<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996
Commission file No. 0-12969
TouchStone Software Corporation
(Exact name of registrant as specified in its charter)
California 95-3778226
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 Main Street, Huntington Beach, CA 92648
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (714) 969-7746
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes _X_ No _____
As of August 2, 1996 there were
7,640,518 shares of Common Stock outstanding
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying financial statements and notes thereto do not
contain all information required by generally accepted accounting
principles to be included in a full set of financial statements.
In the opinion of management, the financial statements reflect
all adjustments necessary for a fair presentation of the
registrant's financial position and results of operations.
However, the results of operations for the three and six months
ended June 30, 1996 are not necessarily indicative of the results
to be expected for the full year.
2
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<TABLE>
<CAPTION>
TouchStone Software Corporation
Consolidated Balance Sheet
June 30, 1996
(Unaudited)
<S> <C>
A S S E T S
- -----------
Current assets:
Cash and cash equivalents $ 11,499,392
Investments 2,956,954
Income tax refund receivable 341,490
Accounts receivable, net 657,599
Inventories 434,437
Prepaid expenses and other current assets 264,113
Employee advances 58,536
------------
Total current assets 16,212,521
Investments 989,000
Property, net 351,454
Software development costs, net 155,666
Other assets 30,177
------------
$ 17,738,818
============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 3,035,227
Accrued payroll and related expenses 472,105
Accrued cooperative advertising costs 659,082
Other accrued liabilities 913,195
------------
Total current liabilities 5,079,609
Deferred compensation 114,000
Deferred lease obligation 36,348
Shareholders' equity:
Preferred stock, $.001 par value, 3,000,000 shares
authorized, none issued or outstanding
Common stock, $.001 par value, 20,000,000 shares
authorized; 7,630,219 shares issued
and outstanding 7,630
Additional paid-in capital 18,538,474
Accumulated deficit (6,013,154)
Notes receivable from sale of common stock (24,089)
------------
Net shareholders' equity 12,508,861
------------
$ 17,738,818
============
See accompanying notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
TouchStone Software Corporation
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 1,620,582 $ 3,261,232 $ 2,275,126 $ 6,022,127
Royalty income 61,678 59,180 163,205 159,280
----------- ----------- ----------- -----------
Total revenues 1,682,260 3,320,412 2,438,331 6,181,407
Cost of Sales 690,591 1,154,830 1,389,552 1,904,608
----------- ----------- ----------- -----------
Gross Profit 991,669 2,165,582 1,048,779 4,276,799
Operating expenses:
Sales and marketing 1,247,983 980,326 2,198,291 1,840,735
General and administrative 327,121 407,183 784,438 805,474
Research and development 344,382 144,696 604,932 273,271
Litigation settlement
and related costs 1,375,000 -- 1,811,941 --
----------- ----------- ----------- -----------
Total operating expenses 3,294,486 1,532,205 5,399,602 2,919,480
----------- ----------- ----------- -----------
Income (loss) from operations (2,302,817) 633,377 (4,350,823) 1,357,319
Other income, net 214,392 17,996 404,662 31,699
----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes (2,088,425) 651,373 (3,946,161) 1,389,018
Provision for income taxes -- 248,000 -- 528,300
----------- ----------- ----------- -----------
Net income (loss) ($2,088,425) $ 403,373 ($3,946,161) $ 860,718
=========== =========== =========== ===========
Net income (loss) per share of
common stock outstanding ($ 0.28) $ 0.06 ($ 0.53) $ 0.13
----------- ----------- ----------- -----------
Weighted average shares 7,484,000 6,765,000 7,425,000 6,696,000
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
TouchStone Software Corporation
Consolidated Statements
of Cash Flows
(Unaudited)
<CAPTION>
Six months Six months
ended ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) ($ 3,946,161) $ 860,718
Adjustments to reconcile net income
to net cash flows provided by
operating activities:
Depreciation and amortization 144,179 162,519
Provision for doubtful accounts 36,804 63,900
Provision for obsolete inventories 71,858 167,067
Change in deferred lease obligation 14,073
Amortization of investment premium 3,597
Loss (gain) on disposal of assets (1,382) 947
Issuance of common stock in litigation settlement 625,000
Changes in operating assets and liabilities:
Income tax refund receivable 657,400
Accounts receivable (469,350) (33,740)
Inventories (208,017) (114,275)
Prepaid expenses and other current assets (147,096) (562)
Employee advances (39,111) (28,568)
