED)
In July 1995, the Company granted non-qualified options for 40,000 shares
under the 1988 Non-Qualified Stock Option Plan (39,000 shares) and the 1991
Incentive Stock Option and Non-Qualified Stock Option Plans (1,000 shares), to a
public relations firm with an exercise price of $5.00
In July 1995, TouchStone Europe Ltd., a wholly owned subsidiary of the
Company, commenced operations in the United Kingdom. TouchStone Europe Ltd. was
formed to market and sell the Company's products in Europe and to provide
additional customer support.
In July 1995, options to purchase 60,000 shares were exercised and warrants
to purchase 50,000 shares were canceled.
F-17
<PAGE>
[ COLOR PHOTOGRAPHS
OF A SAMPLE
ADVERTISEMENT FOR
WIN'95 ADVISOR ]
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES
OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 10
Price Range of Common Stock.................... 11
Dividend Policy................................ 11
Capitalization................................. 12
Selected Financial Data........................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Business....................................... 21
Management..................................... 28
Principal and Selling Shareholders............. 31
Description of Securities...................... 34
Shares Eligible for Future Sale................ 35
Underwriting................................... 36
Legal Matters.................................. 37
Experts........................................ 37
Additional Information......................... 37
Index to Financial Statements.................. F-1
</TABLE>
TOUCHSTONE
SOFTWARE CORPORATION
[LOGO]
2,000,000 SHARES
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
CRUTTENDEN ROTH
INCORPORATED
PUNK, ZIEGEL & KNOELL
, 1995
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws include provisions to permit the Registrant to
indemnify its directors and officers to the fullest extent permitted by Section
317 of the Corporations Code. Pursuant to Section 317 of the Corporations Code,
a corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in such positions so long as they acted in good
faith and in a manner they reasonably believed to be in, or not opposed to, the
best interests of a corporation, and with respect to any criminal action, they
had no reasonable cause to believe their conduct was unlawful. The Registrant
believes that these provisions are necessary to attract and retain qualified
persons as directors and officers. The provisions do not eliminate liability for
breach of the director's duty of loyalty to the Registrant or its shareholders,
for acts or omissions not in good faith or involving intentional misconduct or
knowing violations of the law, for any transaction from which the director
derived an improper personal benefit or for any willful or negligent payment of
any unlawful dividend.
The Underwriting Agreement to be filed as Exhibit 1.1 to this Registrant
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee................................................. $8,811.03
NASD filing fee.................................................. $2,703.12
Blue sky qualification fees and expenses.........................
Printing and engraving expenses..................................
Legal fees and expenses..........................................
Accounting fees and expenses.....................................
Transfer agent and registrar fees................................
Miscellaneous....................................................
---------
Total........................................................
---------
---------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since July 12, 1992, the Registrant has sold and issued the following
unregistered securities:
<TABLE>
<CAPTION>
AMOUNT OF CASH PRICE
DATE TITLE SECURITIES UNDERWRITER BUYER ($/PER SHARE)
---------- ------------------ ----------- --------------- ----------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
6/7/93 Common Stock 12,500 None Ernest W. Baumgardner 0.16
6/8/94 Common Stock 5,000 None Bill Coffin 0.14
6/8/94 Common Stock 11,000 None Dennis Marquardt 0.14
6/8/94 Common Stock 11,120 None Larry Dingus 0.22
6/8/94 Common Stock 11,000 None Ray Norberte 0.14
6/8/94 Common Stock 4,810 None Ron Maas 0.22
8/15/94 Common Stock 20,000 None C. Shannon Jenkins 0.22
8/15/94 Common Stock 1,000 None Carmela Santos 0.22
8/15/94 Common Stock 10,000 None Cedric Adams 0.22
8/15/94 Common Stock 20,000 None Don Watters 0.22
8/15/94 Common Stock 20,000 None Ernest W. Baumgardner 0.22
8/15/94 Common Stock 2,000 None Hammud Saway 0.22
8/15/94 Common Stock 2,300 None Jan Penny 0.22
8/15/94 Common Stock 1,000 None JC Negri 0.22
8/15/94 Common Stock 20,000 None Kenneth C. Welch III 0.22
8/15/94 Common Stock 20,000 None Larry W. Dingus 0.22
8/15/94 Common Stock 13,600 None Leigh Ann Panaro 0.22
8/15/94 Common Stock 15,000 None Mike Greco 0.22
8/15/94 Common Stock 5,000 None Norman Oldfield 0.30
8/15/94 Common Stock 2,000 None Phyliss Andrews 0.22
8/15/94 Common Stock 20,000 None Ron Maas 0.22
8/15/94 Common Stock 2,000 None Scott Mackay 0.22
8/15/94 Common Stock 2,000 None Shan Dabiri 0.22
8/15/94 Common Stock 20,000 None Sigmund A. Fidyke III 0.22
8/15/94 Common Stock 10,000 None Tam Pham 0.22
8/16/94 Common Stock 286,000 None C. Shannon Jenkins 0.16(avg.)
8/16/94 Common Stock 70,000 None Don Watters 0.19
8/16/94 Common Stock 113,334 None Ernest W. Baumgardner 0.21(avg.)
8/16/94 Common Stock 4,167 None Ernest W. Baumgardner 0.16
8/16/94 Common Stock 10,000 None Kenneth C. Welch III 0.24
8/16/94 Common Stock 291,000 None Larry Dingus 0.16(avg.)
8/16/94 Common Stock 169,333 None Ron Maas 0.18(avg.)
8/16/94 Common Stock 75,000 None Sigmund A. Fidyke III 0.24
10/15/94 Common Stock 20,000 None Bill Coffin 0.22
10/15/94 Common Stock 20,000 None Mike Schmel 0.22
10/15/94 Common Stock 2,500 None Norman Oldfield 0.20
10/15/94 Common Stock 20,000 None Sal Viveros 0.22
12/01/94 Common Stock 8,333 None Bruce Billington 0.30
12/27/94 Common Stock 2,000 None Don Watters 0.50
12/30/94 Common Stock 11,000 None Dennis Marquardt 0.14
5/03/95 Common Stock 20,000 None Bill Coffin 0.22
5/15/94 Common Stock 6,833 None Ernest W. Baumgardner 0.26
5/15/95 Common Stock 20,000 None Ernest W. Baumgardner 0.22
5/15/95 Common Stock 10,000 None Ernest W. Baumgardner 0.50
5/15/95 Common Stock 6,666 None Lowell Dingus 0.30
5/30/95 Common Stock 2,500 None Mike Miller 0.19
------------------ ----------- --------------- ----------------------------------- ---
1,429,996
-----------
-----------
</TABLE>
II-2
<PAGE>
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2).
Appropriate legends are affixed to the stock certificates issued in the
aforementioned transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
information about the Registrant or had access, through employment or other
relationships, to such information.
ITEM 27. EXHIBITS.
The following is a list of exhibits filed as a part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- ----------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement by and among the Registrant, certain Selling Shareholders of
the Registrant and Cruttenden Roth Incorporated.
3.1 Articles of Incorporation of Registrant. (1)
3.2 Amended Articles of Incorporation of Registrant. (4)
3.3 By-Laws of Registrant. (1)
4.1 Form of Representative's Warrant Agreement by and between the Registrant and Cruttenden Roth
Incorporated.
5.1 Opinion of Phillips & Haddan. (6)
10.1 Incentive Stock Option Plan. (1)
10.1 A Amended Incentive Stock Option Plan. (2)
10.1 B Non-Qualified Stock Option Plan. (2)
10.1 C 1991 Stock Option Plan. (3)
10.1 D Employee Stock Purchase Agreement. (4)
10.1 E 1994 Non-Qualified Stock Option Plan. (6)
10.2 Loan Agreement dated October 19, 1992. (3)
10.3 Eight loan agreement amendments for extension of private loans to the Company. (4)
10.4 Loan Agreement dated April 30, 1994. (4)
10.5 Loan Agreement dated July 25, 1994. (4)
10.6 Office Lease dated February 7, 1995. (5)
10.7 Loan Agreement dated April 27, 1995. (5)
21.0 Subsidiaries of the Registrant. (5)
23.1 Consent of Phillips & Haddan (included in the opinion to be filed as Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (5)
<FN>
------------------------
(1) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Registration Statement on Form S-18, as amended, as filed with the
Securities and Exchange Commission, Registration Number 2-9450-LA.
(2) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission, Registration Number 33-25989.
(3) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1992, as filed
with the Securities and Exchange Commission.
(4) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Annual Report on 10-KSB for the year ended December 31, 1993, as filed with
the Securities and Exchange Commission.
(5) Previously filed.
(6) To be filed by amendment.
</TABLE>
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(3) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable ground to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in the
City Huntington Beach, State of California, on the 14th day of August, 1995.
TOUCHSTONE SOFTWARE CORPORATION
By: /s/ C. SHANNON JENKINS
-----------------------------------
C. Shannon Jenkins
President and Chief Executive
Officer
(PRINCIPAL EXECUTIVE OFFICER)
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement was signed below by the following
persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE
------------------------------- -------------------------------- -------------
President, Chief Executive
/s/ C. SHANNON JENKINS Officer August 14,
------------------------------- and Director 1995
C. Shannon Jenkins (PRINCIPAL EXECUTIVE OFFICER)
Executive Vice President,
* Chief Financial Officer,
------------------------------- General Manager and Director August 14,
Ronald R. Maas (PRINCIPAL FINANCIAL AND 1995
ACCOUNTING OFFICER)
*
------------------------------- Chairman of the August 14,
Larry W. Dingus Board of Directors 1995
------------------------------- Director , 1995
Kenneth C. Welch III
------------------------------- Director , 1995
Richard W. Brail
*By /s/ C. SHANNON
JENKINS
-------------------------------
C. Shannon Jenkins
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NUMBER
--------- --------------------------------------------------------------------------------- -----------------
<S> <C> <C>
1.1 Form of Underwriting Agreement by and among the Registrant, certain Selling
Shareholders of the Registrant and Cruttenden Roth Incorporated.
3.1 Articles of Incorporation of Registrant. (1)
3.2 Amended Articles of Incorporation of Registrant. (4)
3.3 By-Laws of Registrant. (1)
4.1 Form of Representative's Warrant Agreement by and between the Registrant and
Cruttenden Roth Incorporated.
5.1 Opinion of Phillips & Haddan. (6)
10.1 Incentive Stock Option Plan. (1)
10.1 A Amended Incentive Stock Option Plan. (2)
10.1 B Non-Qualified Stock Option Plan. (2)
10.1 C 1991 Stock Option Plan. (3)
10.1 D Employee Stock Purchase Agreement. (4)
10.1 E 1994 Non-Qualified Stock Option Plan. (6)
10.2 Loan Agreement dated October 19, 1992. (3)
10.3 Eight loan agreement amendments for extension of private loans to the Company.
(4)
10.4 Loan Agreement dated April 30, 1994. (4)
10.5 Loan Agreement dated July 25, 1994. (4)
10.6 Office Lease dated February 7, 1995. (5)
10.7 Loan Agreement dated April 27, 1995. (5)
21.0 Subsidiaries of the Registrant. (5)
23.1 Consent of Phillips & Haddan (included in the opinion to be filed as Exhibit
5.1).
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (5)
<FN>
------------------------
(1) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Registration Statement on Form S-18, as amended, as filed with the
Securities and Exchange Commission, Registration Number 2-9450-LA.
(2) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission, Registration Number 33-25989.
(3) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Annual Report on Form 10-KSB for the year ended December 31, 1992, as filed
with the Securities and Exchange Commission.
(4) Filed as an exhibit to, and incorporated by reference to, the Registrant's
Annual Report on 10-KSB for the year ended December 31, 1993, as filed with
the Securities and Exchange Commission.
(5) Previously filed.
(6) To be filed by amendment.
</TABLE>
<PAGE>
EXHIBIT 1.1
UNDERWRITING AGREEMENT
PUBLIC OFFERING OF
1,800,000 SHARES OF COMMON STOCK
TOUCHSTONE SOFTWARE CORPORATION
_____________, 1995
CRUTTENDEN ROTH INCORPORATED
As Representative of the
several Underwriters
named in Schedule I hereto
18301 Von Karman, Suite 100
Irvine, California 92715
Ladies and Gentlemen:
TouchStone Software Corporation, a corporation organized under the laws
of the State of California (the "Company"), proposes to issue and sell to the
several Underwriters named in Schedule I hereto (collectively, the
"Underwriters," which term shall also include any underwriter substituted as
hereinafter provided in Section 7) 1,800,000 shares (the "Firm Shares") of
Common Stock, $0.001 par value (the "Common Stock"), of the Company, of which
1,000,000 shares are to be issued and sold by the Company (the "Company
Shares") and 800,000 shares are to be sold by the Selling Shareholders (the
"Firm Shareholder Shares"), each Selling Shareholder selling the amount set
forth opposite such Selling Shareholder's name on Schedule II hereto, and, in
addition to the Firm Shares, for the sole purpose of covering over-allotments
in connection with the sale of the Firm Shares, the Selling Shareholders
named in Schedule III hereto propose to grant to the Underwriters an option
to purchase up to an additional 270,000 shares (the "Option Shares" and,
together with the Firm Shareholder Shares, the "Shareholder Shares") of such
Common Stock as set forth in Schedule III hereto. The Company also proposes
to sell to you (the "Representative"), individually and not in your capacity
as Representative of the several underwriters, five-year warrants (the
"Representatives' Warrants") to purchase up to 100,000 shares of Common Stock
of the Company (the "Representative's Warrant Stock"), which sale will be
consummated in accordance with the terms and conditions of the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
filed as an exhibit to the Registration Statement described below. The Firm
Shares and any Option Shares purchased pursuant to this Agreement are
hereinafter called the "Shares."
-------------------
* Plus an option to purchase up to an aggregate of 270,000 Option Shares
from the Selling Shareholders to cover overallotments, if any.
<PAGE>
This is to confirm the agreement concerning the sale and the purchase of
the Shares from the Company and the Selling Shareholders by the Underwriters.
The Company and the Selling Shareholders understand that the Underwriters
propose to make a public offering of the Shares as soon as you deem advisable
after the Registration Statement (as defined below) becomes effective.
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents and warrants to, and agrees with, each Underwriter that:
(a) A registration statement on Form SB-2 (File No. 33-_________)
relating to the Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Securities
Act"), and the Rules and Regulations (as defined below) of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. Copies of such registration statement and any amendments, and all
forms of the related prospectuses contained therein, previously filed by the
Company with the Commission have been delivered to you and the Company has
consented to the Underwriter's use of such copies for the purposes permitted
by the Securities Act. Such registration statement, including the
prospectus, Part II and all exhibits thereto, as amended at the time when it
shall become effective, is herein referred to as the "Registration
Statement," and the prospectus included as part of the Registration Statement
on file with the Commission that discloses all the information that was
omitted from the prospectus on the effective date pursuant to Rule 430A of
the Rules and Regulations with any changes contained in any prospectus filed
with the Commission by the Company with your consent after the effective date
of the Registration Statement, is herein referred to as the "Final
Prospectus." Such amendments to such Registration Statement as may have been
required prior to the date hereof have been filed with the Commission; and
the Company will file such additional amendments to such Registration
Statement and such amended prospectuses as may hereafter be required. If the
Registration Statement has been declared effective under the Securities Act
by the Commission, the Company has prepared and will promptly file with the
Commission the information omitted from the Registration Statement pursuant
to Rule 430A(a) of the Rules and Regulations as part of an amendment or
supplement to the prospectus pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment
to the Registration Statement (including an amended prospectus); otherwise
the Company has prepared and will promptly file an amendment to the
Registration Statement (including an amended prospectus). The prospectus
included as part of the Registration Statement on the date when the
Registration Statement became effective is referred to herein as the
"Effective Prospectus"; any prospectus included in the Registration Statement
of the Company and in any amendments thereto prior to the effective date of
the Registration Statement is referred to herein as a "Pre-Effective
Prospectus." For purposes of this Agreement, "Rules and Regulations" mean
the rules and regulations adopted by the Commission under either the
Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable, and "affiliate" shall have the definition
specified in Rule 405 of the Rules and Regulations.
