<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
2124 MAIN STREET, SUITE 250
HUNTINGTON BEACH, CALIFORNIA 92648
(714) 969-7746
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 14, 1996
------------------------
To the Holders of Common Stock of TouchStone Software Corporation:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of TouchStone
Software Corporation will be held at The Holiday Inn, 7667 Center Avenue,
Huntington Beach, California 92647 on June 14, 1996 at 10:00 A.M., local time,
for the following purposes:
1. To elect a board of six directors, with each director so elected to hold
office until the next Annual Meeting and until their successors have been
duly elected and qualified;
2. To consider and vote upon a proposal to approve the Company's 1996 Stock
Option Plan, pursuant to which options to purchase up to 400,000 shares
of the Company's Common Stock may be granted to officers, directors,
employees, consultants, vendors, and others expected to provide
significant services to the Company may be granted; and
3. To transact such other business as may properly come before the Annual
Meeting and any continuation or adjournment thereof.
The Board of Directors has fixed the close of business on April 24, 1996 as
the record date for the determination of the shareholders entitled to notice of
and to vote at the Annual Meeting, and only shareholders of record at the close
of business on that date will be entitled to vote at the Annual Meeting.
All shareholders are cordially invited to attend the Annual meeting in
person. YOU ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY IN THE ACCOMPANYING PRE-ADDRESSED, STAMPED ENVELOPE. Your proxy will not
be used if you are present at the Annual Meeting and desire to vote your shares
personally.
By Order of the Board of Directors,
Larry W. Dingus,
CHAIRMAN OF THE BOARD
Huntington Beach, California
May 14, 1996
IMPORTANT: IF YOU DO NOT EXPECT TO ATTEND THE MEETING IN PERSON, IT IS
IMPORTANT THAT YOUR SHARES BE REPRESENTED SO THAT THE PRESENCE OF A
QUORUM MAY BE ASSURED. PLEASE SIGN AND DATE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY. NO POSTAGE REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
2124 MAIN STREET, SUITE 250
HUNTINGTON BEACH, CALIFORNIA 92648
------------------------
PROXY STATEMENT
---------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 14, 1996
This Proxy Statement is being furnished to the shareholders of TouchStone
Software Corporation, a California corporation (the "Company"), in connection
with the solicitation of proxies by the Company's Board of Directors for use at
the Annual Meeting of Shareholders of the Company to be held at The Holiday Inn,
7667 Center Avenue, Huntington Beach, California 92647, on June 14, 1996, at
10:00 A.M., local time, and at any continuation or adjournment thereof.
This Proxy Statement, and the accompanying Notice of Annual Meeting and
proxy card, are first being mailed on or about May 14, 1996, to shareholders of
record on April 24, 1996, the record date for the determination of the
shareholders entitled to notice of and to vote at the Annual Meeting. A copy of
the Company's Annual Report to Shareholders for the fiscal year ended December
31, 1995, which contains audited financial statements for the year ended
December 31, 1995, is concurrently being mailed to all shareholders of record as
of April 24, 1996.
The cost of soliciting proxies will be borne by the Company. In addition to
the solicitation of proxies by mail, solicitation may be made by telephone,
telegraph or personal interview by Directors, officers and other regular
employees of the Company, without extra compensation. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting material to the beneficial owners of shares and will be reimbursed
for their expenses.
VOTING RIGHTS
As of April 24, 1996, the record date for the determination of the
shareholders of the Company entitled to notice of and to vote at the Annual
Meeting, there were 7,390,450 shares of the Company's Common Stock outstanding.
Each share of Common Stock entitles the holder to one vote on each matter to
come before the Annual Meeting, except that shareholders may be entitled to
cumulative voting rights in the election of directors. Cumulative voting rights
entitle a shareholder to give one nominee that number of votes equal to the
number of directors to be elected multiplied by the number of shares of Common
Stock he or she is entitled to vote, or to distribute such number of votes among
two or more nominees in such proportion as the shareholder may choose. The six
nominees receiving the highest number of votes at the Annual Meeting will be
elected. In order for all shareholders to cumulate votes, one shareholder must
give notice to the Secretary prior to commencement of voting that of his or her
intention to cumulate his or her votes.