Other assets 2,499 (19,320)
Accounts payable 1,000,936 (177,775)
Accrued liabilities 369,225 263,205
------------ ------------
Net cash provided by (used in)
operating activities (1,885,546) 1,144,116
Cash flow from investing activities:
Sale of investments 6,487,560
Capitalized software development costs (88,818) (198,848)
Purchase of investments (5,818,015)
Purchases of property (169,983) (65,023)
Sale of property 7,800 --
------------ ------------
Net cash provided by (used in)
investing activities 418,544 (263,871)
Cash flow from financing activities:
Principal payments on notes payable -- (389,622)
Principal payments under capital
lease obligations -- (3,118)
Deferred offering costs -- (77,451)
Other prepaid financing costs -- (1,000)
Proceeds from exercise of stock warrants and
options and repayment on notes receivable 47,751 51,805
------------ ------------
Net cash provided by (used in)
financing activities 47,751 (419,386)
------------ ------------
Net increase (decrease) in cash and cash equivalents (1,419,251) 460,859
Cash and cash equivalents, beginning of period 12,918,643 1,298,201
------------ ------------
Cash and cash equivalents, end of period $ 11,499,392 $ 1,759,060
============ ============
Supplemental cash flow information:
Interest paid -- $ 6,179
============ ============
Income taxes paid -- $ 712,701
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
5
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TOUCHSTONE SOFTWARE CORPORATION
Notes to Consolidated Financial Statements
June 30, 1996
(Unaudited)
1. General
The consolidated financial statements of the Company include
the financial statements of the Company's wholly-owned
subsidiary, TouchStone Europe Ltd., which commenced
operations in the United Kingdom in July 1995. These
consolidated financial statements have been prepared by the
Registrant, without audit, and include all adjustments which
are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three and
six months ended June 30, 1996 and 1995, the financial
position at June 30, 1996, and the cash flows for the six
months ended June 30, 1996 and 1995, pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
the Registrant believes that the disclosures in such
financial statements are adequate to make the information
presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the
TouchStone Software Corporation financial statements and
notes thereto included in the TouchStone Software
Corporation Annual Report filed with the Securities and
Exchange Commission on Form 10-KSB for the year ended
December 31, 1995.
Net income (loss) per share
Certain shares reserved for outstanding common stock
purchase warrants and options have been considered common
stock equivalents in computing net income per share for the
three and six months ended June 30, 1995. Such common
equivalent shares were not included in the calculation of
the net loss per share for the three and six months ended
June 30, 1996 as their effect would have been antidilutive.
2. Accounts Receivable
At June 30, 1996, accounts receivable is presented net of
allowance for doubtful accounts, reseller rebate reserves,
and product return reserves of approximately $89,200,
$291,300, and $745,300, respectively. Certain distributors'
accounts resulted in credit balances and therefore were
reclassified to accounts payable.
3. Financing Arrangements
The Company's bank line of credit expired May 5, 1996. The
Company is currently renegotiating with the bank for a new
bank line of credit which would be secured by a certificate
of deposit. The Company anticipates a new bank line of
credit will be secured in 1996.
4. Litigation Settlement
In June 1996 the Company reached an agreement to settle
three shareholder class action and derivative suits against
the Company and certain of its officers and directors. Under
the principal terms of the agreement, the Company
established a settlement fund consisting of $500,000 and
200,000 newly-issued shares of common stock in June 1996.
See Part II, Item 1 Legal Proceedings.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company develops and publishes utility software. The
Company's products include:
Initial Release
Product Title Description Date
- ------------- ----------- ---------------
Check[mark]It
Diagnostic Kit March, 1996
For use with DOS, Windows 3.1 and Windows 95, this
multi-utility package is designed to meet the
specific needs of both technicians and technical
users. It includes the new Check[mark]It 4
program, a portable, self-booting DOS utility that
provides extensive hardware testing and
configuration analysis features; the new
WINCheck[mark]It Pro, an advanced version of
WINCheck[mark]It Qualitas RAMexam, a comprehensive
PC memory test; plus a four-volume McGraw-Hill
Technical Reference Library on CD-ROM, computer
screwdrivers, and a set of three loopback plugs.