(b) No stop order or other order preventing or suspending the use of
any Pre-Effective Prospectus has been issued by the Commission nor any "Blue
Sky" or securities authority of any
2
<PAGE>
jurisdiction and each Pre-Effective Prospectus, at the time of filing
thereof, did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; except that the foregoing shall not apply to statements
in or omissions from any Pre-Effective Prospectus in reliance upon, and in
conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation thereof.
(c) As of the Closing Date (as defined herein), the Registration
Statement will have been declared effective under the Securities Act, and no
post-effective amendment to the Registration Statement will have been filed
as of the Closing Date or Option Closing Date (as defined herein), as the
case may be, without the Representative's approval as provided in Section
4(a) hereof. When the Registration Statement becomes effective and at all
times subsequent thereto, the Registration Statement, any post-effective
amendment thereto and the Effective Prospectus and the Final Prospectus as
amended or supplemented shall comply in all material respects with the
requirements of the Securities Act and the Rules and Regulations. No such
document shall contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that the foregoing shall not apply to statements in,
or omissions from, any such document, in reliance upon, and in conformity
with, written information furnished to the Company by you, or by any
Underwriter through you, specifically for use in the preparation thereof.
There is no contract or document required to be described in the Registration
Statement or Effective Prospectus or Final Prospectus or to be filed as an
exhibit to the Registration Statement which is not in all material respects
accurately described in the Effective Prospectus or Final Prospectus and
filed as an exhibit to the Registration Statement or Final Prospectus, or
both, as the case may be. As of the Closing Date or Option Closing Date, as
the case may be, no stop order or other order suspending the effectiveness of
the Registration Statement or preventing or suspending the use of the
Effective Prospectus or the Final Prospectus or any amendment or supplement
thereto, has been issued by the Commission nor any "Blue Sky" or securities
authority of any jurisdiction.
(d) Deloitte & Touche LLP, whose report appears in the
Registration Statement, the Pre-Effective Prospectus, the Effective
Prospectus and the Final Prospectus, are independent auditors as required by
the Securities Act and the Rules and Regulations. The financial statements
(including the related schedules and notes) included in the Registration
Statement, any Pre-Effective Prospectus, the Effective Prospectus and/or the
Final Prospectus, together with the unaudited financial information of the
Company forming part of the Registration Statement, each Pre-Effective
Prospectus, the Effective Prospectus and/or the Final Prospectus present
fairly the financial condition, the results of the operations and changes in
cash flows and equity of the entities purported to be shown thereby at the
dates and for the periods indicated and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated. The selected and summary financial data
included in the Registration Statement, the Effective Prospectus, and the
Final Prospectus present fairly the information shown therein and have been
compiled on a basis substantially consistent with the
3
<PAGE>
financial statements presented in the Registration Statement, the Effective
Prospectus, and the Final Prospectus.
(e) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of California,
with full power and authority (corporate and other) to own, lease and operate
its properties and conduct its business as described in the Registration
Statement, each Pre-Effective Prospectus, the Effective Prospectus and Final
Prospectus, and is duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which the character of the
business conducted by it or the location of the properties owned or leased by
it makes such qualification necessary; and the Company holds all licenses,
certificates, permits, consents, orders, approvals and other authorizations
from governmental authorities necessary for the conduct of its business and
to own or lease, as the case may be, and to operate its properties as
described in the Registration Statement, each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus. The expiration or revocation of
any such licenses, certificates, permits, consents, orders, approvals or
other governmental authorizations would not materially affect the operations
of the Company. None of the activities or businesses of the Company is in
violation of, or might cause the Company to violate, any law, rule,
regulation or order of the United States, any state, county, city or
locality, or of any agency or body of the United States or of any state,
county, city or locality of any foreign jurisdiction which violation might
have a material adverse effect on the financial condition, results of
operations, business or prospects of the Company.
(f) The Actual and As Adjusted capitalization of the Company as of
____________, is as set forth under the caption "Capitalization" in the
Registration Statement, each Pre-Effective Prospectus, the Effective
Prospectus and Final Prospectus, and the Common Stock conforms to the
description thereof contained under the caption "Description of Capital
Stock" in the Registration Statement, each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus; the outstanding shares of Common
Stock (including the Shareholder Shares) have been and are, and the Shares to
be sold by the Company, upon issuance and delivery and payment therefor in
the manner herein described, will be, duly authorized, validly issued, fully
paid and nonassessable and are not subject to any preemptive or similar
rights. Except as described in the Registration Statement, each
Pre-Effective Prospectus, the Effective Prospectus and Final Prospectus,
there are no preemptive rights or other rights to subscribe for or to
purchase, or any restriction upon the voting or transfer of, any shares of
Common Stock pursuant to the Company's Articles of Incorporation, by-laws or
other governing documents or any agreement, contract or other instrument to
which the Company is a party or by which it may be bound. Neither the filing
of the Registration Statement nor the offering or sale of the Shares or
Representative's Warrant Stock as contemplated by this Agreement and the
Representative's Warrant Agreement, respectively, gives rise to any rights,
other than those which have been waived or satisfied, for or relating to the
registration of any shares of Common Stock; and any such waivers, to the best
of the Company's knowledge, were duly and validly given. The Company has no
"subsidiary" as defined in Rule 405 of the Rules and Regulations, other than
TouchStone Europe Ltd..
4
<PAGE>
(g) Except as described in or contemplated by the Registration
Statement, each Pre-Effective Prospectus, the Effective Prospectus and Final
Prospectus, (i) there has not been any material adverse change in, or any
adverse development which materially affects, the business, properties,
financial condition, results of operations or prospects of the Company,
whether or not arising in the ordinary course of business, from the date as
of which information is given; (ii) the Company has not, directly or
indirectly, incurred any liabilities or obligations, direct or contingent,
not in the ordinary course of business, or which is material in amount
whether or not in the ordinary course of business, or entered into any
transactions not in the ordinary course of business, or which is material to
the business of the Company whether or not in the ordinary course of
business; (iii) to the Company's knowledge, the agreements to which the
Company is a party described in the Registration Statement, each
Pre-Effective Prospectus, the Effective Prospectus and Final Prospectus, are
valid and enforceable by the Company and the other party or parties thereto
are not in material breach or default under any such agreement; (iv) there
has not been any change in the capital stock of, or any incurrence of
long-term debt by, the Company, or any issuance or grant of options, warrants
or rights to purchase the capital stock of the Company, or any security
convertible into, exercisable for, or exchangeable for capital stock of the
Company, or any declaration or payment of any dividend or other distribution
on any class of the capital stock of the Company from the date as of which
information is given in the Registration Statement, each Pre-Effective
Prospectus, the Effective Prospectus and Final Prospectus; (v) there is
outstanding no security or other instrument which by its terms is convertible
into or exchangeable for capital stock of the Company; and (vi) there is no
commitment, plan or arrangement to change or alter the rights, preferences or
privileges of any outstanding class or series of the capital stock of the
Company.
(h) The Company is not, nor with the giving of notice or lapse of
time or both would be, in violation of or in default under, nor will the
execution or delivery of this Agreement or the Representative's Warrant
Agreement or consummation of the transactions contemplated hereby or thereby
result in a violation of, or constitute a default under, the Articles of
Incorporation, by-laws or other governing documents of the Company, or any
contract, indenture, mortgage, deed of trust, loan or credit agreement, bond,
debenture, note, lease or other agreement or instrument, to which the Company
is a party or by which it is bound, or to which any of its properties is
subject, nor will the performance by the Company of its obligations hereunder
or under the Representative's Warrant Agreement violate any law, rule,
administrative regulation, judgment, order, writ or decree of any court, or
any governmental agency or body having jurisdiction over the Company or any
of its properties, or result in the creation or imposition of any lien,
charge, claim or encumbrance upon any property or asset of the Company.
Except for permits and similar authorizations required under the Securities
Act and the securities or "Blue Sky" laws of certain jurisdictions and for
such permits and authorizations which have been obtained, no consent,
approval, authorization or order of any court, governmental agency or body,
financial institution or other person or entity is required in connection
with the consummation of the transactions contemplated by this Agreement,
including, without limitation, the valid sale and delivery of the Shares or
the Representative's Warrant Agreement.
(i) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement, and the
Representative's Warrant
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Agreement and this Agreement and the Representative's Warrant Agreement have
been duly authorized, executed and delivered by the Company and constitute
legal, valid and binding agreements of the Company and are enforceable
against the Company in accordance with their respective terms except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
other similar laws affecting creditors' rights generally.
(j) The Company has good and marketable title in fee simple to all
items of real property and good and marketable title to all personal property
owned by it, in each case free and clear of all liens, charges, claims,
encumbrances and defects except such as are described or referred to in the
Registration Statement, each Pre-Effective Prospectus, the Effective
Prospectus and Final Prospectus or such as do not materially affect the value
of such property and do not interfere with the use made or proposed to be
made of such property by the Company, and any real property and buildings
held under lease by the Company are held by it under valid, existing and
enforceable leases with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company and except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally.
(k) There is no litigation or governmental proceeding to which the
Company is a party or to which any of its property is subject or which is
pending or, to the Company's knowledge, threatened against or affecting the
Company which might result in any material adverse change in the financial
condition, results of operations, business or prospects of the Company, which
is required to be disclosed in the Registration Statement, each Pre-Effective
Prospectus, the Effective Prospectus and Final Prospectus or which could
materially and adversely affect the consummation of the transactions
contemplated by this Agreement, nor are there any actions, suits or
proceedings related to environmental matters or related to discrimination on
the basis of age, sex, religion, race, or physical or mental disability, and
no labor disturbance by the employees of the Company exists or is imminent
which might be expected to affect adversely the financial condition, results
of operations, business or prospects of the Company or which is required to
be disclosed in the Registration Statement, each Pre-Effective Prospectus,
the Effective Prospectus and Final Prospectus.
(l) The Company is not in violation of any law, ordinance,
governmental rule or regulation or court decree to which it may be subject
which violation might have a material adverse effect on the financial
condition, results of operations, business or prospects of the Company.
(m) The Company complies in all material respects with all
Environmental Laws (as defined below), except to the extent that failure to
comply with such Environmental Laws would not have a material adverse effect
on the financial condition, results of operation, business or prospects of
the Company. The Company (i) is not the subject of any pending or, to the
knowledge of the Company, threatened federal, state or local investigation
evaluating whether any remedial action by the Company is needed to respond to
a release of any Hazardous Materials (as defined below) into the environment,
resulting from the Company's business operations or ownership or possession
of any of their properties or assets, or (ii) is not in contravention of any
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Environmental Law that could reasonably be expected to have a material
adverse effect on the financial condition, results of operation, business or
prospects of the Company. The Company has not received any notice or claim,
nor are there pending or, to the knowledge of the Company, threatened
lawsuits against them, with respect to violations of an Environmental Law or
in connection with any release of Hazardous Materials into the environment
that, in the aggregate, if the subject of any unfavorable decision, ruling or
finding, could reasonably be expected to have a material adverse effect on
the financial condition, results of operation, business or prospects of the
Company. As used herein, "Environmental Laws" means any federal, state, city
or local law or regulation applicable to the Company's business operations or
ownership or possession of any of their properties or assets relating to
environmental matters, and "Hazardous Materials" means those substances that
are regulated by or form the basis of liability under any Environmental Laws.
(n) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(o) The Company has timely (giving effect to permitted extensions)
filed and properly prepared all necessary federal, state, local and foreign
income, franchise and any other required tax returns and has paid all taxes
shown as due thereon, and the Company has no knowledge of any tax deficiency
which has been or might be asserted against the Company which might
materially and adversely affect the financial condition, results of
operations, business or prospects of the Company.
(p) Neither the Company nor any officers, directors, employees or
agents or any other persons associated with or acting on behalf of it has at
any time (i) made any contributions to any candidate for political office in
violation of law, or failed to disclose fully any contributions to any
candidate for political office in accordance with any applicable statute,
rule, regulation or ordinance requiring such disclosure, (ii) made any
payment to any local, state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or allowed by applicable law, (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977, as amended (iv) made
any payment outside the ordinary course of business to any purchasing or
selling agent or person charged with similar duties of any entity to which
the Company sells or from which the Company buys products for the purpose of
influencing such agent or person to buy products from or sell products to the
Company, (v) made any other bribe, rebate, payoff, influence payment,
kickback or other unlawful payment or (vi) engaged in any transaction,
maintained any bank account or used any corporate funds except for
transactions, bank accounts and funds which have been and are reflected in
the normally maintained books and records of the Company.
(q) Except for the several Underwriters and the Representative
there are no claims for services in the nature of, and no person has any
right to receive a finder's fee, brokerage fee or similar fee with respect
to, this offering for which the Company or any of the several Underwriters
may be responsible.
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(r) The Company has its properties adequately insured against loss
or damage by fire and maintains such other insurance as is prudent or
customarily maintained by companies in the same or similar business and in
the same or similar locality.
(s) The Company owns or possesses adequate rights to use all
material patents, patent rights, inventions, proprietary software (whether
represented by source code, object code or in any other manner), trademarks,
service marks, trade names and copyrights (collectively, the "Intangibles")
necessary for the conduct of its business as described in the Registration
Statement, each Pre-Effective Prospectus, the Effective Prospectus and Final
Prospectus and has taken all reasonable security measures to protect the
secrecy, confidentiality and value of its trade secrets and know-how which
are valid and protectible and are not part of the public knowledge or
literature. All of the Intangibles that the Company owns or has pending, or
under which it is licensed, are in good standing and uncontested. Any of the
Company's employees and any other person who, either alone or in concert with
others, developed, invented, discovered, derived, programmed or designed
these secrets, or who have knowledge of or access to information relating to
them, have been put on notice and have entered into agreements that these
secrets are proprietary to the Company and are not to be divulged or misused.
The Company has not received any notice of infringement of or conflict with,
and to the best of its knowledge, the Company is not infringing or in
conflict with, asserted rights of others with respect to any Intangibles
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could materially and adversely affect the financial
condition, results of operations, business or prospects of the Company. To
the knowledge of the Company, there is no infringement by others of
Intangibles of the Company.
(t) The Representative's Warrants have been duly and validly
authorized by the Company and upon delivery to you in accordance with this
Agreement and the Representative's Warrant Agreement will be duly issued and
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms except as enforceability may be
limited by bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights generally.
(u) The Representative's Warrant Stock has been duly authorized
and reserved for issuance upon the exercise of the Representative's Warrants
and when issued upon payment of the exercise price therefor will be validly
issued, fully paid and nonassessable shares of Common Stock of the Company.
(v) There are no outstanding loans or advances or guarantees of
indebtedness by the Company to or for the benefit of any affiliate of the
Company, any of the officers or directors of the Company, or any of the
members of the families of any of them, or any other business relationships
or related-party transactions of the nature described in Item 404 of
Regulation S-B involving the Company and any other persons referred to in
said Item 404, which are required by the Rules and Regulations to be
described in the Registration Statement, each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus except such that are so described.
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(w) The Company is eligible to use Form SB-2 for the registration
of the Shares.
(x) Application for quotation of the Common Stock on the National
Association of Securities Dealers Automated Quotations (herein called Nasdaq)
National Market has been approved, subject to notice of issuance.