Properly executed and returned proxies, unless revoked, will be voted as
directed by the shareholder or, in the absence of such direction, by the persons
named therein FOR the election of the six director nominees listed below, and
FOR approval of the 1996 Stock Option Plan. As to any other matters that may
properly come before the Annual Meeting, the proxyholders will vote in
accordance with their best judgment. A proxy may be revoked at any time before
it is voted by delivery of written notice of revocation to the Secretary of the
Company or by delivery of a subsequently dated proxy, or by attendance at the
Annual Meeting and voting in person. Attendance at the Annual Meeting without
also voting will not in and of itself constitute the revocation of a proxy.
1
<PAGE>
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information regarding the ownership of the
Company's Common Stock as of April 24, 1996, by (i) each of the current
directors and nominees for election as a director of the Company, (ii) each
person or group known by the Company to be the beneficial owner of more than 5%
of the Company's outstanding Common Stock, and (iii) all current directors and
executive officers of the Company as a group. Except as otherwise noted and
subject to community property laws where applicable, each beneficial owner has
sole voting and investment power with respect to all shares shown as
beneficially owned by them. Except as otherwise indicated, the address of each
holder identified below is in care of the Company, 2124 Main Street, Suite 250,
Huntington Beach, California 92648.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF BENEFICIAL OWNER OWNED* CLASS*
- --------------------------------------------------------------------------------- ------------------ -------------
<S> <C> <C>
Larry W. Dingus.................................................................. 391,957(1) 5.2%
2124 Main Street
Huntington Beach, CA 92648
C. Shannon Jenkins............................................................... 721,518(2) 9.6%
2124 Main Street
Huntington Beach, CA 92648
Ronald R. Maas................................................................... 376,610(3) 5.0%
2124 Main Street
Huntington Beach, CA 92648
Kenneth C. Welch III............................................................. 238,574(4) 3.2%
2124 Main Street
Huntington Beach, CA 92648
Richard W. Brail................................................................. 10,000(5) 0.1%
2124 Main Street
Huntington Beach, CA 92648
Larry Jordan..................................................................... 100,000 1.4%
2124 Main Street
Huntington Beach, CA 92648
All Executive Officers and Directors as a group (6 persons at April 14, 1996).... 1,838,659(6) 23.5%
</TABLE>
- ------------------------
* In calculating beneficial and percentage ownership, all shares of Common
Stock which a named stockholder will have the right to acquire within 60
days of the record date for the Annual Meeting upon exercise of stock
options are deemed to be outstanding for the purpose of computing the
ownership of such shareholder, but are not deemed to be outstanding for the
purpose of computing the percentage of Common Stock owned by any other
shareholder. As of April 24, 1996, an aggregate of 7,390,450 shares of
Common Stock were outstanding. Except as otherwise indicated in the
footnotes to the table, this total does not take into account currently
exercisable stock options outstanding as of April 24, 1996 to purchase an
aggregate of 743,650 shares, nor the Warrants outstanding at April 24, 1996
to purchase up to 329,968 additional shares of Common Stock.
(1) Includes options to purchase 134,883 shares.
(2) Includes options to purchase 134,300 shares.
(3) Includes options to purchase 88,467 shares.
(4) Includes options to purchase 52,000 shares.
(5) Includes options to purchase 10,000 shares.
(6) Includes options to purchase 419,650 shares.
2
<PAGE>
ELECTION OF DIRECTORS
NOMINEES
The Company's current Board of Directors has nominated six (6) individuals,
Larry W. Dingus, C. Shannon Jenkins, Ronald R. Maas, Kenneth C. Welch, Richard
W. Brail and Larry Jordan, for election as directors of the Company at the
Annual Meeting, each to serve as such until the next annual meeting of the
Company's shareholders and until their respective successors are elected and
qualified. Each of the nominees is a current member of the Company's Board of
Directors. Although it is not presently contemplated that any nominee will
decline or be unable to serve as a Director, in either such event, the proxies
will be voted by the proxy holders for such other persons as may be designated
by the present Board of Directors should any nominee become unavailable to
serve. In the event that anyone other than the six nominees listed below should
be nominated for election as a director, the persons named in the accompanying
proxy will have the authority, to be exercised in their discretion, to vote
cumulatively for less than all of the nominees. The six nominees receiving the
highest number of votes at the Annual Meeting will be elected.