PC-cillin 95 November, 1995
Designed for use with Windows 95 and the Internet,
PC-cillin provides complete protection from new
virus sources and increasingly sophisticated types
of viruses. It automatically adjusts protection
levels based on the level of the threat, provides
one-button virus pattern updates, and
intelligently scans for viruses when needed. In
addition, a powerful Clean Wizard automatically
removes viruses step-by-step, without harming
system files.
WINCheck
[mark]IT4.0 October, 1995
This Windows-based utility provides a suite of
diagnostic tools, normally found in separate
programs, that have been designed to work in both
Windows 95 and Windows 3.1 environments.
WINCheck[mark]It now includes a new uninstall
utility, a modem test, a comprehensive CD-ROM
diagnostic utility, and a four-volume McGraw-Hill
technical reference library on CD-ROM.
WIN'95 Advisor July, 1995
This Windows-based utility tests a personal
computer system for Windows 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.
AutoHelp/
Check[mark]It
Diagnostics May, 1995
This utility is a diagnostic software package
available only to hardware manufacturers on an OEM
basis and is "bundled" as part of a personal
computer system. This product helps customers
perform remote diagnostics and upload the results
to a manufacturer's technical support staff.
Hewlett-Packard was the first personal computer
manufacturer to license this product for use on
the HP Multimedia 6100 line of home computers.
FastMove! March, 1995
This Windows and DOS-based file transfer utility
is packaged with a cable to enable a user to
quickly synchronize two personal computers with
up-to-date files while scanning for viruses at the
same time.
7
<PAGE>
The Company's revenues consist of product sales and royalty
income. Royalty income is derived, for the most part, from
international sales of the Company's products under agreements
with co-publishers, principally those who sell the Company's
products in Europe.
Product revenues are recorded at the time products are shipped
less estimated reserves for product returns. Currently the
Company uses historical experience and retail sell-through
information to establish these reserves. Shipments of the
Company's products into the domestic market are reserved until
there is reasonable information that the product has been sold at
the retail level. The Company's operations are subject to
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 customers, large shipments in
anticipation of demand which is subsequently unrealized can lead
to overstocking by the distributors and substantial product
returns. The Company maintains allowances for projected returns;
however there can be no assurance that actual levels of returns
will not significantly exceed amounts anticipated by the
Company. Certain of the Company's customer agreements also
provide for rebates to customers should the price of the
Company's products decline subsequent to shipment. The Company
accrues for such rebates when such price declines are known or
become anticipated.
Cost of sales includes the cost of blank diskettes, software
duplication, packaging materials and user manuals, in addition to
amortization of software development costs, royalties paid to
other software development companies under various agreements,
and inventory obsolescence reserves. Sales and marketing expense
consists primarily of salaries and commissions paid to the
Company's sales, customer service and technical support personnel
and expenditures for retail product merchandising and promotions.
In addition to the base salaries of employees in general
administration, general and administrative expense includes
amounts paid to all of the Company's personnel under the
Company's annual bonus plans that are based upon the Company's
overall levels of quarterly net income. The Company's products
can be expected to have short product life cycles, characterized
by decreases in retail prices as a given product's life cycle
advances. In order for the Company to maintain satisfactory gross
margins, the Company will need to introduce new products to
offset declining margins associated with older products. Research
and development expense consists primarily of salaries and
related benefits paid to computer programmers to research and
design new software products. 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.
In June 1996 the Company reached an agreement to settle three
shareholder class action and derivative suits against the Company
and certain of its officers and directors. Under the principal
terms of the agreement, the Company established a settlement fund
consisting of $500,000 and 200,000 newly-issued shares of common
stock in June 1996. The Company recorded an expense of $1,375,000
in the second quarter of 1996 related to such settlement.