(y) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary in order to permit preparation of
financial statements in accordance with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets
is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(z) The Company is not an "investment company" or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE SELLING
SHAREHOLDERS. Each Selling Shareholder, severally and not jointly,
represents and warrants to, and agrees with, each Underwriter that:
(a) At the Closing Date or Option Closing Date, as the case may
be, such Selling Shareholder will be able to convey good and marketable title
to the Shareholder Shares free and clear of any pledge, lien, security
interest, charge, encumbrance, equity and claim of any kind whatsoever, and,
upon delivery of the Shareholder Shares and payment of the purchase price
therefor as contemplated in this Agreement, each of the Underwriters will
receive good and marketable title to the Shareholder Shares, purchased by it
from such Selling Shareholder, free and clear of any pledge, lien, security
interest, charge, encumbrance, equity and claim of any kind whatsoever.
(b) Such Selling Shareholder, without having made any independent
investigation, (i) has no reason to believe that the representations and
warranties of the Company contained in Section 1 are not true and correct,
(ii) is familiar with the Registration Statement and (iii) has no knowledge
of any material fact, condition or information not disclosed in the
Prospectus or any supplement thereto which has adversely affected or may
adversely affect the business of the Company; and the sale of Shareholder
Shares by such Selling Shareholder pursuant hereto is not prompted by any
information concerning the Company which is not set forth in the Prospectus
or any supplement thereto.
(c) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action designed to stabilize or manipulate or
which has constituted, or which might reasonably be expected to cause or
result in, stabilization or manipulation of, under the Exchange
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<PAGE>
Act, the Rules or Regulations or otherwise, the price of any security of the
Company to facilitate the sale or resale of the Shares.
(d) Such Selling Shareholder has full right, power and authority
to enter into this Agreement, the Custody Agreement (as defined below) and
power-of-attorney (the "Power-of-Attorney") and to sell, transfer and deliver
the Shareholder Shares pursuant to this Agreement, and this Agreement and the
Power-of-Attorney have been duly authorized, executed and delivered by such
Selling Shareholder.
(e) Certificates in negotiable form for the Shareholder Shares to
be sold by such Selling Shareholder pursuant to the terms of this Agreement
have been placed in custody under a Custody Agreement duly authorized,
executed and delivered by such Selling Shareholder, in the form heretofore
furnished to you (the "Custody Agreement"), with the Company, as Custodian
(the "Custodian"); the Common Stock represented by the certificates so held
in custody for each Selling Shareholder are subject to the interests
hereunder of the Underwriters, the Company and the other Selling
Shareholders, the arrangements for custody and delivery of such certificates
made by such Selling Shareholder hereunder and under the Custody Agreement,
are not subject to termination by any acts of such Selling Shareholder, or by
operation of law, whether by the death or incapacity of such Selling
Shareholder or the occurrence of any other event; and if any such death,
incapacity or any other such event shall occur before the delivery of such
Common Stock hereunder, certificates for the Common Stock will be delivered
by the Custodian in accordance with the terms and conditions of this
Agreement and the Custody Agreement as if such death, incapacity or other
event had not occurred, regardless of whether or not the Custodian shall have
received notice of such death, incapacity or other event.
(f) There is no action, suit, investigation or proceeding before
or by any government, governmental instrumentality or court, domestic or
foreign, or otherwise now pending or, to the knowledge of such Selling
Shareholder, threatened to which such Selling Shareholder is or would be a
party or of which the property of such Selling Shareholder is or may be
subject, that (i) seeks to restrain, enjoin, prevent the consummation of or
otherwise challenge the sale of Shares by such Selling Shareholder or any of
the other transactions contemplated hereby, or (ii) questions the legality or
validity of any such transactions or seeks to recover damages or obtain other
relief in connection with any such transactions.
(g) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution and delivery by
such Selling Shareholder of the Custody Agreement or the Power-of-Attorney,
the execution and delivery by or on behalf of such Selling Shareholder of
this Agreement and the consummation by such Selling Shareholder of the
transactions contemplated herein, including the valid sale and delivery of
the Shareholder Shares, except such as may have been obtained under the
Securities Act and such as may be required under the "Blue Sky" laws of any
jurisdiction in connection with the purchase and distribution of the Common
Stock by the Underwriters and such other approvals as have been obtained.
(h) Neither the sale of the Shareholder Shares being sold by such
Selling Shareholder nor the consummation of any other of the transactions
herein contemplated by such
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<PAGE>
Selling Shareholder or the fulfillment of the terms hereof by such Selling
Shareholder will conflict with, result in a breach of, or constitute a
default under the terms of any contract, indenture, mortgage, deed of trust,
loan or credit agreement, bond, debenture, note, lease or other agreement or
instrument to which such Selling Shareholder is a party or bound, or any
decree, judgment, order or regulation applicable to such Selling Shareholder
or its properties of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Shareholder or its properties.
(i) In respect of any statements in or omissions from the
Registration Statement or the Prospectus or any supplement thereto made in
reliance upon and in conformity with information furnished in writing to the
Company by any Selling Shareholder specifically for use in connection with
the preparation thereof, such Selling Shareholder hereby makes the same
representations and warranties to each Underwriter as the Company makes to
such Underwriter under Subsection 1(c).
(j) No such Selling Shareholder nor any of his or her affiliates
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, or has any other association
with (within the meaning of Article I, Section 1(m) of the Bylaws of the
National Association of Securities Dealers, Inc. (the "NASD")), any member
firm of the NASD.
(k) Such Selling Shareholder has not relied upon any
representation by the Underwriters with respect to any tax consequences
(federal, state or local) of the transactions contemplated hereby, or
otherwise. Such Selling Shareholder acknowledges that any tax liability that
might arise with respect to the Shareholder Shares to be sold by such Selling
Shareholder shall be solely the responsibility of such Selling Shareholder.
3. PURCHASE, SALE AND DELIVERY OF SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
the Company agrees to sell the Company Shares to the several Underwriters and
each Selling Shareholder, severally and not jointly, agrees to sell to the
several Underwriters the number of Firm Shareholder Shares set forth opposite
such Selling Shareholder's name in Schedule II hereto, and each Underwriter
agrees, severally and not jointly, to purchase from the Company and each of
the Selling Shareholders, at a purchase price of $______ per share, the
respective number of Firm Shares set forth opposite their names on Schedule I
hereto (subject to adjustment as provided in Section 7 hereof).
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties and agreements set forth herein, the Selling
Shareholders hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to 270,000 Option Shares, at the same purchase
price per share as the Underwriters shall pay for the Firm Shares. Said
option may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 45th day after the date
of the Effective Prospectus upon written or
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telegraphic notice by the Underwriters to the Company setting forth the
number of Option Shares as to which the several Underwriters are exercising
the option and the settlement date, which shall not be earlier than the
Closing Date (as defined below). In the event of a partial exercise of the
over-allotment option, the Option Shares will be sold on a pro rata basis by
the Selling Shareholders as set forth opposite such Selling Shareholder's
name in Schedule III hereto. Delivery of certificates for the Option Shares
by the Selling Shareholders and payment therefor shall be made as provided in
Section 3(c) hereof. The number of Option Shares to be purchased by each
Underwriter shall be the same percentage of the total number of Option Shares
to be purchased by the several Underwriters as such Underwriter is purchasing
of the Firm Shares, subject in each case to such adjustments as the
Underwriters in their absolute discretion shall make to eliminate any
fractional shares.
(c) Delivery of definitive certificates for the Firm Shares and
the Option Shares (if the option provided for in Section 3(b) hereof shall
have been exercised on or before the second business day prior to the Closing
Date) shall be made against payment of the purchase price therefor by the
several Underwriters by checks drawn in next-day funds, payable to the order
of each of the Company and the Custodian for the Selling Shareholders (and
each of the Company and the Selling Shareholders agrees not to deposit or
permit the deposit of any such check in the bank on which drawn until the day
following the date of the delivery of any such check to the Company and the
Custodian for the Selling Shareholders) at the offices of Stradling, Yocca,
Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach,
California 92660 (or at such other place as may be agreed upon between you
and the Company) at 7:00 a.m. California time, on the third full business day
following the date of this Agreement or at such other time and date not later
than seven full business days thereafter as you and the Company may
determine, such time and date of payment and delivery being herein called the
"Closing Date." The certificates for the Shares so to be delivered will be
made available to you at such office or at such other location as you may
reasonably request for checking at least two full business days prior to the
Closing Date and will be in such names and denominations as you may request,
such request to be made at least three full business days prior to the
Closing Date.
It is understood that each Underwriter has authorized you,
individually and not as Representative of the several Underwriters, to accept
delivery and receipt of, for its account, the Shares that it has agreed to
purchase, and each Underwriter has further authorized you (but not obligated
you) to make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior
to the Closing Date or Option Closing Date, as the case may be, for the
Shares to be purchased by such Underwriter or Underwriters. Any such payment
by you shall not relieve any such Underwriter or Underwriters of any of its
or their obligations hereunder or under any other underwriting arrangement
relating to the Shares, including, without limitation, the Agreement Among
Underwriters.
If the option provided for in Section 3(b) hereof is exercised
after the second business day prior to the Closing Date, the Company and the
Selling Shareholders will deliver (at the expense of the Company) to the
Underwriters, at Irvine, California, on the date specified by the
Underwriters (which shall be no earlier than the second business day and no
later than the
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third business day after the exercise of said option), certificates for the
Option Shares in such names and denominations as the Underwriters shall have
requested against payment of the purchase price thereof by certified or
official bank check or checks drawn in next-day funds, payable to the order
of the Custodian for the Selling Shareholders. If settlement for the Option
Shares occurs after the Closing Date, the Selling Shareholders will deliver
to the Underwriters on the settlement date for the Option Shares (such date
and time of delivery and payment for the Option Shares being herein called
the "Option Closing Date" and, together with the Closing Date, the "Closing
Dates"), and the obligation of the Underwriters to purchase the Option Shares
shall be conditioned on receipt of, supplemental opinions, certificates and
letters confirming as of such date the opinions, certificates and letters
delivered on the Closing Date pursuant to Section 5 hereof.
Each Selling Shareholder will pay all applicable state transfer
taxes, if any, involved in the transfer to the several Underwriters of the
Common Stock to be purchased by them from such Selling Shareholder and the
respective Underwriters will pay any additional stock transfer taxes involved
in further transfers.
4. COVENANTS. The Company (and each Selling Shareholder, with respect
to the provisions of Section 5(k) hereof) covenants and agrees with each
Underwriter that:
(a) The Company shall use its best efforts to cause the
Registration Statement to become effective and, if the procedure in Rule 430A
of the Rules and Regulations is utilized, to comply with the provisions of,
and make all requisite filings with the Commission pursuant to, Rule 430A of
the Rules and Regulations and to notify you promptly (in writing, if
requested) of all such filings. The Company shall notify you promptly of the
receipt of any comments from the Commission and any request by the Commission
for any amendment of or supplement to the Registration Statement or the
Effective Prospectus or the Final Prospectus or for additional information;
the Company shall prepare and file with the Commission, promptly upon your
request, any amendments of or supplements to the Registration Statement or
the Effective Prospectus or the Final Prospectus which, in your opinion, may
be necessary or advisable in connection with the distribution of the Shares;
and the Company shall not file any amendment of or supplement to the
Registration Statement or the Effective Prospectus or the Final Prospectus
(including any post-effective amendment), which is not approved by you after
reasonable notice thereof, such approval not to be unreasonably withheld or
delayed. The Company shall advise you promptly of the issuance by the
Commission or any State or other regulatory body of any stop order or other
order suspending the effectiveness of the Registration Statement, suspending
or preventing the use of any Pre-Effective Prospectus, Effective Prospectus
or Final Prospectus or suspending the qualification of the Shares for
offering or sale in any jurisdiction, or of the institution of any
proceedings for any such purpose; and the Company shall use its best efforts
to prevent the issuance of any stop order or other such order and, should a
stop order or other such order be issued, to obtain as soon as possible the
lifting thereof.
(b) If the Company has elected to rely upon Rule 430A, it will
take such steps as it deems necessary to ascertain promptly whether the form
of prospectus transmitted for filing
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under Rule 424(b) was received for filing by the Commission and, in the event
that it was not, it will promptly file such prospectus.
(c) The Company shall furnish to the Underwriters, from time to
time and without charge, a reasonable number of copies of the Registration
Statement and of each amendment and supplement thereto, of which one of each
such Registration Statement and each amendment and supplement thereto for the
Representative and one for counsel to the Underwriters shall be originally
signed and shall include exhibits. During the period in which a prospectus
is required to be delivered under the Securities Act and the Rules and
Regulations, the Company shall furnish to each Underwriter, from time to time
and without charge, such number of copies of the Pre-Effective Prospectus,
Effective Prospectus and Final Prospectus as such Underwriter may reasonably
request and the Company hereby consents to the use of such copies for
purposes permitted by the Securities Act.
(d) Within the time during which a Final Prospectus relating to
the Shares is required to be delivered under the Securities Act, the Company
shall comply with all requirements imposed upon it by the Securities Act, as
now and hereafter amended, and by the Rules and Regulations, as from time to
time in force, so far as is necessary to permit the continuance of sales of
or dealings in the Shares as contemplated by the provisions hereof and the
Final Prospectus. If during such period any event occurs or condition exists
as a result of which in the opinion of counsel for the Underwriters or
counsel for the Company, the Final Prospectus as then amended or supplemented
would include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances then existing, not misleading, or if during such period it is
necessary in the opinion of counsel for the Underwriters or counsel for the
Company, to amend the Registration Statement or supplement the Final
Prospectus to comply with the Securities Act, the Company shall promptly
notify you and shall amend the Registration Statement or supplement the Final
Prospectus (at the expense of the Company), subject to Section 4(a), so as to
correct such statement or omission or effect such compliance, provided that
the Company shall determine the final terms of any such amendment or
supplement only after considering such changes in any such documents as the
Underwriters may reasonably request.
(e) The Company shall take or cause to be taken all necessary
actions and furnish to whomever you may direct such information as may be
required in qualifying the Shares for sale under the laws of such
jurisdictions which you shall designate and to continue such qualifications
in effect for as long as may be necessary for the distribution of the Shares;
except that in no event shall the Company be obligated in connection
therewith to qualify as a foreign corporation. The Company will file such
statements and reports as may be required by the laws of each jurisdiction in
which the Shares have been qualified as above provided.
(f) The Company shall make generally available to its security
holders, in the manner contemplated by Rule 158(b) under the Securities Act,
as soon as practicable but in any event not later than 45 days after the end
of its fiscal quarter in which the first anniversary date of the effective
date of the Registration Statement occurs, an earnings statement satisfying the
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requirements of Section 11(a) of the Securities Act covering a period of
at least twelve (12) consecutive months beginning after the effective date of
the Registration Statement.
(g) For a period of twelve (12) months following the Closing Date,
the Company will not, without your prior written consent, (i) purchase any
shares of Common Stock or equity securities of the Company or (ii) offer,
issue, sell, transfer or otherwise dispose of, for value or otherwise,
directly or indirectly, any shares of Common Stock or other equity securities
of the Company except (A) the Shares and the Representative's Warrants, (B)
pursuant to the exercise of options or warrants of the Company outstanding
immediately prior to the Closing Date, as described in the Effective
Prospectus and Final Prospectus, (C) up to a total of __________ shares of
Common Stock upon the exercise or grant of options currently outstanding or
authorized pursuant to the Company's existing employee benefit plans, as
described in the Effective Prospectus and Final Prospectus, or (D) in
connection with a merger of another corporation into, or an acquisition of
all or substantially all of the assets or stock of another entity by, the
Company where the Company or a subsidiary is the surviving entity.
(h) The Company shall apply the net proceeds of the sale of the
Shares as set forth under the caption "Use of Proceeds" in the Final
Prospectus.
(i) The Company shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Securities
Act.