Certain information concerning the six individuals nominated by the
Company's Board of Directors for election at the Annual Meeting to serve as
directors of the Company for the ensuing year is set forth below:
Larry W. Dingus, age 52, has served as Chairman of the Company's Board of
Directors since the Company was founded in September 1982, and served as
Secretary of the Company from 1989 to October 1995. 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.
C. Shannon Jenkins, age 48, has served as Chief Executive Officer of the
Company since February 1989. She served as the Company's President from March
1988 until January 1996. 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.
Larry Jordan, age 52, joined the Company in January 1996 as President and
Chief Operating Officer. Prior to joining the Company, Mr. Jordan was with
FileNet Corporation, a leading developer of workflow and document imaging
software, from 1984 to 1996, holding the position of Senior Vice President of
Sales since 1992.
Ronald R. Maas, age 50, 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 of the Company, and was elected to the
Company's Board of Directors. In October 1995 he was elected Corporate
Secretary. 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.
Kenneth C. Welch III, age 39, 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 DC 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.
Richard W. Brail, age 54, 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.
STRUCTURE AND FUNCTION OF THE BOARD OF DIRECTORS
During the last fiscal year, the Company's Board of Directors held two
regular and two special meetings or otherwise took action by written consent.
The Board has established both an Audit
3
<PAGE>
Committee and a Compensation Committee, each of which is comprised of Messrs.
Dingus, Welch and Brail. The Audit Committee 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. With respect to compensation, the Compensation Committee
determines the compensation of corporate officers, and will determine the
persons entitled to participate in stock option, bonus and other similar plans.
The Board of Directors continues to meet as a whole to nominate the individuals
to be proposed by the Board of Directors for election as directors of the
Company, and has no separate nominating committee.
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 in attending Board meetings. No
compensation is paid to any of the employee directors.
There is no family relationship between any nominee and any other nominee or
executive officer of the Company.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers of the Company are C. Shannon Jenkins, Chief
Executive Officer; Larry Jordan, President and Chief Operating Officer; and
Ronald R. Maas, Executive Vice President and Chief Financial Officer. Subject to
the terms of applicable employment agreements, officers serve at the pleasure of
the Board of Directors.
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 the 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. Mr. Fidyke
has advised management of his intention to leave the Company and pursue other
interests.
Donald C. Watters joined the Company in July 1992 as the 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. Mr. Watters has advised management
of his intention to leave the Company and pursue other interests.
Mary Bartlett joined the Company as Director of Operations in May of 1995.
In January of 1996, she was promoted to Vice President of Operations. From 1992
to May 1995, Ms. Bartlett was self-employed as a business broker in Arizona. Ms.
Bartlett held upper management positions for various companies in the computer
software industry between 1982 and 1992.
Susan Kennedy joined the Company in August 1995 as Director of Marketing and
was promoted to Vice President of Marketing in February 1996. From June 1994 to
March 1995, Ms. Kennedy was a founder and Director of Marketing at Rememory
Corporation, a developer of NetWare backup systems. Rememory Corporation was
acquired by Stac Electronics in March 1995. From March to August 1995, she held
various marketing management positions at Conner Peripherals (previously Archive
Corp.)