The Company's performance during the last half of 1995 and the
first six months of 1996 was adversely affected by an
unanticipated slowdown in the sale of some of its Windows 95
related products. The Company's results of operations for the
year ended December 31, 1995 were adversely affected by actual
and anticipated product returns of unsold reseller inventories of
WIN '95 Advisor, which was released in July 1995, and WINCheckIt
2.0, which required the booking of additional reserves for price
protection rebates and product returns, of approximately $1.1
million and $2 million in the third and fourth quarters of 1995,
respectively. The sell-through rate of WIN'95 Advisor at the
retail level dropped substantially in the fourth quarter of 1995,
in spite of price reductions implemented in October and November
1995. Management believes that market acceptance of Windows 95
for upgrades has not materialized to the extent expected by the
Company, which negatively affected sales of WIN'95 Advisor at the
retail level. As a result of that slowdown and its experience
with returned products, the Company not only had to make large
adjustments to revenue in the fourth quarter of 1995, but had to
increase the calculation for the required reserves on all
shipment of products in the first and second quarters of 1996.
The slowdown in sales and the Company's reserve policy combined
with increased selling and research and development expenses as
reflected in the accompanying unaudited, consolidated financial
statements, have adversely affected profitability and resulted in
net losses of $2,088,000 and $3,946,000 during the three and six
8
<PAGE>
months ended June 30, 1996, respectively, as compared to net
income of $403,000 and $861,000 during the three and six months
ended June 30, 1995, respectively. In order to improve operating
results, the Company's plans include, but are not limited to, the
introduction of new software products in 1996 and the expansion
of marketing channels by the promotion of products directly to
corporate and institutional customers. No assurance may be given
that the implementation of such plans will result in profitable
operating results.
The following information should be read in conjunction with the
unaudited, consolidated financial statements included herein. All
dollar amounts presented have been rounded to the nearest
thousand and all percentages are approximate.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations
data as a percentage of total revenues for the three and
six-month periods ended June 30:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Product sales 96.3% 98.2% 93.3% 97.4%
Royalty income 3.7 1.8 6.7 2.6
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 41.1 34.8 57.0 30.8
Gross profit 58.9 65.2 43.0 69.2
Sales and marketing 74.2 29.4 90.1 29.8
General and administrative 19.4 12.3 32.2 13.0
Research and development 20.5 4.4 24.8 4.4
Litigation settlement 81.6 -- 74.3 --
Total operating expenses 195.7 46.1 221.4 47.2
Income (loss) from operations (136.8) 19.1 (178.4) 22.0
Other income 12.7 0.5 16.6 0.5
Income (loss) before taxes (124.1) 19.6 (161.8) 22.5
Provision for income taxes -- 7.5 -- 8.6
Net income (loss) (124.1)% 12.1% (161.8)% 13.9%
</TABLE>
Comparison of Three Months Ended June 30, 1996 and 1995
Revenues
Total revenues for the three months ended June 30, 1996 were
$1,682,000, a decrease of $1,638,000, or 49.3%, compared to
$3,320,000 for the three months ended June 30, 1995, primarily
due to the lower sales of the WINCheckIt product line and the
deferral of revenue until retail sell-through is measured as
discussed above. Although sales of PC-cillin and CheckIt
Diagnostic Kit met management's expectations, sales of these
products did not offset the declining sales of the WINCheckIt
products.
For the three months ended June 30, 1996, royalty income was
$62,000, an increase of $3,000, or 4.2%, compared to $59,000 for
the three months ended June 30, 1995. Royalty income increased as
a percentage of total revenues, from 1.8% during the three months
ended June 30, 1995 to 3.7% for the three months ended June 30,
1996.
Gross Profit
Gross profit for the three months ended June 30, 1996 was
$992,000, a decrease of $1,174,000, or 54.2%, compared to
$2,166,000 for the three months ended June 30, 1995. Gross profit
as a percentage of total revenues declined from 65.2% in the
second quarter of 1995 to 58.9% in the second quarter of 1996.
This decrease was primarily attributable to increased royalty
costs paid to other software companies in relation to product
sales, primarily incurred in connection with sales of the
Company's PC-cillin product. Additionally, the gross profit
percentage declined due to the lower sales volume in relation to
certain fixed costs that were established for higher sales
volumes. Such increased costs were offset somewhat by a decline
in amortization of software development costs, which decreased
from $63,000 in
9
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the three months ended June 30, 1995 to $43,000 in the three
months ended June 30, 1996, and by lower freight costs ( $102,000
in the three months ended June 30, 1995 as compared to $38,000 in
the three months ended June 30, 1996).