(i) The Company will furnish to you as early as practicable prior
to the Closing Date and Option Closing Date, as the case may be, but not less
than two full business days prior thereto, a copy of its latest available
unaudited interim financial statements that have been read by the Company's
independent certified public accountants, as stated in their letters to be
furnished pursuant to Section 5(h).
(j) The Company will comply with all provisions of all
undertakings contained in the Registration Statement;
(k) The Company shall pay or cause to be paid (A) all expenses
(including any capital duties, stamp duties and stock transfer taxes)
incurred in connection with the delivery to the several Underwriters of the
Shares, (B) all fees and expenses (including, without limitation, fees and
expenses of the Company's accountants and counsel) in connection with the
preparation, printing, filing, delivery and shipping of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), each Pre-Effective Prospectus, the Effective Prospectus
and the Final Prospectus as amended or supplemented and the printing,
delivery and shipping of this Agreement and other underwriting documents,
including Underwriters' Questionnaires, Underwriters' Powers of Attorney,
Blue Sky Memoranda, Agreements Among Underwriters and Selected Dealer
Agreements and any letters transmitting the offering material to Underwriters
or selling group members (including costs of mailing and shipment) and the
cost of furnishing copies thereof to the Underwriters, (C) all legal fees,
filing fees and fees and disbursements of counsel to the Underwriters
incurred in connection with the
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qualification of the Shares under state securities laws as provided hereof
and in the review of the offering by the NASD, (D) the filing fee of the
NASD, (E) any applicable listing fees, including the fee for including the
Company's Common Stock for quotation on the Nasdaq National Market, (F) the
cost of printing certificates representing the Shares, (G) the cost and
charges of any transfer agent or registrar, (H) the costs of preparing,
printing and distributing bound volumes for the Representative and its
counsel, and (I) all other costs and expenses incident to the performance of
its obligations hereunder which are not otherwise provided for in this
section. In addition, the Company will also pay to you, individually and not
in your capacity as a Representative, a non-accountable expense allowance
equal to three percent (3%) of the public offering price of the Firm Shares,
and the Selling Shareholders shall pay to you, individually, and not in your
capacity as a Representative, a non-accountable expense allowance equal to
three percent (3%) of the public offering price of the Option Shares, to the
extent the option granted pursuant to Section 3(b) is exercised. If the sale
of the Shares provided for herein is not consummated by reason of acts of the
Company pursuant to Section 8(a) hereof which prevent this Agreement from
becoming effective, or by reason of any failure, refusal or inability on the
part of the Company to perform any agreement on its part to be performed, or
because any other condition of the Underwriters' obligations hereunder is not
fulfilled, the Company shall pay for all reasonable out-of-pocket expenses
(including fees and disbursements of counsel) actually incurred by the
Underwriters in connection with the investigation, preparing to market and
marketing the Shares or in contemplation of performing their obligations
hereunder, all "Blue Sky" filing fees and expenses, legal fees incurred in
qualifying the Shares under State Securities or "Blue Sky" laws and in the
review of the offering by the NASD, and all expenses incurred by the Company
including printing expenses and its accounting and legal fees. If this
agreement is terminated for any of the events specified in clauses (ii)
through (vi), inclusive, of Section 8(b) or if the sale of the Shares
provided for herein is not consummated for any reason other than by reason of
any failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed or because any other condition of the
Underwriters' obligations hereunder is not fulfilled, the Company shall (i)
pay the several Underwriters for all reasonable out-of-pocket expenses
(including fees and disbursements of counsel) actually incurred by the
Underwriters in connection with the investigation, preparing to market and
marketing the Shares or in contemplation of performing their obligations
hereunder, (ii) pay all "Blue Sky" filing fees and expenses, including legal
fees incurred in qualifying the Shares under State Securities or "Blue Sky"
laws and in the review of the offering by the NASD, and (iii) pay all
expenses incurred by the Company including printing expenses and its
accounting and legal fees. You acknowledge that $30,000 has already been
paid to you by the Company to be applied against such non-accountable expense
allowance or such reasonable out-of-pocket expenses if the sale of Shares is
not consummated as provided in the preceding sentences, as the case may be.
You agree that any portion of such $30,000 that is not necessary to pay the
Underwriters for their reasonable out-of-pocket expenses actually incurred if
the sale of Shares is not consummated for any reason shall be returned to the
Company. The Company shall not in any event be liable to any of the
Underwriters for loss of anticipated profits from the transactions covered by
this Agreement.
(l) The Company, at its expense, will furnish to its shareholders
an annual report (including financial statements prepared in accordance with
generally accepted accounting principles audited by independent certified
public accountants), and, as soon as practicable after
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the end of each of the first three quarters of each fiscal year, a statement
of operations of the Company for such quarter (which may be in summary form),
all in reasonable detail, and during the five year period after the date
hereof, at its expense, will furnish you, with copies for each of the several
Underwriters, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any subsidiaries as at the end of such
fiscal year, together with statements of income or operations, shareholders'
equity and changes in cash flows of the Company and any consolidated
subsidiaries, and of any non-consolidated significant subsidiary, for such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent certified public accountants;
(ii) as soon as they are available, a copy of all reports (financial or
other) mailed to security holders; (iii) as soon as they are available, a
copy of all reports and financial statements furnished to or filed with the
Commission; and (iv) such other information as you may from time to time
reasonably request. In addition, during such five-year period the Company
will furnish you, with copies for each of the several Underwriters, every
material press release and every material news item or article in respect of
the Company or its affairs that is released or prepared by the Company.
(m) If the Company has an active subsidiary or subsidiaries, the
financial statements provided for in Section 4(l) will be on a consolidated
basis to the extent the accounts of the Company and its subsidiary or
subsidiaries are consolidated in reports furnished to its shareholders
generally. Separate financial statements shall be furnished for all
subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
(n) At or before the Closing Date, you shall receive from each of
the Company's officers, directors and holders of more than five percent (5%)
the Company's outstanding Common Stock and other equity securities
("Insiders") a written agreement (i) not to offer, sell, transfer or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
other equity securities of the Company now owned or hereafter acquired by
such person, other than the Shareholder Shares, for a period of nine months
from the date on which the Registration Statement becomes effective (the
"Lock-up Period"), without your prior written consent (which consent shall
not be unreasonably withheld); PROVIDED, HOWEVER, that they may make private
dispositions or gifts of such securities if such securities constitute
"restricted securities," within the meaning of Rule 144 of the Rules and
Regulations, in the hands of the acquiring persons, and if the acquiring
persons agree in writing to be bound by the foregoing restrictions on
transfer; and (ii) giving you the right of first opportunity during the
Lock-up Period and for a period of two (2) years thereafter to be the sole
broker dealer to effect any sales made under Rule 144 of the Rules and
Regulations by such Insiders, provided your commissions are competitive with
other major brokerage firms. For a period of four years following the Lock-up
Period, the Company will use its best efforts to notify you of any sales made
by such Insiders under Rule 144 of the Rules and Regulations or any similar
provision of or under the Securities Act enacted after the date hereof.
(o) The Company shall continue to maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary in order to permit
preparation of financial statements in accordance with generally accepted
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accounting principles and to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(p) The Company shall make all filings required, including
registration under the Exchange Act, to obtain and maintain the inclusion of
the Common Stock on the Nasdaq National Market concurrently with the
effective date of the Registration Statement (with Nasdaq symbols mutually
acceptable to the Company and the Representative). The Company shall not
release the Common Stock for trading on Nasdaq without the express prior
approval of the Representative and shall not delist its Common Stock from
Nasdaq without the prior approval of the Representative, unless required by
Nasdaq to do so.
(q) The Company will file timely with the Commission and the NASD,
if required, a report on Form 10-C in accordance with the Rules and
Regulations of the Commission under the Exchange Act.
(r) As soon as practicable after the Company's securities become
eligible therefor, the Company shall use its best efforts to be included in
STANDARD & POOR'S CORPORATIONS DESIGNATION MANUAL and/or MOODY'S INVESTORS
SERVICES, INC. OVER-THE-COUNTER INDUSTRIAL MANUAL as soon as possible
following the Closing Date and to continue to be included in either of such
Manuals for at least five years following the Closing Date.
(s) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which
may be the same entity as the transfer agent) for its Common Stock.
(t) If any time during the 25-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price of the Common Stock has been or is likely to be materially
affected (regardless of whether such rumor, publication or event necessitates
a supplement to or amendment of the Final Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication
or event.
(u) Prior to the Closing Date and during the period for which a
prospectus is required to be delivered pursuant to the Rules and Regulations
under the Securities Act, the Company shall not issue any press release or
other publicity about the Company without the prior approval of the
Representative and counsel to the Underwriters.
(v) For a period of three (3) years following the Closing Date,
the Company shall (i) give the Representative notice of all meetings of the
Company's Board of Directors not later than 48 hours prior to such meeting,
and (ii) permit a representative of the Representative
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to attend all such meetings held during such period. During such period, the
Company's Board of Directors shall include at least two (2) members who are
not affiliated with the Company.
(w) If the principal shareholders, officers, or directors of the
Company are required by the "Blue Sky" or securities authority of any
jurisdiction selected by you pursuant to Section 4(e) to escrow or agree to
restrict the sale of any security of the Company owned by them for the
Company to qualify or register the Firm Shares or the Option Shares for sale
under the "Blue Sky" or securities laws of any such jurisdiction, the Company
shall cause each such person to escrow or restrict the sale of such security
on the terms and conditions and in the form specified by the securities
administrator of such jurisdiction.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and on each Closing Date and Option Closing Date, as if made on the
dates thereof, of the representations and warranties of the Company and the
Selling Shareholders contained herein, to the performance by the Company and
the Selling Shareholders of their respective obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made; at each Closing
Date, no stop order or other order suspending the effectiveness of the
Registration Statement or any amendment or supplement thereto shall have been
issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Final
Prospectus or otherwise) shall have been disclosed to you and complied with
to the reasonable satisfaction of you and your counsel.
(b) No Underwriter shall have advised the Company that the
Registration Statement or Effective Prospectus or Final Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact which,
in your opinion, is material, or omits to state a fact which, in your
opinion, is material and is required to be stated therein or is necessary to
make the statements therein not misleading.
(c) On or prior to each Closing Date, you shall have received from
Stradling, Yocca, Carlson & Rauth, counsel for the Underwriters, such opinion
or opinions with respect to the sufficiency of all corporate proceedings and
other legal matters relating to this Agreement and the transactions
contemplated hereby as you reasonably may require and such counsel shall have
received such papers and information as they request to enable them to pass
upon such matters. In rendering such opinion, such counsel may rely upon the
opinion to be delivered to the Underwriter by the counsel for the Company
pursuant to Section 5(d) herein.
(d) On each Closing Date there shall have been furnished to you
the opinion (addressed to the Underwriters) of Phillips & Haddan, counsel for
the Company, dated as of such Closing Date and in form and substance
satisfactory to counsel for the Underwriters and stating
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that it may be relied upon by counsel for the Underwriters in giving their
opinion, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction
of its organization, with full corporate power and authority to own, lease,
license or use its properties and conduct its business as described in the
Registration Statement, each Pre-Effective Prospectus, the Effective
Prospectus and Final Prospectus, and is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
character of the business conducted by it or the location of the properties
owned, leased, licensed or used by it makes such qualification necessary.
(ii) The authorized, issued and outstanding capital stock of
the Company as of __________, 1995 is as set forth under the caption
"Capitalization" in each Pre-Effective Prospectus, the Effective Prospectus
and Final Prospectus and there have been no changes in the authorized and
outstanding capital stock of the Company since such date. The Common Stock
of the Company conforms to the description thereof contained in each
Pre-Effective Prospectus, the Effective Prospectus and the Final Prospectus.
The outstanding shares of Common Stock (including the Shareholder Shares)
have been and are, and the Shares to be issued and sold by the Company, upon
issuance and delivery and payment therefor in the manner herein described
will be, duly authorized, validly issued, fully paid and nonassessable.
Except as described in each Pre-Effective Prospectus, the Effective
Prospectus and the Final Prospectus, there are no preemptive or other rights
to subscribe for or to purchase, or any restriction upon the voting or
transfer of, any shares of Common Stock pursuant to the Company's Articles of
Incorporation, by-laws, other governing documents or any agreement, contract
or other instrument to which the Company is a party or by which it is bound;
neither the filing of the Registration Statement nor the offering or sale of
the Shares or Representative's Warrant Stock as contemplated by this
Agreement and the Representative's Warrant Agreement, respectively, gives
rise to any rights, other than those which have been waived or satisfied, for
or relating to the registration of any shares of Common Stock; and such
waivers, to such counsel's knowledge, were duly and validly given. To such
counsel's knowledge, the Company has no subsidiaries and does not otherwise
have any ownership interest in any corporation, partnership or other entity.
(iii) The Company is not, nor with the giving of notice or
lapse of time or both would be, in violation of or in default under, nor will
the execution or delivery of this Agreement or the Representative's Warrant
Agreement or consummation of the transactions contemplated hereby or thereby
result in a violation of, or constitute a default under, the Articles of
Incorporation, by-laws or other governing documents of the Company or any
contract, indenture, mortgage, deed of trust, loan or credit agreement, bond,
debenture, note, lease or other agreement or instrument known to such counsel
after reasonable investigation, to which the Company is a party or by which
it is bound, or to which any of its properties is subject, nor will the
performance by the Company of its obligations hereunder or under the
Representative's Warrant Agreement violate any existing law, rule,
administrative regulation, judgment, order, writ or decree of any court or
any governmental agency or body having jurisdiction over the Company or its
properties, or result in the creation or imposition of any lien, charge,
claim or encumbrance upon any property or asset of the Company, where such
violation, default or lien
20
<PAGE>
would have a material adverse effect on the financial condition, results of
operations, business or prospects of the Company. Except for permits and
similar authorizations required under the Securities Act, the securities or
"Blue Sky" laws of certain jurisdictions and from the NASD and for such
permits and authorizations which have been obtained, no consent, approval,
authorization or order of any court, governmental agency or body or financial
institution is required in connection with the consummation of the
transactions contemplated by this Agreement, including, without limitation,
the valid sale and delivery of the Shares, or the Representative's Warrant
Agreement.
(iv) To the knowledge of such counsel, no default exists in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust, loan
or credit agreement, bond, debenture, note, lease or other agreement or
instrument to which the Company is party or to which any of its properties
are bound, except as disclosed in the Registration Statement and except for
such defaults that would not have a material adverse effect on the financial
condition, results of operation, business or prospects of the Company.
(v) The descriptions in the Registration Statement, each
Pre-Effective Prospectus, the Effective Prospectus and the Final Prospectus
of the statutes, regulations, legal or governmental proceedings, contracts
and other documents therein described, to the extent that such descriptions
constitute summaries of matters of law, documents or proceedings, or legal
conclusions, have been reviewed by such counsel and fairly present the
information disclosed therein in all material respects.
(vi) The Registration Statement and all post-effective
amendments thereto have become effective under the Securities Act and, to the
best of such counsel's knowledge, no stop order or other order suspending the
effectiveness of the Registration Statement or preventing or suspending the
use of any Pre-Effective Prospectus, the Effective Prospectus, the Final
Prospectus or any amendment or supplement thereto has been issued and no
proceedings for that purpose have been instituted or are pending before or
contemplated by the Commission or any "Blue Sky" or securities authority of
any jurisdiction and all filings required by Rule 424 and Rule 430A of the
Rules and Regulations have been made within the required time period; the
Registration Statement, each Pre-Effective Prospectus, the Effective
Prospectus and the Final Prospectus and any amendment or supplement thereto,
as of their respective effective dates, comply in all material respects with
the requirements of the Securities Act and the Rules and Regulations (except
that counsel need express no opinion on the financial statements or other
financial data); and although such counsel has not verified the accuracy or
completeness of the statements contained in the Registration Statement, each
Pre-Effective Prospectus, the Effective Prospectus or Final Prospectus,
nothing has come to such counsel's attention that caused it to believe that
the Registration Statement or any amendment thereto at the time it became
effective contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that, on such Closing Date, the
Effective Prospectus or the Final Prospectus or any amendment or supplement
thereto contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were
21
<PAGE>
made, not misleading (it being understood that such counsel need express no
opinion as to the financial statements or other financial data).