4
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table summarizes the annual and long term compensation paid by
the Company during fiscal years ended December 31, 1993, 1994 and 1995 to those
persons who were, as of December 31, 1995, (i) the Chief Executive Officer of
the Company and (ii) the other compensated executive officers of the Company
whose total annual salary and bonus exceeded $100,000 during the year ended
December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
AWARDS
ANNUAL COMPENSATION ----------------------------
--------------------------------------- RESTRICTED OPTIONS/
NAME AND PRINCIPAL POSITION YEAR SALARY $ BONUS $ OTHER $ STOCK AWARDS $ SAR #
- ------------------------------------ --------- ----------- ----------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Larry W. Dingus 1995 71,489 73,289 0 0 0
Chairman of the Board of Directors 1994 95,333 78,683 0 0 138,300
1993 86,000 17,641(1) 0 0 80,000
C. Shannon Jenkins 1995 125,750 88,911 0 0 0
Chief Executive Officer and 1994 112,400 89,657 0 0 138,300
Director 1993 100,000 17,641(2) 0 0 80,000
Ronald R. Maas 1995 85,862 43,444 0 0 0
Executive Vice-President and 1994 83,800 47,449 0 0 92,467
Director 1993 78,300 8,376(3) 0 0 78,000
<CAPTION>
PAYOUTS
----------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION LTIP PAYOUTS COMPENSATION
- ------------------------------------ ------------- -------------------
<S> <C> <C>
Larry W. Dingus 0 0
Chairman of the Board of Directors 0 0
0 0
C. Shannon Jenkins 0 0
Chief Executive Officer and 0 0
Director 0 0
Ronald R. Maas 0 0
Executive Vice-President and 0 0
Director 0 0
</TABLE>
- ------------------------------
(1) Amount reported for 1993 excludes $18,340 representing a bonus paid in
1994.
(2) Amount reported for 1993 excludes $20,960 representing a bonus paid in
1994.
(3) Amount reported for 1993 excludes $11,480 representing a bonus paid in
1994.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of its three
executive officers, Ms. Jenkins, Mr. Jordan, 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 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, 1993, 1994 and 1995, the Company's
Board of Directors established a plan to provide additional incentive to
management. Under such plans, 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 also established a bonus plan for the year ending December 31,
1996 (the "1996 Bonus Plan"). Under the 1996 Bonus Plan, participants selected
by the Board of Directors were eligible to receive bonuses (which, in the case
of any individual participant, shall not exceed that participant's base salary
for the year) 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 1996 Bonus Plan, as a group, is
5
<PAGE>
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 1996 bonus plan.
STOCK OPTION PLANS
On August 5, 1988, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "Non-Qualified Plan"). Options to purchase a total of
166,667 shares of Common Stock may be granted under the Non-Qualified Plan to
provide incentive for non-employee directors, technical advisors, vendors and
consultants of the Company, its subsidiaries or affiliates. Options granted
under the Non-Qualified Plan are not intended to qualify as incentive stock
options. The Non-Qualified Plan is administered by 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. As of March 31, 1996, options to
purchase an aggregate of 39,000 shares of Common Stock, at an exercise price of
$5.00 per share, were outstanding under the Non-Qualified Plan. As of March 31,
1996 there were no shares available for grant under the Non-Qualified Plan.
In 1991, the Company adopted stock option plans (collective, 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 March 31, 1996, options to
purchase an aggregate of 11,000 shares of Common Stock were outstanding under
the 1991 Plan and 27,501 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. 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. As of March 31, 1996, options to
purchase an aggregate of 425,350 shares were outstanding under the 1994 Plan,
and 10,000 shares were available for issuance upon exercise of options that may
be granted under the 1994 Plan.
In 1995, the Company's Board of Directors adopted a 1995 Stock Option Plan
(the "1995 Plan") pursuant to which options to purchase up to 300,000 of the
Company's Common Stock may be granted. Only non-qualified options can be granted
under the 1995 Plan to employees, including executive officers, non-employee
directors, consultants, vendors, customers and others expected to provide
significant services to the Company. As of March 31, 1996, options to purchase
an aggregate of 268,300 shares were outstanding under the 1995 Plan, and 31,700
shares were available for issuance upon exercise of options that may be granted
under the 1995 Plan.
On February 5, 1996, the Company's Board of Directors adopted the 1996 Stock
Options Plan which is being submitted to the Company's shareholders for their
approval at the Annual Meeting. See "Proposal to Approve the Company's 1996
Stock Option Plan."
The Company did not grant stock options or stock appreciation rights in 1995
to any of the executive officers identified in the Summary Compensation Table
set forth above.
The following table sets forth information regarding options exercised
during the year ended December 31, 1995 by executive officers of the Company
identified above, as well as the aggregate value of unexercised options held by
such executive officers at December 31, 1995. The Company has no outstanding
stock appreciation rights, either freestanding or in tandem with options.