Sales and Marketing Expense
Sales and marketing expense for the three months ended June 30,
1996 was $1,248,000, an increase of $268,000, or 27.3%, compared
to $980,000 for the three months ended June 30, 1995. This
increase was primarily attributable to an increase in the number
of customer service, technical support and marketing personnel in
1996 as compared to 1995. Additionally, direct mail and media
advertising costs increased in 1996 as compared to 1995. Further,
the Company's consulting costs increased in 1996 from 1995 levels
to support the Company's attempts to increase sales
internationally. Such increased costs were offset somewhat by a
decline in retail promotional expenditures. Due to these
additional expenditures and the decline in product sales, sales
and marketing expenses increased as a percentage of total
revenues from 29.4% in the second quarter of 1995 to 74.2% in the
second quarter of 1996. The Company continues to make investment
in sales and marketing to support future revenue growth, but such
revenue growth may lag the expense level.
General and Administrative Expense
General and administrative expense for the three months ended
June 30, 1996 was $327,000, a decrease of $80,000, or 19.7%,
compared to $407,000 for the three months ended June 30, 1995.
This decrease is primarily attributable to a decline in
profit-sharing bonuses paid to employees ($143,000 in the three
months ended June 30, 1995, as compared to none in the three
months ended June 30, 1996). As a percentage of total revenues,
general and administrative expenses increased from 12.3% to 19.4%
during the three months ended June 30, 1995 to the three months
ended June 30, 1996, respectively.
Research and Development Expense
Research and development expense for the three months ended June
30, 1996 was $344,000, an increase of $199,000, or 138.0%,
compared to $145,000 during the three months ended June 30, 1995.
The increase was attributable primarily to the hiring of
additional programmers and increased use of outside programmers
to develop new products, and to salary increases for existing
programmers. Research and development expense also increased as a
percentage of total revenues, from 4.4% for the three months
ended June 30, 1995 to 20.5% for the three months ended June 30,
1996.
Litigation Settlement
In June 1996 the Company reached an agreement to settle three
shareholder class action and derivative suits against the Company
and certain of its officers and directors. Under the principal
terms of the agreement, the Company established a settlement fund
consisting of $500,000 and 200,000 newly-issued shares of common
stock in June 1996.
Other Income
During the three months ended June 30, 1995, the Company's
interest income exceeded its interest expense by approximately
$18,000. Interest income exceeded interest expense in the three
months ended June 30, 1996, by approximately $214,000, as
interest-bearing investments increased.
Comparison of Six Months Ended June 30, 1996 and 1995
Revenues
Total revenues for the six months ended June 30, 1996 were
$2,438,000, a decrease of $3,743,000, or 60.6%, compared to
$6,181,000 for the six months ended June 30, 1995, as sales of
WINCheckIt 4.0 in 1996 were significantly less than expected.
Although sales of PC-cillin and CheckIt Diagnostic Kit met
management's expectations, sales of these products did not offset
declining sales of the WINCheckIt product line.
10
<PAGE>
For the six months ended June 30, 1996, royalty income was
$163,000, an increase of $4,000, or 2.5%, compared to $159,000
for the six months ended June 30, 1995. Royalty income increased
as a percentage of total revenues, from 2.6% during the six
months ended June 30, 1995 to 6.7% for the six months ended June
30, 1996.
Gross Profit
Gross profit for the six months ended June 30, 1996 was
$1,049,000, a decrease of $3,228,000, or 75.5%, compared to
$4,277,000 for the six months ended June 30, 1995. Gross profit
as a percentage of total revenues declined from 69.2% in 1995 to
43.0% in 1996. This decrease was primarily attributable to
increased royalty costs paid to other software companies
($523,000 in the six months ended June 30, 1996, compared to
$274,000 in the six months ended June 30, 1995), primarily
incurred in connection with sales of the Company's PC-cillin
product. Additionally, the gross profit percentage declined
because the sales volume is low in relation to certain fixed
costs. Such increased costs were offset somewhat by a decline in
amortization of software development costs, which decreased from
$138,000 in the six months ended June 30, 1995 to $83,000 in the
six months ended June 30, 1996, and by lower freight costs
($181,000 in the six months ended June 30, 1995 as compared to
$74,000 in the three months ended June 30, 1996).