(vii) To the best of such counsel's knowledge, all
descriptions in each Pre-Effective Prospectus, the Effective Prospectus and
the Final Prospectus of contracts and other documents and trademarks, and the
statements under the captions "Dividend Policy," "Management," "Certain
Transactions," "Description of Capital Stock" and "Shares Eligible for Future
Sale" are accurate in all material respects and fairly present the
information set forth therein; and such counsel does not know, after
reasonable investigation, of any contracts or documents of a character
required to be summarized or described in each Pre-Effective Prospectus, the
Effective Prospectus and Final Prospectus or required to be filed as exhibits
to the Registration Statement which are not so summarized, described or
filed, nor does such counsel know, after reasonable investigation, of any
pending or threatened litigation or any governmental action, suit or
proceeding, statute or regulation required to be described in each
Pre-Effective Prospectus, the Effective Prospectus and the Final Prospectus
which is not so described.
(viii) The Company has the corporate power to enter into
and perform its obligations under this Agreement and the Representative's
Warrant Agreement and each of this Agreement and the Representative's Warrant
Agreement has been duly authorized, executed and delivered by the Company and
constitutes the valid and binding agreement of the Company and is enforceable
against the Company in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by Federal or
state securities laws or equitable principles, and except as enforceability
may be limited by bankruptcy, insolvency, reorganization or other similar
laws affecting creditors' rights generally.
(ix) The Company has obtained all licenses, permits and other
governmental authorizations necessary to the conduct of its business as now
being conducted; such licenses, permits and other governmental authorizations
are in full force and effect and the Company is in all respects complying
therewith; and the Company, its activities and products, is otherwise in
compliance with all laws, rules, regulations and statutes of any jurisdiction
to which it is subject.
(x) The Representative's Warrant Stock has been duly
authorized and reserved for issuance and, when issued and delivered in
accordance with the terms of the Representative's Warrant Agreement, will be
duly and validly issued, fully paid and nonassessable.
(xi) The offer and sale of all securities of the Company made
within the last three years as set forth in Part II, Item 26 of the
Registration Statement were exempt from the registration requirements of the
Securities Act and from the registration or qualification requirements of all
relevant state securities laws.
(xii) The Company is not an "investment company" or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
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In rendering such opinion, such counsel may rely
upon certificates of any officer of the Company or of government officials as
to matters of fact of which the maker of such certificate has knowledge
provided that counsel rendering such opinion shall furnish the Representative
with copies of any such statements or certificates and state in their opinion
that they have no reason not to rely upon any such statements or certificates.
(e) On the Closing Date with respect to the Selling Shareholders
and on each Closing Date on which the Selling Shareholders are selling Option
Shares, there shall have been furnished to you the opinion (addressed to the
Underwriters) of Phillips & Haddan, as counsel to the Selling Shareholders,
dated as of each such Closing Date and in form and substance satisfactory to
counsel for the Underwriters and stating that it may be relied upon by
counsel for the Underwriters in giving their opinion, to the effect that:
(i) Each of this Agreement, the Custody Agreement and the
Powers-of-Attorney has been duly authorized, executed and delivered by
or on behalf of each of the Selling Shareholders and each is valid and
binding on each of the Selling Shareholders, enforceable against each
Selling Shareholder in accordance with its terms except insofar as
indemnification and contribution provisions may be limited by Federal or
state securities laws or equitable principles, and except as
enforceability may be limited by bankruptcy, insolvency, reorganization
or other similar laws affecting creditors' rights generally.
(ii) Each of the Selling Shareholders is the sole registered
owner of the Shareholder Shares to be sold by such Selling Shareholder;
upon completion and registration with the transfer agent of the sale of
such Shareholder Shares pursuant to this Agreement, each of the
Underwriters will be the registered owner of the Shareholder Shares
purchased by it from such Selling Shareholder, and, assuming the several
Underwriters purchased the Shareholder Shares in good faith and without
prior notice of any adverse claim, the Underwriters will have acquired the
Shareholder Shares free and clear of all liens, encumbrances, equities and
claims whatsoever; the owner of such Shareholder Shares, if other than the
Selling Shareholder, is precluded from asserting against the Underwriters
the ineffectiveness of any unauthorized endorsement; and the Selling
Shareholder has the full right and power (A) to enter into this Agreement,
the Custody Agreement and the Powers-of-Attorney, and (B) to sell,
transfer and deliver the Shareholder Shares to be sold by the Selling
Shareholder under this Agreement.
(iii) No consent, approval, authorization or order of any
court or governmental agency or body is required for the valid sale and
delivery of such Shareholder Shares or for the consummation by any Selling
Shareholder of the transactions contemplated herein, except such as may
have been obtained under the Securities Act and such as may be required
under the "Blue Sky" laws of any jurisdiction in connection with the
purchase and distribution of the Common Stock by the Underwriters and such
other approvals (specified in such opinion) as have been obtained.
(iv) Neither the execution or delivery of this Agreement by any
Selling Shareholder nor the sale of the Shareholder Shares being sold by
any Selling Shareholder
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or the consummation of any other of the transactions herein
contemplated by any Selling Shareholder or the fulfillment of the
terms hereof by any Selling Shareholder will conflict with, result
in a breach of, or constitute a default under the terms of any
contract, indenture, mortgage, deed of trust, loan or credit
agreement, bond, debenture, note, lease or other agreement or
instrument known to such counsel without any independent
investigation and to which any Selling Shareholder is a party or
bound, or any order or regulation known to such counsel to be
applicable to any Selling Shareholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over any Selling Shareholder or result in the creation
or imposition of any lien, charge, claim or encumbrance upon any
property or asset of any Selling Shareholder.
In rendering such opinion, such counsel may rely upon certificates
of any officer of the Company, government officials or other persons as to
matters of fact of which the maker of such certificate has knowledge provided
that counsel rendering such opinion shall furnish the Representative with
copies of any such statements or certificates and state in their opinion that
they have no reason not to rely upon any such statements or certificates.
(f) There shall have been furnished to you on the Closing Date and
on the Option Closing Date, if any, a certificate, dated such Closing Date
and addressed to you, signed by the President and by the Chief Financial
Officer of the Company to the effect that: (i) the representations and
warranties of the Company in this Agreement are true and correct, as if made
at and as of such Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date; (ii) no stop order or other order
suspending the effectiveness of the Registration Statement or preventing or
suspending the use of any Pre-Effective Prospectus, the Effective Prospectus
or Final Prospectus or any amendment or supplement thereto has been issued by
the Commission or any "Blue Sky" or securities authority of any jurisdiction,
and no proceedings for that purpose has been initiated or threatened; (iii)
all filings required by Rule 424 and Rule 430A of the Rules and Regulations
have been made; (iv) the signers of said certificate have carefully examined
the Registration Statement and the Effective Prospectus and the Final
Prospectus, and any amendments or supplements thereto, and such documents
contain all statements and information required to be included therein, and
do not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; (v) there has been no material adverse
change in the general affairs, business key personnel, earnings,
capitalization, financial position or net worth of the Company since the
effective date of the Registration Statement; and (vi) since the effective
date of the Registration Statement, there has occurred no event required to
be set forth in an amendment or supplement to the Registration Statement or
the Effective Prospectus and the Final Prospectus which has not been so set
forth.
(g) Since the effective date of the Registration Statement, the
Company shall not have sustained any loss by fire, flood, accident or other
calamity, nor shall have become a party to or the subject of any litigation,
nor shall there have been a change in the general affairs, business, key
personnel, earnings, capitalization, financial position or net worth of the
Company, whether or not arising in the ordinary course of business, which
loss, litigation or change is so
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material and adverse to the Company that, in your judgment, shall render it
inadvisable to proceed with the delivery of the Shares.
(h) On the date of this Agreement and on each Closing Date you
shall have received a letter of Deloitte & Touche LLP, dated such date and
each Closing Date, respectively, addressed to you as Representative,
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the financial
statements and certain financial information contained in the Registration
Statement and the Effective Prospectus and Final Prospectus.
(i) You shall have received on the Closing Date and on the Option
Closing Date, if any, a certificate of each of the Selling Shareholders (or
their attorneys-in-fact) selling Shareholder Shares on such Closing Date,
signed by such Selling Shareholders, dated the applicable Closing Date to the
effect that (i) such Selling Shareholders has read the Registration
Statement, each Pre-Effective Prospectus, the Effective Prospectus, Final
Prospectus, and any supplement thereto and this Agreement and that the
representations and warranties of such Selling Shareholders in this Agreement
are true and correct in all material respects on and as of the Closing Date
or the Option Closing Date, as the case may be, to the same effect as if made
on such Closing Date and (ii) such Selling Shareholders has performed all of
his or her obligations in all material respects.
(j) At or prior to the Closing Date, the Representative's Warrant
Agreement shall have been entered into by the Company and you, and the
Representative's Warrants shall have been issued and sold to you pursuant
thereto.
(k) At or prior to the Closing Date, you shall have received the
written agreements described in Section 4(n) hereof.
(l) All proceedings taken in connection with the issuance, sale,
transfer and delivery of the Shares shall be satisfactory in form and
substance to you and to counsel to the Underwriters, and you shall have been
furnished such additional documents and certificates as you may reasonably
request.
(m) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in subsection 4(e) above.
(n) Prior to the Closing Date, the Shares shall have been duly
authorized for quotation on the Nasdaq National Market upon official notice
of issuance.
(o) The NASD, upon review of the terms of the public offering of
the Shares, shall not have objected to your participation in such offering.
All such opinions, certificates, letters and documents shall
be in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you
25
<PAGE>
and to counsel for the Underwriters. Any certificate or document signed by
any officer of the Company and delivered to you or counsel for the
Underwriters shall be deemed a representation and warranty by such officer
individually and by the Company hereunder to the Underwriters as to the
statements made therein. Each of the Company and the Selling Shareholders
shall furnish you with such number of conformed copies of such opinions,
certificates, letters and other documents as you shall reasonably request.
If any of the conditions specified in this Section 5 shall not have been
fulfilled when and as required by this Agreement, this Agreement and all
obligations of the Underwriters hereunder may be cancelled at, or at any time
prior to, each Closing Date, by you. Any such cancellation shall be without
liability of the Underwriters to the Company. Notice of such cancellation
shall be given to the Company in writing, or by telegraph or telephone and
confirmed in writing.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless the Underwriters, any member of the selling
group, and each of such entities' officers, directors, partners, employees,
agents, and counsel, and each person, if any, who controls any one of the
Underwriters or selling group members within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act (each an "Indemnified
Underwriter") against any and all loss, claim, damage, expense or liability,
joint or several, to which such Indemnified Underwriter may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
expense or liability (or action in respect thereof) arises out of or is based
upon (i) the inaccuracy of any of the representations or warranties made by
the Company in Section 1 hereof or otherwise, or (ii) any untrue statement or
alleged untrue statement of a material fact contained (A) in the Registration
Statement, any Pre-Effective Prospectus, the Effective Prospectus or the
Final Prospectus or any amendment or supplement thereto, or (B) in any
application or other document or communication (in this Section 6,
collectively called an "Application") executed by or on behalf of the Company
or based upon written information furnished by or on behalf of the Company in
any jurisdiction in order to qualify the Shares under the "Blue Sky" or
securities laws thereof or filed with the Commission or any securities
exchange or national market system, such as the Nasdaq National Market; , or
(iii) the omission or alleged omission to state, in the Registration
Statement, any Pre-Effective Prospectus, the Effective Prospectus or Final
Prospectus or any amendment or supplement thereto or in any Application, a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iv) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement;
and shall pay each Indemnified Underwriter for any and all costs and
expenses, including reasonable attorneys' fees, as and when incurred by such
Indemnified Underwriter in connection with investigating or defending against
or appearing as a third-party witness in connection with any litigation,
commenced or threatened, and any and all amounts paid in settlement of any
claim or litigation of any such loss, claim, damage, liability or action
whatsoever, notwithstanding the possibility that payments for such expenses
might later be held to be improper; except that the Company shall not be
liable in any such case to the extent, but only to the extent, that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company through you by or on
26
<PAGE>
behalf of any Underwriter specifically for use in the preparation of the
Registration Statement, any Pre-Effective Prospectus, the Effective
Prospectus or Final Prospectus or any amendment or supplement thereto, or any
Application, nor shall the Company be liable to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission in any
Pre-Effective Prospectus which is corrected in the Final Prospectus if a
sufficient number of copies of such Final Prospectus were provided to the
party seeking indemnification and such party failed to send or deliver a copy
and such Final Prospectus to the person asserting any such loss, claim,
damage or liability at or prior to the written confirmation of the sale of
such shares to such person, if such delivery was required by law. In addition
to its other obligations under this Section 6(a), the Company agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company herein or the failure to
perform its obligations hereunder, it will pay each Indemnified Underwriter
on a monthly basis for all costs and expenses, including reasonable
attorneys' fees, incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety
and enforceability of the Company's obligation to indemnify hereunder or to
pay each Indemnified Underwriter for such expenses and the possibility that
such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim payment is so
held to have been improper, each Indemnified Underwriter shall promptly
return it to the Company, together with interest compounded daily, determined
on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to time by Bank
of America NT&SA, San Francisco, California (the "Prime Rate"). Any such
interim payment which is not made to an Indemnified Underwriter within 30
days of a request for payment, shall bear interest at the Prime Rate from the
date of such request. The foregoing agreement to indemnify shall be in
addition to any liability which the Company may otherwise have, including
liabilities arising under this Agreement.
(b) Each Selling Shareholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, each Indemnified Underwriter and each
person who controls the Company within the meaning of the Securities Act or
otherwise and each other Selling Shareholder to the same extent as the
foregoing indemnity from the Company to each Indemnified Underwriter, but
only with reference to Applications executed by or on behalf of such Selling
Shareholder or written information furnished to the Company by or on behalf
of such Selling Shareholder specifically for use in preparation of the
documents referred to in the foregoing indemnity or for any breach of any
representation, warranty, covenant or agreement of such Selling Shareholder
contained in this Agreement. This indemnity agreement shall be in addition to
any liability which any Selling Shareholder may otherwise have, including
liabilities arising under this Agreement.