6
<PAGE>
AGGREGATED OPTION EXERCISES LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
12/31/95 (#) 12/31/95 ($)
-------------- --------------
SHARES ACQUIRED VALUE ALL ALL
NAME ON EXERCISE (#) REALIZED EXERCISABLE EXERCISABLE
- ---------------------------------------------------------- ----------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
C. Shannon Jenkins........................................ 0 0 134,300 $ 445,507
Larry W. Dingus........................................... 0 0 134,883 $ 447,542
Ronald R. Maas............................................ 0 0 88,467 $ 295,150
</TABLE>
The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the closing sale price of a share of
the Company's Common Stock on December 31, 1995 on the Nasdaq National Market.
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 was due and payable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1995 and 1994, the Company paid royalties aggregating approximately
$27,000 and $67,000 to Custom Software, Inc., a software programming company
whose majority stockholder is Sigmund A. Fidyke III, a TouchStone officer.
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 34,000 of the
Company's Common Stock in consideration for their guarantees of borrowings under
the Company's bank line of credit.
7
<PAGE>
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
others 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 was paid in full in August 1995.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
The Company's Bylaws provide that the Company may indemnify its officers and
directors, employees and other agents in certain circumstances. As described
more fully in the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1995, the Company and Larry W. Dingus, C. Shannon Jenkins,
Ronald R. Maas, Kenneth C. Welch III, Donald C. Watters, and Sigmund Fidyke III
have been named as defendants in two purported class and derivative actions
alleging violations of federal securities laws and various state statutes
sounding in fraud. In accordance with the Company's Bylaws and California law,
the Company has agreed to advance all expenses incurred in defending such
actions upon receipt from each of the individual defendants of a written
undertaking to repay the expenses advanced by the Company for their respective
accounts if it is determined ultimately that any of them is not entitled to be
indemnified by the Company. 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.
PROPOSAL TO APPROVE THE COMPANY'S 1996 STOCK OPTION PLAN
DESCRIPTION OF THE 1996 STOCK OPTION PLAN
Under the Company's existing stock option plans, only 69,201 shares of
Common Stock remain available for the grant of options. See "Compensation of
Executive Officers and Directors -- Stock Option Plans". The Company's Board of
Directors believes it to be in the best interests of the Company and its
shareholders to increase the number of shares available for the grant of options
to provide incentives to officers and other key employees of the Company to
remain with and increase their efforts on behalf of the Company, and to enable
the Company's management to grant options to non-employee directors,
consultants, major vendors and others expected to provide significant services
to the Company. Accordingly, the 1996 Stock Option Plan (the "1996 Plan") was
unanimously adopted by the Company's Board of Directors on February 5, 1996, and
is being submitted to the Company's shareholders at the Annual Meeting for their
approval. A complete copy of the 1996 Plan will be made available, free of
charge, upon the written or telephonic request of any stockholder of record to
whom this Proxy Statement is sent. All such requests should be made to the
Corporate Secretary, TouchStone Software Corporation, 2124 Main Street, 2nd
Floor, Huntington Beach, California 92648; telephone: (714) 969-7746.
Subject to typical anti-dilution provisions for stock splits, stock
dividends, and the like, the 1996 Plan authorizes the grant of options to
purchase an aggregate of up to 400,000 additional shares of the Company's Common
Stock. As of March 31, 1996, the aggregate market value of these 400,000 shares
of Common Stock was $2,150,000, based upon the closing sale price of the Common
Stock on that date on the Nasdaq National Market. If an option granted under the
1996 Plan expires or terminates, the shares subject to any unexercised portion
of that option will again become available for the issuance of
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further options under the 1996 Plan. Options may be granted under the 1995 Plan
which are intended to qualify as "incentive stock options" under the United
States Internal Revenue Code (the "Code") or, alternatively, as stock options
which will not so qualify ("nonstatutory options"). The 1996 Plan will terminate
on February 4, 2006, and no options may be granted under the 1996 Plan
thereafter. As of the date of this Proxy Statement, no options had been granted
under the 1996 Plan.