Sales and Marketing Expense
Sales and marketing expense for the six months ended June 30,
1996 was $2,198,000, an increase of $357,000, or 19.4%, compared
to $1,841,000 for the six months ended June 30, 1995. This
increase was primarily attributable to an increase in the number
of customer service, technical support and marketing personnel in
1996 as compared to 1995. Additionally, direct mail and media
advertising costs increased in 1996 as compared to 1995. Further,
the Company's consulting costs increased in 1996 from 1995 levels
as the Company attempts to increase sales internationally. Such
increased costs were offset somewhat by a decline in retail
promotional expenditures. Due to these additional expenditures
and the decline in product sales, sales and marketing expenses
increased as a percentage of total revenues from 29.8% in the six
months ended June 30, 1995 to 90.2% in the six months ended June
30, 1996.
General and Administrative Expense
General and administrative expense for the six months ended June
30, 1996 was $784,000 a decrease of $21,000, or 2.6%, compared to
$805,000 for the six months ended June 30, 1995. This decrease is
primarily attributable to a decline in profit-sharing bonuses
paid to employees ($301,000 in the six months ended June 30,
1995, as compared to none in the six months ended June 30, 1996).
Such decreased costs were partially offset by compensation
expense related to a stock buy-back agreement incurred in
connection with the resignation of a Company officer.
Additionally, investor relations and audit costs increased. As a
percentage of total revenues, general and administrative expenses
increased from 13.0% to 32.2% during the six months ended June
30, 1995 to the six months ended June 30, 1996, respectively.
Research and Development Expense
Research and development expense for the six months ended June
30, 1996 was $605,000, an increase of $332,000, or 121.4%,
compared to $273,000 during the six months ended June 30, 1995.
The increase was attributable primarily to the hiring of
additional programmers and increased use of outside programmers
to develop new products, and to salary increases for existing
programmers. Research and development expense also increased as a
percentage of total revenues, from 4.4% for the six months ended
June 30, 1995 to 24.8% for the six months ended June 30, 1996.
Litigation Settlement
In June 1996 the Company reached an agreement to settle three
shareholder class action and derivative suits against the Company
and certain of its officers and directors. Under the principal
terms of the agreement, the Company established a settlement fund
consisting of $500,000 and 200,000 newly-issued shares of common
stock in June 1996.
11
<PAGE>
Other Income
During the six months ended June 30, 1995, the Company's interest
income exceeded its interest expense by approximately $32,000.
Interest income exceeded interest expense in the six months ended
June 30, 1996, by approximately $405,000, as interest-bearing
investments increased.
Liquidity and Capital Resources
During the six months ended June 30, 1996, the Company used its
cash resources primarily for investments in debt securities
totaling $5,818,000. Additionally, the Company used $1,886,000
for operating activities. The Company also invested $89,000 in
capitalized software development and purchased equipment totaling
$170,000. These expenditures were funded primarily by cash
received from sale of investments of $6,488,000. The Company also
received proceeds from sales of common stock aggregating $48,000.
Primarily as a result of the net loss incurred in the six months
ended June 30, 1996 as discussed above, the Company's working
capital has decreased from $15,373,000 at December 31, 1995 to
$11,133,000 at June 30, 1996. Cash and cash equivalents decreased
from $12,919,000 at December 31, 1995 to $11,499,000 at June 30,
1996.
The Company's bank line of credit expired May 5, 1996. The
Company is currently renegotiating with the bank for a new bank
line of credit which would be secured by a certificate of
deposit. The Company anticipates a new bank line of credit will
be secured in 1996.