(c) Each Underwriter severally, but not jointly, shall indemnify
and hold harmless the Company, each director of the Company, each officer of
the Company who has signed the Registration Statement and any person who
controls the Company within the meaning of Section 15 of the Securities Act
against any loss, claim, damage or liability to which the
27
<PAGE>
Company may become subject, under the Securities Act or otherwise, insofar as
such loss, claim, damage or liability (or action in respect thereof) arises
out of or is based upon (i) any untrue statement or alleged untrue statement
of a material fact contained (A) in the Registration Statement, any
Pre-Effective Prospectus, the Effective Prospectus or Final Prospectus or any
amendment or supplement thereto, or (B) in any Application, or (ii) the
omission or alleged omission to state in the Registration Statement, any
Pre-Effective Prospectus, the Effective Prospectus or Final Prospectus or any
amendment or supplement thereto or in any Application a material fact
required to be stated therein or necessary to make the statements therein not
misleading; except that such indemnification shall be available in each such
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company
through you by or on behalf of such Underwriter specifically for use in the
preparation thereof; and shall pay the Company for any and all costs and
expenses, including reasonable attorney's fees, as and when incurred by it in
connection with investigating or defending against or appearing as a
third-party witness in connection with any such loss, claim, damage,
liability or action. Each Underwriter severally, but not jointly, shall
indemnify and hold harmless each Selling Shareholder to the same extent and
subject to the same limitations as the foregoing indemnity from each
Underwriter to the Company. This indemnity agreement shall be in addition to
any liability which any Underwriter may otherwise have. The Company and each
Selling Shareholder acknowledge that the statements set forth in the last
paragraph of the cover page (insofar as such information relates to the
Underwriters) the paragraph on page 2 with respect to stabilization and under
the heading "Underwriting" in any Pre-Effective Prospectus, Effective
Prospectus and/or the Final Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters, for
inclusion in any such Prospectus, and you, as the Underwriters, confirm that
such statements are correct.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b), or (c) above of notice of any claim or the commencement
of any action, the indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the claim or the commencement of that
action; the failure to notify the indemnifying party shall not relieve it
from any liability which it may have to an indemnified party. If any such
claim or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly
with any other similarly notified indemnifying party, to assume the defense
thereof with counsel reasonably satisfactory to the indemnified party. After
notice from the indemnifying party to the indemnified party of its election
to assume the defense of such claim or action, the indemnifying party shall
not be liable to the indemnified party under such subsection for any legal or
other expenses subsequently incurred by the indemnified party in connection
with the defense thereof other than reasonable costs of investigation; except
that you shall have the right to employ counsel to represent you and those
other Indemnified Underwriters who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Indemnified
Underwriters against the Company under such subsection if, in your reasonable
judgment, it is advisable for you and those Indemnified Underwriters to be
represented by separate counsel, and in that event the fees and expenses of
such separate counsel shall be paid by the Company. The Company and the
Selling
28
<PAGE>
Shareholders each agree promptly to notify the Underwriters and the
Representative of the commencement of any litigation or proceedings against
the Company or any Selling Shareholder, respectively, or against any of their
officers or directors in connection with the sale of the Shares, the
Registration Statement, any Pre-Effective Prospectus, the Effective
Prospectus or the Final Prospectus, or any amendment or supplement thereto,
or any Application. To the extent any provision of this Section 6 entitles
the indemnified party to reimbursement of fees and expenses, such obligations
may be billed by the indemnified party monthly and shall be due and payable
within ten (10) days of the date thereof.
(e) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in
subsection (a), (b) or (c) above (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company or the Selling
Shareholders, as the case may be, on the one hand, and the Underwriters on
the other, from the offering of the Shares or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company or the Selling
Shareholders, as the case may be, on the one hand, and the Underwriters on
the other, in connection with the statements or omissions that resulted in
such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company or
the Selling Shareholders, as the case may be, on the one hand, and the
Underwriters on the other, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Shares (before deducting
expenses) received by the Company and the Selling Shareholders, taken
together, bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page
of the Final Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Shareholders or
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The Company, the Selling Shareholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
subsection (e) were to be determined by PRO RATA allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this subsection (e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities referred to in the first sentence of this
subsection (e) shall be deemed to include any and all costs and expenses,
including reasonable attorneys' fees, incurred by such indemnified party in
connection with investigating or defending against any action or claim which
is the subject of this subsection (e). Notwithstanding the provisions of this
subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be
29
<PAGE>
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this
subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint. Each party entitled to contribution
agrees that upon the service of a summons or other initial legal process upon
it in any action instituted against it in respect of which contribution may
be sought, it shall promptly give written notice of such service to the party
or parties from whom contribution may be sought, but the omission so to
notify such party or parties of any such service shall not relieve the party
from whom contribution may be sought from any obligation it may have
hereunder or otherwise. For purposes of this Section 6(e), each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement, and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act, shall
have the same rights to contribution as the Company. This Section 6(e) is
intended to supersede any right to contribution under the Securities Act, the
Exchange Act, or otherwise.
(f) It is agreed that any controversy arising out of the operation
of the interim payment arrangements set forth in Sections 6(a) or 6(b)
hereof, including the amounts of any requested payments and method of
determining such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of the New
York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of
the National Association of Securities Dealers, Inc. Any such arbitration
shall be commenced by service of a written demand for arbitration or written
notice of intention to arbitrate, therein electing the arbitration tribunal.
In the event the party demanding arbitration does not make such designation
of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Such an
arbitration shall be limited to the operation of the interim payment
provisions contained in Sections 6(a) or 6(b) hereof and shall not resolve
the ultimate propriety or enforceability of the obligation to indemnify or
pay expenses which is created by the provisions of such Sections 6(a) or 6(b)
hereof.
7. SUBSTITUTION OF UNDERWRITERS. If any Underwriter defaults in its
obligation to purchase the number of Shares which it has agreed to purchase
under this Agreement, the non-defaulting Underwriters shall be obligated to
purchase (in the respective proportions which the number of Shares set forth
opposite the name of each non-defaulting Underwriter in Schedule I hereto
bears to the total number of Shares set forth opposite the names of all the
non-defaulting Underwriters in Schedule I hereto) the Shares which the
defaulting Underwriter agreed but failed to purchase; except that the
non-defaulting Underwriters shall not be obligated to purchase any of the
Shares if the total number of Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase exceeds 9.09% of the total number
of Shares, and any non-defaulting Underwriter shall not be obligated to
purchase more than 110% of the number of Shares set forth opposite its name
in Schedule I hereto plus the total number of Option Shares, purchasable by
it pursuant to the terms of Section 3(b) provided, further, that the
non-defaulting Underwriters shall not be obligated to purchase any Shares if
such additional purchase would cause the Underwriter to be in violation of
the net capital rule of the Commission or other applicable law. If the
foregoing maximums are exceeded, (i) the non-defaulting Underwriters, and any
other underwriters satisfactory to you who so agree, shall have the right,
but shall not be obligated, to
30
<PAGE>
purchase (in such proportions as may be agreed upon among them) all the
Shares which the defaulting Underwriter agreed but failed to purchase. If
the non-defaulting Underwriters or the other underwriters satisfactory to you
do not elect to purchase the Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase, this Agreement shall terminate
without liability on the part of any non-defaulting Underwriter or the
Company except for the payment of expenses to be borne by the Company and the
Underwriters as provided in Section 4(k) and the indemnity and contribution
agreements of the Company and the Underwriters contained in Section 6 hereof.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have for damages caused by its default. If the other
underwriters satisfactory to you are obligated or agree to purchase the
Shares of a defaulting Underwriter, either you or the Company may postpone
the Closing Date for up to seven full Business Days in order to effect any
changes that may be necessary in the Registration Statement, the Effective
Prospectus or the Final Prospectus or in any other document or agreement, and
to file promptly any amendments or any supplements to the Registration
Statement or the Effective Prospectus or the Final Prospectus which in your
opinion may thereby be made necessary. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 7.
8. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at whichever of the
following times shall first occur: (i) at 8:00 A.M., Los Angeles time, on the
first full Business Day following the date upon which the Registration
Statement becomes effective, or (ii) the time after the Registration
Statement becomes effective as you, in your discretion, shall first release
the Shares for sale to the public. For purposes of this Section 8, the
Shares shall be deemed to have been released for sale to the public upon
release by you for publication of a newspaper advertisement relating to the
Shares or upon release by you of communications offering the Shares for sale
to securities dealers, whichever shall first occur. Until this Agreement is
effective, it may be terminated by the Company by giving notice as
hereinafter provided to you or by you by giving notice as hereinafter
provided to the Company, except that the provisions of Section 4(k) and
Section 6 shall at all times be effective.
(b) Until the Closing Date, this Agreement may be terminated by
you by giving notice as hereinafter provided to the Company, if (i) the
Company shall have failed, refused or been unable, at or prior to the Closing
Date, to perform any agreement on its part to be performed hereunder; (ii)
any other condition of the obligations of the Underwriters hereunder is not
fulfilled; (iii) if there has been, since the date as of which the
information is given in the Final Prospectus, any material adverse change, or
any development involving a prospective material adverse change, in the
financial condition, results of operation, business or prospects of the
Company; (iv) trading in the Shares has been suspended by the Commission or
trading in securities generally on either the New York Stock Exchange,
American Stock Exchange or Nasdaq shall have been suspended or minimum or
maximum prices shall have been established on or maximum ranges for prices
for securities have been required by such exchange or Nasdaq by the
Commission or by such exchange or other regulatory body or governmental
authority
31
<PAGE>
having jurisdiction; or (v) a general banking moratorium shall have been
declared by Federal or California authorities; or (vi) if there has occurred
any material adverse change in the financial markets in the United States or
internationally or any outbreak of hostilities or escalation of existing
hostilities or other calamity or crisis that, in your reasonable judgment, is
material and adverse. Any termination of this Agreement pursuant to this
Section 8 shall be without liability on the part of the Company or any
Underwriter, except as otherwise provided in Sections 4(k) and 6 hereof.
Any notice referred to above may be given at the address specified
in Section 10 hereof in writing or by telegraph or telephone, and if by
telegraph or telephone, shall be immediately confirmed in writing.
9. SURVIVAL OF INDEMNITIES, CONTRIBUTION, WARRANTIES AND
REPRESENTATIONS. The indemnity and contribution agreements contained in
Section 6 and the representations, warranties and agreements of the Company
and the Selling Shareholders in Sections 1, 2 and 4 shall survive the
delivery of the Shares to the Underwriters hereunder and shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of any indemnified party.
10. NOTICES. Except as otherwise provided in this Agreement, (a)
whenever notice is required by the provisions of this Agreement to be given
to the Company or the Selling Shareholders, such notice shall be in writing
(and may be telecopied if confirmed by letter) addressed to the Company at
2124 Main Street, 2nd Floor, Huntington Beach, California 92648, telecopier
number (714) 536-6815, Attention: President; and (b) whenever notice is
required by the provisions of this Agreement to be given to the several
Underwriters, such notice shall be in writing addressed to the Underwriters
in care of Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine,
California 92715, telecopier number (714) 852-9603, Attention: President.
11. INFORMATION FURNISHED BY UNDERWRITERS. The statements set forth
the in the last paragraph on the cover page, the paragraph on page 2 with
respect to stabilization, and under the caption "Underwriting" in any
Pre-Effective Prospectus and in the Effective Prospectus and the Final
Prospectus, constitute the written information furnished by or on behalf of
any Underwriter referred to in paragraph (b) and (c) of Section 1 hereof and
in paragraph (c) of Section 6 hereof.
12. PARTIES. This Agreement is made solely for the benefit of the
several Underwriters, the Company, any officer, director or controlling
person referred to in Section 6 hereof, the Selling Shareholders and their
respective successors and assigns, and no other person shall acquire or have
any right by virtue of this Agreement. The term "successors and assigns," as
used in this Agreement, shall not include any purchaser of any of the Shares
from any of the Underwriters merely by reason of such purchase.
13. DEFINITION OF "BUSINESS DAY." The purposes of this Agreement,
"Business Day" means any day other than Saturday, Sunday, a federal holiday
or a day on which the New York Stock Exchange is closed.
32
<PAGE>
14. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect
to the choice of law or conflict of laws principles thereof.
33
<PAGE>
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement. Please confirm, by
signing and returning to us counterparts of this Agreement, that you are
acting on behalf of yourselves and the several Underwriters and that the
foregoing correctly sets forth the Agreement among the Company and the
several Underwriters.
Very truly yours,
TOUCHSTONE SOFTWARE CORPORATION
By:________________________________
Name:___________________________
Title:__________________________
THE SELLING SHAREHOLDERS AND THE
OVER-ALLOTMENT SELLING
SHAREHOLDERS
By:________________________________
Attorney-in-Fact
Confirmed and accepted as of
the date first above mentioned:
CRUTTENDEN ROTH INCORPORATED
as Representative of the
several Underwriters named
in Schedule I hereto
By:________________________________
Name:___________________________
Title:__________________________
34
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Cruttenden Roth Incorporated
Total 1,800,000
=========
</TABLE>
35
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
SELLING SHAREHOLDERS TO BE SOLD
-------------------- -----------
<S> <C>
Total 800,000
=======
</TABLE>
36
<PAGE>
SCHEDULE III
<TABLE>
<CAPTION>
NUMBER OF
OPTION SHARES
SELLING SHAREHOLDERS TO BE SOLD
-------------------- -----------
<S> <C>
Total 270,000
=======
</TABLE>
37
<PAGE>
EXIHIBIT 4.1
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
___________, 1995 is made and entered into by and between TOUCHSTONE SOFTWARE
CORPORATION, a California corporation (the "Company") and CRUTTENDEN ROTH
INCORPORATED ("Cruttenden") (Cruttenden is hereinafter sometimes referred to
as a "Warrantholder")
The Company agrees to issue and sell to Cruttenden, and Cruttenden
agrees to purchase warrants, as hereinafter described (the "Warrants") at a
purchase price of $0.001 per Warrant, to purchase an aggregate of 100,000
shares, subject to adjustment pursuant to the terms hereof (the "Shares") of
the Company's Common Stock, $0.001 par value (the "Common Stock"), in
connection with a public offering (the "Public Offering") by the Company of
1,800,000 shares of Common Stock pursuant to an underwriting agreement (the
"Underwriting Agreement"), dated as of ________, 1995 between the Company and
the Warrantholder as Representative of the several Underwriters named in the
Underwriting Agreement. The purchase and sale of the Warrants shall occur on
the Closing Date, as defined in the Underwriting Agreement, and be subject to
the conditions to the Underwriters' obligations to purchase Common Stock
thereunder.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and
obligations thereunder, the Company and the Warrantholder, for value
received, hereby agree as follows:
Section 1. TRANSFERABILITY AND FORM OF WARRANTS.
1.1 REGISTRATION. The Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.2 TRANSFER. The Warrants shall be transferable in whole or in
part only on the books of the Company maintained at its principal office in
Huntington Beach, California, or wherever its principal office may then be
located, upon delivery thereof duly endorsed by the Warrantholder or by its
duly authorized attorney or representative, accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver new Warrants to the person or
persons entitled thereto.
1.3 LIMITATIONS ON TRANSFER OF THE WARRANTS. Subject to the
provisions of Section 11, the Warrants shall not be sold, transferred,
assigned or hypothecated by the Warrantholder, except to (i) one or more
persons, each of whom on the date of transfer is an officer or employee of
the Warrantholder; (ii) a general partnership or general partnerships, the
general partners of which are the Warrantholder and one or more persons, each
of whom on the date of transfer is an officer or employee of the
Warrantholder; (iii) a successor to the Warrantholder in merger or
consolidation; (iv) a purchaser of all or substantially all of the
Warrantholder's assets; or (v) any person receiving the Warrants from one or
more of the persons listed in this subsection 1.3 at such person's or
persons' death pursuant to a will or trust or the laws of intestate
succession. The Warrants may be divided or combined, upon request to the
Company by the Warrantholder, into a certificate or certificates representing
the right to purchase the same aggregate number of Shares. Unless the
context indicates otherwise, the term "Warrantholder" shall include any
transferee or transferees of the Warrants pursuant to this subsection 1.3,
and the term "Warrants" shall include any and all warrants outstanding
pursuant to this Agreement, including those evidenced by a certificate or
certificates issued upon division, exchange, substitution or transfer
pursuant to this Agreement.
1.4 FORM OF WARRANTS. The text of the Warrants and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The number of Shares issuable upon exercise of the Warrants
is subject to adjustment upon the occurrence of certain events, all as
hereinafter provided. The Warrants shall be executed on behalf of the
Company by its President or by a Vice President, attested to by its Secretary
or an Assistant Secretary. A Warrant bearing the signature of an individual
who was
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at the time of signature the proper officer of the Company shall bind the
Company, notwithstanding that such individual shall have ceased to hold such
office prior to the delivery of such Warrant or did not hold such office on
the date of this Agreement.