The 1996 Plan will be administered by a committee consisting of at least
three members of the Board of Directors who have been appointed by the Board
(the "Committee"). The Committee will have the authority to select the persons
to receive options granted under the 1996 Plan, the extent of their
participation, and the terms and conditions of each option, subject to certain
limitations set forth in the 1996 Plan. Full-time officers and employees of the
Company or its divisions and subsidiaries are eligible to be granted Incentive
Stock Options under the 1996 Plan. At the present, the Company has no active
subsidiaries. No director who is not also a full time employee of the Company
will be eligible to receive incentive stock options. In addition, full and part
time employees, officers, non-employee directors, consultants, major vendors,
and others expected to provide significant services to the Company may be
granted nonstatutory options under the 1996 Plan. The Company presently employs
approximately 54 persons on a full-time basis, all of whom except for the
present members of the Committee are currently eligible for selection as
participants in the 1996 Plan.
Options granted under the 1996 Plan will become exercisable in accordance
with the terms of the grant made by the Committee, as set forth in a written
stock option agreement to be entered into by all participants receiving options
granted under the 1996 Plan. The Committee has discretionary authority to select
participants from among eligible persons and to determine at the time an option
is granted whether it is intended to be an incentive stock option or a
nonstatutory option, and when and in what increments shares covered by the
option may be purchased. Options may be granted on terms providing that they
will be exercisable either in whole or in part at any time or times during their
respective terms, or only in specified percentages at stated time periods or
intervals during the term of the option. While the 1996 Plan does not limit the
number of shares as to which options may be granted to any one participant
(including executive officers and directors of the Company), it does provide
that no employee may be granted incentive stock options which first become
exercisable in any calendar year to purchase shares of Common Stock having a
fair market value (determined at the time of the grant of the option) in excess
of $100,000, reduced by the fair market value (similarly determined) of any
shares subject to incentive stock options granted under any other plan of the
Company which also become exercisable in such calendar year.
The Committee may in its discretion also include in a stock option agreement
a provision making the exercise price of any option granted under the 1996 Plan
payable in full (i) by cash, by surrender of shares of the Company's Common
Stock having a market value equal to the aggregate exercise price of all shares
to be purchased, by cancellation of indebtedness owed by the Company to
Optionee, or by any combination of the foregoing, or (ii) by a full recourse
promissory note executed by the optionee. If payment is made by means of a
promissory note, the shares purchased generally would be held in pledge to
secure payment of the note. Unless and until the purchaser defaulted under the
promissory note or governing instruments, the shares so pledged would remain
registered in the name of the purchaser, and the purchaser would be entitled to
vote the shares and to receive all dividends and any other amounts accruing as a
result of his or her ownership of such shares.
If an optionee's employment is terminated other than for cause (as defined
in each option agreement), the employee will have the right to exercise his
option to the extent then exercisable, at any time within a three (3) month
period thereafter. If an optionee dies while still employed, or within the
period of time after his voluntary retirement specified in his option agreement,
the option may be exercised at any time within twelve (12) months thereafter by
his estate of by the person or persons to whom his rights under the option
passed by will or the laws of descent or distribution, but only to the extent
such option was exercisable by him on that date. The Board of Directors or the
Committee may
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accelerate the time at which options may be exercised. Options granted under the
1996 Plan will not be transferable except by will and the laws of descent and
distribution. During the life of the person to whom the option is granted, that
person alone may exercise it.
Within the limits of the 1996 Plan, the Committee may also modify, extend or
renew outstanding options or accept the cancellation of outstanding options (to
the extent not previously exercised) for the granting of new options in
substitution therefor. However, no modification of an option which alters or
impairs any rights or obligations under any option previously granted may be
made without the consent of the optionee.
For employees holding more than ten percent (10%) of the total combined
voting power of all classes of outstanding stock, the purchase price of each
option granted under the 1996 Plan cannot be less than 110% of the fair market
value per share of the Company's Common Stock subject thereto on the date of the
grant. For all other participants, the option exercise price may not be less
than the fair market value per share of the Company's Common Stock subject
thereto on the date of the grant in the case of incentive stock options, nor
less than 85% of the fair market value per share of the Company's Common Stock
on the date of grant in the case of nonstatutory options. Upon exercise of an
option, the exercise price shall be payable to the company in full. The fair
market value per share will generally be the closing price of a share of the
Company's Common Stock on the Nasdaq National Market on the date an option is
granted under the 1996 Plan. If there is no market price available on such date,
the fair market value per share will be determined on the basis of factors
deemed relevant by the Committee, including without limitation the book value of
the shares on such date and the earnings of the Company.