Management believes that the Company's existing cash resources
and anticipated cash flows from operations, and periodic
borrowings under the line of credit, will be sufficient to fund
the Company's operations at currently anticipated levels through
June 30, 1997. The Company plans to use its cash resources to
finance new product development and existing product
enhancements, expand internationally, expand the direct sales
force for corporate customers, and for general corporate
customers. The execution of such plans may include strategic
acquisitions of or investments in complementary businesses,
products or technologies.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On January 26, 1996, a purported class and derivative action
entitled DARRIN J. CARAMONTA v. LARRY W. DINGUS, ET AL. Was filed
in United States District Court for the Central District of
California, in which Mr. Caramonta, on behalf of himself and all
others who purchased the Company's Common Stock between May 2,
1995 and December 21, 1995, alleges that the Company and certain
of its officers violated Section 10(b) and Rule 10b-5 promulgated
under the Securities Exchange Act of 1934, as amended, and
various state statutes sounding in fraud, by reporting earnings
for the first three quarters of 1995 that allegedly were
knowingly inflated due to inadequate reserves for product
returns, in part, in order to assist the Company and the
individual defendants in selling Common Stock at an inflated
price in the Company's August 25, 1995 public offering. The
derivative claims essentially assert that the allegations
sounding in fraud constituted a breach of the individual
defendants' fiduciary duties.
On March 13, 1996, and on March 21, 1996, substantially similar
purported class and derivative actions entitled JACK BODNER v.
LARRY W. DINGUS, ET AL. and MARC JAFFE v. LARRY W. DINGUS, ET
AL., respectively, were also filed in the same court.
On March 11, 1996, defendants moved to dismiss the Caramonta
action pursuant to Fed. R. Civ. P. 12(b) (6) and Rule 9(b). A
ruling on the motion to dismiss was pending at the time the
parties reached an agreement-in-principle to settle the
litigation.
Under the principal terms of the agreement, the Company
established a settlement fund consisting of $500,000 and 200,000
newly-issued shares of common stock. The Company also adopted a
written policy on insider trading.
Settlement documents have been prepared and will be submitted to
the Court for preliminary approval; if the Court grants such
approval, the notice of settlement will be mailed to class
members who will have the opportunity to accept or to opt out of
the settlement. Following a reasonable period thereafter, a final
settlement hearing will be scheduled for final approval of the
settlement by the Court.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
13
<PAGE>
ITEM 5. Certain Considerations
This quarterly report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The actual
future results of TouchStone Software Corporation ("Company")
could differ materially from those statements. Factors that could
cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this report,
as well as those factors discussed in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1995.
These risks include, but are not limited to, the risk that the
products under development prove more difficult to develop than
currently anticipated, resulting in delays in reaching the market
or even in the planned product having to be abandoned. Moreover,
with or without delays in bringing new products to market, it is
possible that the Company's competitors will bring to market
successful competing products which reduce the size of, or
eliminate altogether, the market for the Company's planned
products. Furthermore, several of the products under
consideration involve complicated communication systems, which is
an area where the Company has little experience, and thus it may
find that the technological problems are more difficult than
presently anticipated. In addition, the software industry is
characterized by rapid change and technological advancement,
including a trend by hardware manufacturers to feature pre-loaded
software packages in computers. This could reduce demand for the
Company's products, if such pre-loaded software performs many of
the same functions as the Company's currently marketed or
currently under-development software.
With respect to statements regarding the sales force and the hope
to broaden the Company's customer base, the Company intends on
entering markets that are new for it and in so doing will compete
against other companies with greater resources. There is a risk
that the Company will not be able to penetrate these new markets
successfully, but will nonetheless incur sales and administrative
expenses in attempting to do so. With regard to the hoped for
expansion of the Company's presence at retail chains, the Company
competes against many other software vendors both directly, in
the form of directly competing products, and indirectly, with
even noncompeting products for limited shelf space at retailers
and distributors. To a large extent, the Company's success in
this regard will be a function of the Company's ability to
develop successfully the planned products identified in this
report, along with market acceptance of the Company's products
currently being sold at retail. Other risks are detailed in the
Company's Securities and Exchange Commission filings, including
form 10-KSB for the year ended December 31, 1995.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibit 27 - Financial Data Schedule.
b. No reports on form 8-K have been filed at June 30, 1996.
14
<PAGE>
S I G N A T U R E S
-------------------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
TOUCHSTONE SOFTWARE CORPORATION
(Registrant)
/s/ Larry S. Jordan President, Chief Executive
- ------------------- Officer and Director
Larry S. Jordan Dated: August 13, 1996
/s/ Ronald R. Maas Executive Vice President,
- ------------------ Chief Financial Officer,
Ronald R. Maas Dated: August 13, 1996 Principal Accounting Officer
and Director
15
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