The Warrants shall be dated as of the date of signature thereof by
the Company either upon initial issuance or upon division, exchange,
substitution or transfer.
1.5 LEGEND ON SHARES. Each Warrant certificate and certificate
for Shares initially issued upon exercise of the Warrants shall bear the
following legend, unless, at the time of exercise, such Shares are subject to
a currently effective Registration Statement under the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR
TRANSFERRD IN ANY MANNER EXCEPT PURSUANT TO A REGISTRATION OR AN
EXEMPTIONFROM SUCH REGISTRATION AND IN COMPLIANCE WITH SECTION 11
OF THE AGEEMENT PURSUANT TO WHICH THEY WERE ISSUED."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement
under the Securities Act of 1933, as amended (the "Act"), of the securities
represented thereby) shall also bear the above legend unless, in the opinion
of the Company's counsel, the securities represented thereby need no longer
be subject to such restrictions.
Section 2. EXCHANGE OF WARRANT CERTIFICATE. Any Warrant certificate
may be exchanged for another certificate or certificates entitling, the
Warrantholder to purchase a like aggregate number of Shares as the
certificate or certificates surrendered then entitled such Warrantholder to
purchase. If the Warrantholder desires to exchange a Warrant certificate,
the Warrantholder shall make such request in writing delivered to the
Company, and shall surrender, properly endorsed, with signatures guaranteed,
the certificate evidencing the Warrant to be so exchanged. Thereupon, the
Company shall execute and deliver to the person or persons entitled thereto a
new Warrant certificate as so requested.
Section 3. TERM OF WARRANTS; EXERCISE OF WARRANTS.
(a) Subject to the terms of this Agreement, the Warrantholder
shall have the right, at any time during the period commencing at 9:00 a.m.,
Pacific Time, on _________, 1996 and ending at 5:00 p.m., Pacific Time, on
________, 2000 (the "Termination Date"), to purchase from the Company up to
the number of fully paid and nonassessable Shares to which such Warrantholder
may at the time be entitled to purchase pursuant to this Agreement, upon
surrender to the Company, at its principal office, of the certificate
evidencing the Warrants to be exercised, together with the purchase form on
the reverse thereof duly filled in and signed, with signatures guaranteed,
and upon payment to the Company of the Warrant Price (as defined in and
determined in accordance with the provisions of this section 3 and sections 7
and 8 hereof), for the number of Shares in respect of which such Warrants are
then exercised.
(b) Payment of the aggregate Warrant Price shall be made in
cash, by check, through the use of Appreciation Currency (as defined below),
or any combination thereof. Upon such surrender of the Warrants and payment
of such Warrant Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Warrantholder and in such name or names as the Warrantholder may designate a
certificate or certificates for the number of full Shares so purchased upon
the exercise of the Warrant, together with cash, as provided in Section 9
hereof, in respect of any fractional Shares otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been
issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such securities as of the date of surrender
of the Warrants and payment of the Warrant Price, as aforesaid,
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notwithstanding that the certificate or certificates representing such
securities shall not actually have been delivered or that the stock transfer
books of the Company shall then be closed. The Warrants shall be exercisable,
at the election of the Warrantholder, either in full or from time to time in
part and, in the event that a certificate evidencing the Warrants is
exercised in respect of less than all of the Shares specified therein at any
time prior to the Termination Date, a new certificate evidencing the
remaining portion of the Warrants will be issued by the Company.
(c) As used herein, "Appreciation Currency" shall mean the
consideration given by the surrender of a Warrant (or portion thereof) in an
amount equal to the product of (i) the number of Shares purchasable upon
exercise of the Warrant (or portion thereof) surrendered and (ii) the excess
of the Current Market Price (as defined in section 9) per share of Common
Stock over the Warrant Price. For purposes of determining Appreciation
Currency, the Warrant Price shall mean the Warrant Price defined in section 7
as adjusted and readjusted as set forth in Section 8.
Section 4. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of the Warrants or
the securities comprising the Shares; provided, however, the Company shall
not be required to pay any tax which may be payable in respect of any
secondary transfer of the Warrants or the securities comprising the Shares.
Section 5. MUTILATED OR MISSING WARRANTS. In case the certificate
or certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant
certificate or certificates of like tenor and representing an equivalent
right or interest, but only upon receipt of evidence satisfactory to the
Company of such loss, theft or destruction of such Warrant and a bond of
indemnity, if requested, also satisfactory in form and amount at the
applicant's cost. Applicants for such substitute Warrant certificates shall
also comply with such other reasonable regulations and pay such other
reasonable charges as the Company may prescribe.
Section 6. RESERVATION OF SHARES. There has been reserved, and the
Company shall at all times keep reserved so long as the Warrants remain
outstanding, out of its authorized Common Stock, such number of shares of
Common Stock as shall be subject to purchase under the Warrants. Every
transfer agent for the Common Stock and other securities of the Company
issuable upon the exercise of the Warrants will be irrevocably authorized and
directed at all times to reserve such number of authorized shares and other
securities as shall be requisite for such purpose. The Company will keep a
copy of this Agreement on file with every transfer agent for the Common Stock
and other securities of the Company issuable upon the exercise of the
Warrants. The Company will supply every such transfer agent with duly
executed stock and other certificates, as appropriate, for such purpose and
will provide or otherwise make available any cash which may be payable as
provided in Section 9 hereof.
Section 7. WARRANT PRICE. The price per Share at which Shares shall
be purchasable upon the exercise of the Warrants (the "Warrant Price") shall
be $_____ [120% of the Public Offering Price] subject to further adjustment
pursuant to Section 8 hereof.
Section 8. ADJUSTMENT OF NUMBER OF SHARES. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant
Price shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
8.1 ADJUSTMENTS. The number of Shares purchasable upon the
exercise of the Warrants shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in Common
Stock or make a distribution in Common Stock, (ii) subdivide its outstanding
Common Stock, (iii) combine its outstanding Common Stock into a smaller
number of shares of Common Stock, or (iv) issue by reclassification of its
Common
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Stock other securities of the Company, the number of Shares purchasable
upon exercise of the Warrants immediately prior thereto shall be adjusted so
that the Warrantholder shall be entitled to receive the kind and number of
Shares or other securities of the Company which it would have owned or would
have been entitled to receive immediately after the happening of any of the
events described above, had the Warrants been exercised immediately prior to
the happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subsection 8.1(a) shall become effective
immediately after the effective date of such event.
(b) In case the Company shall issue rights, options, warrants
or convertible securities to all or substantially all holders of its Common
Stock, without any charge to such holders, entitling them to subscribe for or
purchase Common Stock at a price per share which is lower at the record date
mentioned below than the then Current Market Price (as defined in Section 9),
the number of Shares thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of the Warrant by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of additional shares of Common Stock
offered for subscription or purchase, and of which the denominator shall be
the number of shares of Common Stock outstanding immediately prior to the
issuance of such rights, options, warrants or convertible securities plus the
number of shares which the aggregate offering price of the total number of
shares offered would purchase at such Current Market Price. Such adjustment
shall be made whenever such rights, options, warrants or convertible
securities are issued, and shall become effective immediately upon issuance
of such rights, options, warrants or convertible securities.
(c) In case the Company shall distribute to all or substantially
all holders of its Common Stock evidences of its indebtedness or assets
(excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in subsection
8.1(b) above), then in each case the number of Shares thereafter purchasable
upon the exercise of the Warrants shall be determined by multiplying the
number of Shares theretofore purchasable upon exercise of the Warrants by a
fraction, of which the numerator shall be the then Current Market Price on
the date of such distribution, and of which the denominator shall be such
Current Market Price on such date minus the then fair value (determined as
provided in subsection (d) below) of the portion of the assets or evidences
of indebtedness so distributed or of such subscription rights, options,
warrants or convertible securities applicable to one share. Such adjustment
shall be made whenever any such distribution is made and shall become
effective on the date of distribution.
(d) For the purposes of the adjustments covered by subsections
8.1(b) or (c) hereof, the Common Stock which the holders of any rights,
options, warrants or convertible securities shall be entitled to subscribe
for or purchase shall be deemed issued and outstanding as of the date of such
sale or issuance and the consideration received by the Company therefor shall
be deemed to be the consideration received by the Company for such rights,
options, warrants or convertible securities, plus the consideration or
premiums stated in such rights, options, warrants or convertible securities
to be paid for the Common Stock covered thereby. In case the Company shall
sell or issue Common Stock or rights, options, warrants or convertible
securities containing the right to subscribe for or purchase Common Stock for
a consideration consisting, in whole or in part, of property other than cash
or its equivalent, then in determining the "price per share" of Common Stock
and the "consideration received by the Company" for purposes of the first
sentence of this subsection 8.1(d), the Board of Directors shall determine
the fair value of said property, and such determination, if reasonable and
based upon the Board of Directors' good faith business judgment, shall be
binding upon the Warrantholder. In determining the "price per share" of
Common Stock, any underwriting discounts or commissions shall not be deducted
from the price received by the Company for sales of securities registered
under the Act.
(e) No adjustment in the number of Shares purchasable pursuant
to the Warrants shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not
then exercisable, the number of Shares purchasable upon the exercise of the
Warrants on the first date thereafter that the Warrants become exercisable;
provided, however, that any adjustments which by reason of this subsection
8.1(d) are not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
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(f) Whenever the number of Shares purchasable upon the exercise
of the Warrant is adjusted, as herein provided, the Warrant Price payable
upon exercise of the Warrant shall be adjusted by multiplying such Warrant
Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Shares purchasable upon the exercise of the
Warrant immediately prior to such adjustment, and of which the denominator
shall be the number of Shares so purchasable immediately thereafter.
(g) Whenever the number of Shares purchasable upon the exercise
of the Warrants is adjusted as herein provided, the Company shall cause to be
promptly mailed to the Warrantholder by first class mail, postage prepaid,
notice of such adjustment and a certificate of the chief financial officer of
the Company setting forth the number of Shares purchasable upon the exercise
of the Warrants and the Warrant Price after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
(h) For the purpose of this subsection 8.1, the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock of
the Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value,
or from no par value to par value. In the event that at any time, as a
result of an adjustment made pursuant to this Section 8, the Warrantholder
shall become entitled to purchase any securities of the Company other than
Common Stock, (i) if the Warrantholder's right to purchase is on any other
basis than that available to all holders of the Company's Common Stock, the
Company shall obtain an opinion of an independent investment banking firm
valuing such other securities and (ii) thereafter the number of such other
securities so purchasable upon exercise of the Warrants shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Shares contained in this
Section 8.
(i) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the number of
Shares purchasable upon exercise of the Warrants, to the extent the Warrants
have not then been exercised, shall, upon such expiration, be readjusted and
shall thereafter be such as they would have been had they been originally
adjusted (or had the original adjustment not been required, as the case may
be) on the basis of (A) the fact that the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon
the exercise of such rights, options, warrants or conversion privileges, and
(B) the fact that such shares of Common Stock, if any, were issued or sold
for the consideration actually received by the Company upon such exercise
plus the consideration, if any, actually received by the Company for the
issuance, sale or grant of all such rights, options, warrants or conversion
privileges whether or not exercised; provided, however, that no such
readjustment shall have the effect of decreasing the number of Shares
purchasable upon exercise of the Warrants by an amount in excess of the
amount of the adjustment initially made in respect of the issuance, sale or
grant of such rights, options, warrants or conversion privileges.
8.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in
subsection 8.1, no adjustment in respect of any dividends or distributions
out of earnings shall be made during the term of the Warrants or upon the
exercise of the Warrants.
8.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments shall be
made pursuant to Section 8 hereof in connection with the issuance of the
Common Stock sold as part of the public sale pursuant to the Underwriting
Agreement or the issuance of Shares upon exercise of the Warrants. No
adjustments shall be made pursuant to Section 8 hereof in connection with the
exercise of the presently outstanding warrants to purchase up to __________
shares of Common Stock held by certain investors or in connection with the
exercise of options to purchase up to ______ shares of Common Stock which
have been granted or may be granted to participants in the Company's stock
option plans.
8.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or
merger of the Company into another corporation or in case of any sale or
conveyance to another corporation of the property, assets or business of the
Company as an entirety or
5
<PAGE>
substantially as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Warrantholder an
agreement that the Warrantholder shall have the right thereafter upon payment
of the Warrant Price in effect immediately prior to such action to purchase,
upon exercise of the Warrants, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale or conveyance
had the Warrants been exercised immediately prior to such action. In the
event of a merger described in Section 368(a)(2)(E) of the Internal Revenue
Code of 1986, in which the Company is the surviving corporation, the right to
purchase Shares under the Warrants shall terminate on the date of such merger
and thereupon the Warrants shall become null and void, but only if the
controlling corporation shall agree to substitute for the Warrants its
warrant which entitles the holder thereof to purchase upon its exercise the
kind and amount of shares and other securities and property which it would
have owned or been entitled to receive had the Warrants been exercised
immediately prior to such merger. Any such agreements referred to in this
subsection 8.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 8
hereof. The provisions of this subsection 8.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
8.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any
action which would cause an adjustment effectively reducing the portion of
the Warrant Price allocable to each Share below the then par value (if any)
per share of the Common Stock issuable upon exercise of the Warrants, the
Company will take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable Common Stock upon exercise of the Warrants.
8.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain a
firm of independent public accountants of recognized national standing (which
may be any such firm regularly employed by the Company) to make any
computation required under this Section 8, and a certificate signed by such
firm shall be conclusive evidence of the correctness of any computation made
under this Section 8.
8.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any
adjustments in the number of securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant
certificates initially issuable pursuant to this Agreement. However, the
Company may, at any time in its sole discretion (which shall be conclusive),
make any change in the form of Warrant certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
certificate thereafter issued, whether upon registration of transfer of, or
in exchange or substitution for, an outstanding Warrant certificate, may be
in the form so changed.
Section 9. FRACTIONAL INTERESTS; CURRENT MARKET PRICE. The Company
shall not be required to issue fractional Shares on the exercise of the
Warrants. If any fraction of a Share would, except for the provisions of
this Section 9, be issuable on the exercise of the Warrants (or specified
portion thereof), the Company shall pay an amount in cash equal to the then
Current Market Price multiplied by such fraction. For purposes of this
Agreement, the term "Current Market Price" shall mean (i) if the Common Stock
is traded in the over-the-counter market and not in The Nasdaq Stock Market
nor on any national securities exchange, the average of the per share closing
bid prices of the Common Stock on the 30 consecutive trading days immediately
preceding the date in question, as reported by Nasdaq or an equivalent
generally accepted reporting service, or (ii) if the Common Stock is traded
in The Nasdaq Stock Market or on a national securities exchange, the average
for the 30 consecutive trading days immediately preceding the date in
question of the daily per share closing prices of the Common Stock in The
Nasdaq Stock Market or on the principal stock exchange on which it is listed,
as the case may be. For purposes of clause (i) above, if trading in the
Common Stock is not reported by Nasdaq, the bid price referred to in said
clause shall be the lowest bid price as reported in the "pink sheets"
published by National Quotation Bureau, Incorporated. The closing price
referred to in clause (ii) above shall be the last reported sale price or, in
case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case in The Nasdaq Stock
Market or on the national securities exchange on which the Common Stock is
then listed.
Section 10. NO RIGHTS AS SHAREHOLDER; NOTICES TO WARRANTHOLDER.