The Board of Directors may, without affecting any outstanding options, from
time to time revise or amend the 1996 Plan, and may suspend or discontinue it at
any time. However, no such revision or amendment may either increase the number
of shares subject to the 1996 Plan (with the exception of adjustments resulting
from changes in capitalization) or change the class of participants eligible to
receive options granted under the 1996 Plan without shareholder approval.
In the event that the Company should elect to dissolve, merge or consolidate
with any other corporation, sell substantially all of its assets to another
person or entity, or enter into any other reorganization in a transaction in
which the Company is not the surviving corporation, the date of exercisability
of each option outstanding under the 1996 Plan will be accelerated to a date
prior to such transaction unless provision is made in connection with such
transaction for the assumption of the option or substitution of new options with
appropriate adjustments by the surviving corporation.
FEDERAL INCOME TAX CONSEQUENCES OF THE 1996 PLAN
Except under the circumstances described below, neither the grant or the
exercise of an incentive stock option will result in the recognition of taxable
income to the Optionee. Correspondingly, the Company will not be entitled to a
deduction for federal income tax purposes either at the time an incentive stock
option is granted or when the optionee exercises the incentive stock option or
subsequently sells the option shares.
If the optionee does not dispose of the shares acquired upon exercise of an
incentive stock option until at least two years after the date the option was
granted and at least one year after the date of exercise of the option, any gain
on the sale will be taxed to the optionee as long-term capital gain. However,
the excess of the market value of the shares of Common Stock acquired upon
exercise over the option exercise price constitutes an "item of tax preference"
which is subject to the "alternative minimum tax" provisions of the Internal
Revenue Code, unless the disposition of the shares received upon exercise
results in ordinary income to the optionee.
If an optionee disposes of shares acquired upon the exercise of an incentive
stock option granted under the 1996 Plan sooner than two years after the date of
grant, or within one year after exercise of the option, any gain realized will
generally be taxed as ordinary income in the year of such disposition, in an
amount equal to the difference between the exercise price and either the value
of the shares at
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the time of exercise or the sale price, whichever is less. The balance of the
optionee's gain, if any, on the disposition of the shares will be taxable as
long-term capital gain, provided the holding period for long-term capital
assets, currently six months, has been satisfied. On any disposition of shares
which does not qualify for incentive stock option treatment under the Internal
Revenue Code, the Company will be entitled to a deduction for federal income tax
purposes equal to the amount of ordinary income taxed to the optionee.
At the time of the grant of a nonstatutory option, the optionee will
recognize no taxable income, and the Company will not be entitled to a
deduction, as long as such options are not actively traded on an established
market and their fair market value cannot otherwise be measured with reasonable
accuracy. However, upon the exercise of a nonstatutory option the optionee will
recognize taxable income in the amount by which the then fair market value of
the shares of the Company's Common Stock acquired upon exercise exceeds the
aggregate exercise price therefor, with the Company being entitled to a
compensation deduction for federal income tax purposes in an equal amount. The
amount of such taxable income will be characterized as compensation income to
the optionee. Persons that may be subject to the application of the provisions
of Section 16(b) are subject to certain additional rules.
Upon subsequent disposition of shares of Common Stock acquired upon exercise
of a nonstatutory option, the optionee will recognize capital gain or loss in an
amount equal to the difference between the proceeds received upon disposition
and the basis for the shares (the basis being equal to the sum of the price paid
for the shares upon exercise and the amount of ordinary income recognized on
account thereof), provided that the shares were held as a capital asset. Any
capital gain or loss to the optionee will be characterized as long or short
term, depending upon whether the holding period for long-term capital gain
treatment, currently one year, has been met.
RECOMMENDATION
The Company's Board of Directors has unanimously recommended that the
Company's shareholders vote FOR approval of the 1996 Plan. Approval of the 1996
Plan by the Company's shareholders will require the affirmative vote of the
holders of a majority of the shares of Common Stock represented in person or by
proxy at the Annual Meeting and entitled to vote. As of the record date for the
Annual Meeting, the Company's executive officers and nominees for election to
the Board at the Annual Meeting, owned or had voting control over an aggregate
of 1,418,009 shares, or approximately 19% of the outstanding shares, of the
Company's Common Stock. Each of these individuals has indicated his intention to
vote all of his respective shares in favor of approval of the 1996 Plan.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the company's officers and Directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership (Forms 3, 4
and 5) with the Securities and Exchange Commission. Officers, directors and
greater-than-ten-percent shareholders are required to furnish the Company with
copies of all such forms which they file.