Nothing contained in this Agreement or in the Warrants shall be construed as
conferring upon the Warrantholder or its transferees any rights as a
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shareholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a shareholder in respect of any meeting of
shareholders for the election of directors of the Company or any other
matter. If, however, at any time prior to the expiration of the Warrants and
prior to their exercise, any one or more of the following events shall occur:
(a) any action which would require an adjustment pursuant to
Section 8.1 (except subsection 8.1(h)) or 8.4; or
(b) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its
property, assets and business as an entirety or substantially as an
entirety) shall be proposed; then the Company shall give notice in writing
of such event to the Warrantholder, as provided in Section 14 hereof, at
least 20 days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the shareholders
entitled to any relevant dividend, distribution, subscription rights or
other rights or for the determination of shareholders entitled to vote on
such proposed dissolution, liquidation or winding up. Such notice shall
specify such record date or the date of closing the transfer books, as the
case may be. Failure to mail or receive such notice or any defect therein
shall not affect the validity of any action taken with respect thereto.
Section 11. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
(a) The Warrantholder agrees that prior to making any
disposition of the Warrants or the Shares, other than to persons or entities
identified in clauses (i) through (v), inclusive, of Section 1.3, such
Warrantholder shall give written notice to the Company describing briefly the
manner in which any such proposed disposition is to be made; and no such
disposition shall be made if the Company has notified the Warrantholder that
in the opinion of counsel reasonably satisfactory to the Warrantholder a
registration statement or other notification or post-effective amendment
thereto (hereinafter collectively a "Registration Statement") under the Act
is required with respect to such disposition and no such Registration
Statement has been filed by the Company with, and declared effective, if
necessary, by, the Securities and Exchange Commission (the "Commission").
(b) The Company shall be obligated to the owners of the
Warrants and the Shares to file a Registration Statement as follows:
(i) Whenever during the four-year period beginning on
________, 1996 and ending on __________, 2000, the Company proposes to file
with the Commission a Registration Statement (other than on Form S-4 or as to
securities issued pursuant to an employee benefit plan or a transaction
subject to Rule 145 promulgated under the Act), it shall, at least 30 days
prior to each such filing, give written notice of such proposed filing to the
Warrantholder and each holder of Shares at their respective addresses as they
appear on the records of the Company, and shall offer to include and shall
include in such filing any proposed disposition of the Shares upon receipt by
the Company, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to such person reasonably
necessary to be included in such Registration Statement. In the event that
the managing underwriter for said offering advises the Company in writing
that the inclusion of such securities in the offering would be detrimental to
the offering, such securities shall nevertheless be included in the
Registration Statement, provided that the Warrantholder and each holder of
Warrants and Shares desiring to have their Shares included in the
Registration Statement agree in writing, for a period of 90 days following
such offering, not to sell or otherwise dispose of such Shares pursuant to
such Registration Statement, which Registration Statement the Company shall
keep effective for a period of at least nine months following the expiration
of such 90-day period.
(ii) In addition to any Registration Statement pursuant to
subsection (i) above, during the four-year period beginning on ___________,
1996 and ending on ___________, 2000, the Company will, as promptly as
practicable (but in any event within 60 days), after written request (the
"Request") by the Warrantholders, or by a person or persons holding (or
having the right to acquire by virtue of holding the Warrants) at least 50%
of the shares of Common Stock which have been (or may be) issued upon
exercise of the
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Warrants, prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities sufficient
to permit the public offering of the Shares and will use its best efforts at
its own expense through its officers, directors, auditors and counsel, in all
matters necessary or advisable, to cause such Registration Statement to
become effective as promptly as practicable and to maintain such
effectiveness so as to permit resale of the Shares covered by the Request
until the earlier of the time that all such Shares have been sold or the
expiration of ninety (90) days from the effective date of the Registration
Statement; provided, however, that the Company shall only be obligated to
file and have declared effective one such Registration Statement under this
Section 11(b)(ii). If a Registration Statement is filed pursuant to this
Section 11(b)(ii) but not declared effective, or is not kept effective for
the Minimum Period, then it shall not be deemed to be a Registration
Statement meeting the requirements hereunder.
(c) All fees, disbursements and out-of-pocket expenses (other
than Warrantholder's brokerage fees and commissions and legal fees of counsel
to the Warrantholder, if any) in connection with the filing of any
Registration Statement under Section 11(b) (or obtaining the opinion of
counsel and any no-action position of the Commission with respect to sales
under Rule 144) and in complying with applicable securities and Blue Sky laws
shall be borne by the Company. The Company at its expense will supply the
Warrantholder and any holder of Shares with copies of such Registration
Statement and the prospectus included therein and other related documents any
opinions and no-action letters in such quantities as may be reasonably
requested by the Warrantholder or holder of Shares.
(d) The Company shall not be required by this Section 11 to
file such Registration Statement if, in the opinion of counsel for the
Warrantholder and holders of Shares and the Company (or, should they not
agree, in the opinion of another counsel experienced in securities law
matters acceptable to counsel for such holders and the Company), the proposed
public offering or other transfer as to which such Registration Statement is
requested is exempt from applicable federal and state securities laws and
would result in all purchasers or transferees obtaining securities which are
not "restricted securities," as defined in Rule 144 under the Act.
(e) The provisions of this Section 11 and Section 12 hereof
shall apply to the extent as provided herein if the Company chooses to file
an Offering Statement under Regulation A promulgated under the Act.
(f) The Company agrees that until all Shares have been sold
under a Registration Statement or pursuant to Rule 144 under the Act, it will
keep current in filing all materials required to be filed with the Commission
in order to permit the holders of such securities to sell the same under Rule
144.
Section 12. INDEMNIFICATION.
(a) In the event of the filing of any Registration Statement
with respect to the Shares pursuant to Section 11 hereof, the Company agrees
to indemnify and hold harmless the Warrantholder and any holder of such
Shares and each person, if any, who controls the Warrantholder or any holder
of such Shares within the meaning of the Act, against any losses, claims,
damages or liabilities, joint or several (which shall, for all purposes of
this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Warrantholder or any
holder of such Shares or such controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
such Registration Statement, or any related preliminary prospectus, final
prospectus, or amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such Registration Statement, preliminary
prospectus, final prospectus or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
the
8
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Warrantholder or the holder of such Shares specifically for use in the
preparation thereof. This indemnity will be in addition to any liability
which the Company may otherwise have.
(b) The Warrantholder and the holders of the Shares agree that
they will, severally and not jointly, indemnify and hold harmless the
Company, each other person referred to in subparts (1), (2) and (3) of
Section 11(a) of the Act in respect of the Registration Statement and each
person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or
any such director, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in such
Registration Statement, or any related preliminary prospectus, final
prospectus or amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but in each case only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in such
Registration Statement, preliminary prospectus, final prospectus or amendment
or supplement thereto in reliance upon, and in conformity with, written
information furnished to the Company by the Warrantholder or such holder of
Shares specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which the Warrantholder or
such holder of Shares may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 12 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 12, notify the indemnifying party of
the commencement thereof; but the omission to so notify the indemnifying
party will not relieve the indemnifying party from any liability which it may
have to any indemnified party. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
in, and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, reasonably assume the defense thereof, subject to
the provisions herein stated, and after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 12 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless the indemnifying party shall not
pursue the action to its final conclusion. The indemnified party shall have
the right to employ separate counsel in any such action and to participate in
the defense thereof, but the fees and expenses of such counsel shall not be
at the expense of the indemnifying party if the indemnifying party has
assumed the defense of the action with counsel reasonably satisfactory to the
indemnified party; provided that if the indemnified party is the
Warrantholder or a holder of Shares or a person who controls the
Warrantholder or a holder of Shares within the meaning of the Act, the fees
and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized
in writing by the indemnifying party or (ii) the named parties to any such
action, including any impleaded parties, include both the Warrantholder or a
holder of Shares or such controlling person and the indemnifying party and
the Warrantholder or a holder of Shares or such controlling person shall have
been advised by such counsel that there may be one or more legal defenses
available to the Warrantholder or a holder of Shares or controlling person
which are not available to or in conflict with any legal defenses which may
be available to the indemnifying party (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of
the Warrantholder or a holder of Shares or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations
or circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys for the Warrantholder, the holders of the
Shares and controlling persons, which firm shall be designated in writing by
a majority in interest of such holders and controlling persons based upon the
value of the securities included in the Registration Statement). No
settlement of any action against an indemnified party shall be made without
the consent of the indemnified and the indemnifying parties, which shall not
be unreasonably withheld in light of all factors of importance to such
parties.
9
<PAGE>
Section 13. CONTRIBUTION. In order to provide for just and equitable
contribution under the Act in any case in which (i) the Warrantholder or any
holder of the Shares or controlling person makes a claim for indemnification
pursuant to Section 12 hereof but it is judicially determined (by the entry
of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of Section 12 hereof provide for
indemnification in such case or (ii) contribution under the Act may be
required on the part of the Warrantholder or any holder of the Shares or
controlling person, then the Company and the Warrantholder or any such holder
of the Shares or controlling person shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as
any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company on the
one hand or the Warrantholder or holder of Shares or controlling person on
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Company and such holders of such securities and such controlling persons
agree that it would not be just and equitable if contribution pursuant to
this Section 13 were determined by pro rata allocation or by any other method
which does not take account of the equitable considerations referred to in
this Section 13. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section 13 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Section 14. NOTICES. Any notice pursuant to this Agreement by the
Company or by the Warrantholder or a holder of Shares shall be in writing and
shall be deemed to have been duly given on the date of delivery or refusal
indicated on the return receipt if delivered or mailed by certified mail,
return receipt requested:
(a) If to the Warrantholder or a holder of Shares, addressed
c/o Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine,
California, Attention: Corporate Finance Department.
(b) If to the Company addressed to it at 2124 Main Street, 2nd
Floor, Huntington Beach, California 92648, Attention: President.
Each party may from time to time change the address to which notices to it
are to be delivered or mailed hereunder by notice in accordance herewith to
the other party.
Section 15. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company, the Warrantholder, or the
holders of Shares shall bind and inure to the benefit of their respective
successors and assigns hereunder.
Section 16. MERGER OR CONSOLIDATION OF THE COMPANY. The Company will
not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the
provisions of Section 8.4 are complied with.
Section 17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements
contained in any schedule, exhibit, certificate or other instrument delivered
by or on behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on
behalf of the parties to this Agreement, all representations, warranties and
agreements made by the parties to this Agreement or pursuant hereto shall
survive.
10
<PAGE>
Section 18. APPLICABLE LAW. This Agreement shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be construed in accordance with the laws of said State.
Section 19. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any person or corporation other than the
Company, the Warrantholder and the holders of Shares any legal or equitable
right, remedy or claim under this Agreement. This Agreement shall be for the
sole and exclusive benefit of the Company, the Warrantholder and the holders
of Shares.
Section 20. AMENDMENTS. This Agreement may be amended only by a
written instrument executed by duly authorized representatives of the Company
and Cruttenden.
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
TOUCHSTONE SOFTWARE CORPORATION
By:___________________________________
Name:_________________________________
Title:________________________________
CRUTTENDEN ROTH INCORPORATED
By:___________________________________
Name:_________________________________
Title:________________________________
12
<PAGE>
EXHIBIT I
Initial Distribution of Warrants
<TABLE>
<CAPTION>
Name Amount
---- ------
<S> <C>
Cruttenden Roth Incorporated. . . . . . . . . . . . . . 100,000
</TABLE>
13
<PAGE>
EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT
PURSUANT TO A REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION AND IN
COMPLIANCE WITH SECTION 11 OF THE AGREEMENT PURSUANT TO WHICH THEY
WERE ISSUED.
Warrant Certificate No. _____
REPRESENTATIVE'S WARRANTS TO PURCHASE 100,000 SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
PACIFIC TIME, ON _________, 2000
TOUCHSTONE SOFTWARE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
This certifies that, for value received, Cruttenden Roth
Incorporated the registered holder hereof or assigns (the "Warrantholder"),
is entitled to purchase from TOUCHSTONE SOFTWARE CORPORATION (the "Company"),
at any time during the period commencing at 9:00 a.m., Pacific Time,
on _________, 1996, and before 5:00 p.m., Pacific Time, on _______, 2000 at
the purchase price per share of $____ (the "Warrant Price"), the number of
Shares of Common Stock of the Company set forth above (the "Shares"). The
number of Shares issuable upon exercise of each Warrant evidenced hereby and
the Warrant Price shall be subject to adjustment from time to time as set
forth in the Representative's Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part
by presentation of this Warrant Certificate with the Purchase Form attached
hereto duly executed (with a signature guarantee as provided thereon) and
simultaneous payment of the Warrant Price at the principal office of the
Company. Payment of such price shall be made at the option of the
Warrantholder in cash, by check, through the use of Appreciation Currency
(as defined in the Representative's Warrant Agreement) or any combination
thereof.
The Warrants evidenced hereby represent the right to purchase an
aggregate of up to ________________________ (__________) Shares, subject to
certain adjustments, and are issued under and in accordance with a
Representative's Warrant Agreement, dated as of ________, 1995 (the
"Representative's Warrant Agreement"), between the Company, and Cruttenden
Roth Incorporated and are subject to the terms and provisions contained in
the Representative's Warrant Agreement, to all of which the Warrantholder
by acceptance hereof consents.
Upon any partial exercise of the Warrants evidenced hereby, there
shall be signed and issued to the Warrantholder a new Warrant Certificate in
respect of the Shares of Common Stock as to which the Warrants evidenced
hereby shall not have been exercised. These Warrants may be exchanged at the
office of the Company by surrender of this Warrant Certificate properly
endorsed for one or more new Warrants of the same aggregate number of Shares
of Common Stock as evidenced by the Warrant or Warrants exchanged. No
fractional Shares of Common Stock will be issued upon the exercise of rights
to purchase hereunder, but the Company shall pay the cash value of any
fraction upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject to the
limitations set forth in the Representative's Warrant Agreement.
This Warrant Certificate does not entitle any Warrantholder to any
of the rights of a stockholder of the Company.
TOUCHSTONE SOFTWARE CORPORATION
By:
Dated:_________________, 1995
ATTEST:
_____________________________
1
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
PURCHASE FORM
TOUCHSTONE SOFTWARE CORPORATION
2124 Main Street, 2nd Floor
Huntington Beach, California 92648
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to purchase
thereunder, ____________ Shares of Common Stock (the "Shares") provided for
therein, and requests that certificates for the Shares be issued in the name
of:
______________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
______________________________________________________________
______________________________________________________________
and, if said number of Shares shall not be all the Shares purchasable
hereunder, that a new Warrant Certificate for the balance of the Shares
purchasable under the within Warrant Certificate be registered in the name of
the undersigned Warrantholder or his Assignee as below indicated and
delivered to the address stated below.
Dated: __________________________
Name of Warrantholder
or Assignee:________________________________
(Please Print)
Address:____________________________________
____________________________________
Signature:__________________________________
Note: The above signature must correspond with the name as written upon the
face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, unless these Warrants have been assigned.
Signatures Guaranteed:_______________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto the assignee named below all of the rights of the undersigned
represented by the attached Warrant with respect to the number of Shares
covered by the Warrant set forth below:
(Name and Address of Assignee Must Be Printed or Typewritten)
<TABLE>
<CAPTION>
Social Security No.
Name of Assignee or Tax I.D. No. Address No. of Shares
<S> <C> <C> <C>
__________________________ _________________ ___________________________ _____________
___________________________
___________________________
</TABLE>
and does hereby irrevocably constitute and appoint _____________________
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated: _____________________________ ___________________________________
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant Certificate in every
particular, without alteration or enlargement or any change whatever.
Signature Guaranteed:________________________________
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors and Stockholders of
TouchStone Software Corporation:
We consent to the use in Amendment No. 1 to Registration Statement No.
33-94352 of TouchStone Software Corporation on Form SB-2 of our report dated
February 3, 1995, appearing in the Prospectus, which is a part of this
Registration Statement, and to the references to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
Costa Mesa, California
August 14, 1995