To the Company's knowledge, based solely on the Company's review of such
reports or written representations from certain reporting persons that no Forms
5 were required to be filed by those persons, the Company believes that during
the year ended December 31, 1995, all filing requirements applicable to its
officers, directors, and other persons subject to Section 16 of the Exchange Act
were complied with.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP has been retained to serve as the Company's
independent certified public accountants for the fiscal year ending December 31,
1996. A representative of Deloitte & Touche LLP
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is expected to be present at the Annual Meeting, and to be available to respond
to any shareholder questions directed to Deloitte & Touche. This representative
will have an opportunity to make a statement if Deloitte & Touche LLP so
desires.
SHAREHOLDER PROPOSALS
In order to be considered for inclusion in the Company's proxy statement and
form of proxy relating to the Company's next annual meeting of shareholders,
proposals by the Company's shareholders intended to be presented at such annual
meeting must be received by the Company no later than ninety (90) days prior to
May 14, 1997.
ANNUAL REPORTS
The Company's 1994 Annual Report to Stockholders, which includes audited
financial statements for the Company's fiscal year ended December 31, 1994 is
concurrently being mailed with this proxy statement to shareholders of record on
April 24, 1996. A copy of the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1995, and any amendments thereto, is available
without charge to any shareholder of the Company upon written request to Ronald
R. Maas, Chief Financial Officer, TouchStone Software Corporation, 2124 Main
Street, Suite 250, Huntington Beach, California 92648.
OTHER MATTERS
The Board of Directors knows of no other matters to be presented for action
at the meeting. However, if any matters not included in this Proxy Statement
properly come before the meeting, it is the intention of the persons named in
the enclosed proxy to vote under the authority therein given in accordance with
his or their best judgment.
By Order of the Board of Directors,
Larry W. Dingus,
CHAIRMAN OF THE BOARD
May 14, 1996
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PROXY
TOUCHSTONE SOFTWARE CORPORATION
2124 MAIN STREET, SUITE 250
HUNTINGTON BEACH, CA 92648
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Larry W. Dingus and C. Shannon Jenkins as
Proxies, each with the power to appoint his or her substitute and hereby
authorize them to represent and to vote as designated below, all the shares of
common stock of TouchStone Software held on record by the undersigned on April
24, 1996 at the annual meeting of shareholders to be held on June 14, 1996 or
any adjournment thereof.
<TABLE>
<S> <C> <C> <C> <C>
1. ELECTION OF DIRECTORS
/ / FOR all nominees listed below / / WITHHOLD AUTHORITY to vote
except as marked to the contrary below for all nominees listed below
</TABLE>
Larry W. Dingus, C. Shannon Jenkins, Ronald R. Maas, Kenneth C. Welch, Richard
W. Brail, Larry Jordan
(INSTRUCTION: To withhold authority to vote for any individual nominee write
that nominee's name on the space provided below).
- --------------------------------------------------------------------------------
2. Proposal to approve the Company's 1996 Stock Option Plan
/ / FOR / / AGAINST / / ABSTAIN
3. In their discretion, the Proxies are authorized to vote upon such business as
may properly come before the meeting.
(CONTINUED ON REVERSE SIDE.)
<PAGE>
(CONTINUED FROM OTHER SIDE)
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER HEREIN SPECIFIED
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS INDICATED, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF EACH OF THE SIX NOMINEES LISTED ABOVE TO THE COMPANY'S
BOARD OF DIRECTORS, FOR APPROVAL OF THE COMPANY'S 1996 STOCK OPTION PLAN, AND IN
ACCORDANCE WITH THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS TO COME
BEFORE THE ANNUAL MEETING.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership please sign in partnership name by authorized person.
Dated:________________, 199_
____________________________
Signature
____________________________
Signature if held jointly
