UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _______________ to _____________
Commission File Number 0-12969
TouchStone Software Corporation
-------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware 95-3778226
-------- ----------
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2124 Main Street, Huntington Beach, California 92648
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(Registrant's Telephone Number including Area Code): (714) 969-7746
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The aggregate market value of the voting stock held by non- affiliates of
the registrant as of March 1, 1997 was $18,396,188 based upon the closing bid
-----------
price for the Company's common stock at March 1, 1997.
The issuer's revenues for the year ended December 31, 1996 were $7,667,035.
The number of shares outstanding of the registrant's classes of common
stock as of March 1, 1997 was 7,808,235 shares.
---------
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
This Annual Report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties. TouchStone Software Corporation's actual future
results could differ materially from those statements. Factors that could cause
or contribute to such differences include, but are not limited to, those factors
discussed in Item 1, "Business" and elsewhere in this Report.
Item 1. Business
- - ------- --------
General
TouchStone Software Corporation (the "Company" or "TouchStone") is a
leading developer and publisher of utility software used to set up, maintain,
and manage personal computers. The Company's CheckIt family of products,
including WINCheckIt and CheckIt Diagnostic Kit, 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. In October 1995, the Company
released WINCheckIt 4.0, TouchStone's latest version of its Windows problem
solver. WINCheckIt 4.0 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.
In November 1995, TouchStone released PC-cillin 95. Designed for use with
Windows 95 and the Internet, PC-cillin 95 provides protection from new virus
sources and increasingly sophisticated types of viruses. PC-cillin 95 was
awarded Home PC magazine's 1996 Editor's Choice Award, recognizing it as one of
the top 100 software products of 1996, and also received PC Computing magazine's
1996 Best Award. An upgraded version of this product, PC-cillin II, was released
in October 1996. PC-cillin II incorporates superior detection technology to
protect users from virus threats, including the Internet, macro viruses, E-mail,
networks, and unknown viruses. The product also features intelligent,
Internet-based enhancements designed to optimize the program's ease of use.
In March 1996, TouchStone released CheckIt Diagnostic Kit, the Company's
latest addition to its CheckIt product line. The package features a long list of
high-powered troubleshooting utilities for Windows 95, Windows 3.1 and DOS
environments, providing users with a comprehensive collection of PC diagnostics.
The Company's FastMove! product, initially 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
August 1996, TouchStone released FastMove! 2.0, which incorporated ZIPSync
utility, the first ever synchronization and backup program for removable drives.
During 1996, the Company devoted significant resources to develop a new
product line, e.Support. Released for testing in the fourth quarter of 1996,
this product is designed to provide PC users with a convenient method of
requesting customer support from thousands of vendors via modem or the Internet.
Developed by TouchStone with input and direction from the Software Support
Professionals Association, e.Support has broad applications for many companies.
TouchStone's primary target markets for this product are computer hardware
manufacturers, software publishers, and on-line service providers.
The Company markets its products domestically primarily through software
distributors, including Ingram Micro, Inc. ("Ingram Micro"), Tech Data
Corporation ("Tech Data"), Navarre Corporation, and Merisel Americas, Inc.
("Merisel"), for resale through the retail channel. The Company's primary sales
and marketing efforts in 1996 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 7,500 in
1996. Additionally, the Company's enterprise sales group is focused primarily on
selling product site licenses directly to large institutions.
Organized in 1982 as a California corporation, the Company reincorporated
in Delaware in January 1997. The Company's principal executive offices are
located at 2124 Main Street, Huntington Beach, California, 92648, and its
telephone number is (714) 969-7746.
Industry Overview
During the last decade, the personal computer industry has grown rapidly.
International Data Corporation (IDC) estimates that worldwide PC utility
software sales were approximately $580 million in 1996 compared with $469
million in 1995. The Company believes that the market will continue to expand in
the future as technological advances and increased functionality, combined with
lower pricing, have made personal computers common for use in both homes and
businesses. Future changes of the operating systems that run personal computers
may contain some of the functionality of certain utility software. However, the
Company believes that the complexities created by multimedia systems utilizing
technologically advanced features such as CD-ROM drives and enhanced video,
storage, animation, and sound capability, will continue to drive the demand for
new, sophisticated, separately installed, utility software.
<PAGE>
Products
The following table sets forth the products currently marketed by the
Company:
Initial Release
Product Title Description Date
- - ------------- ----------- ----
e.Support e.Support is an electronic support December 1996
system which allows users to (Testing)
communicate with multiple vendors from
one simple user interface on the user's
system. e.Support allows the user to
send a Problem Report, Information
Request, Registration, "How To"
Request or Feedback to a vendor
electronically via a modem, LAN or
Internet connection, and contains the
option to include system diagnostic
information, and user-attached files.
PC-cillin PC-cillin II provides automatic October 1996
II protection from computer viruses. PC-
cillin II monitors virus sources,
adjusts protection automatically, and
removes viruses. PC-cillin II utilizes
the latest in ActiveX technology and
includes the new patent-pending Macro
Shield that detects known and unknown
macro viruses.
CheckIt For use with DOS, Windows 3.1 and March 1996
Diagnostic Windows 95, this multi-utility package
Kit is designed to meet the specific needs
of both technicians and technical
users. It includes the new CheckIt 4
program, a portable, self-booting DOS
utility that provides extensive
hardware testing and configuration
analysis features; the new WINCheckIt
Pro, an advanced version of WINCheckIt;
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.
WINCheckIt This Windows-based utility provides a October 1995
4.0 suite of diagnostic tools, normally
found in separate programs, that have
been designed to work in both Windows
95 and Windows 3.1 environments.
WINCheckIt includes an uninstall
utility, a modem test, a comprehensive
CD-ROM diagnostic utility, and a four-
volume McGraw-Hill technical reference
library on CD-ROM.
FastMove! A file synchronization and transfer March 1995
program with ZIPSync that keeps the
files and directories on desktop PCs,
laptops, networks and Zip drive,
synchronized and up-to-date with the
click of a button. ZIPSync is the
first utility of its kind to
synchronize and catalog files on a Zip
drive. FastMove! includes an Ultra Flex
Parallel Transfer Cable.
<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 be
competitive, improve quality and consistency, and quickly bring products to
market.
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 usability 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 adapts its "core" technology to develop products, or enhances existing
ones, designed to assist the user in resolving problems or adapting to new
technological environments. The Company's strategy for developing products
compatible with Windows 95 and Windows NT, and future versions of the foregoing,
is substantially dependent on its ability to gain pre-release access to, and
develop expertise in, such versions.
The Company has worked with other 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 that the Company pay the developer royalties 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.
FastMove! and the PC-cillin products were originally developed by Trend Micro
Incorporated ("Trend"), and were subsequently modified by the Company. Trend has
been an important provider of essential technologies, and the Company believes
Trend will continue to play a key role in the development of enhancements and
upgrades to certain products.
During 1996 and 1995, royalty expenses were approximately $1,314,000 and
$575,000, respectively. Research and development expenses during 1996 and 1995
were approximately $1,470,000 and $729,000, respectively. In addition, the
Company capitalized costs of approximately $182,000 and $360,000 in 1996 and
1995, respectively, for the development of new software products and the
enhancement of existing products. When these amounts are combined, the resulting
totals represent 38.7% and 17.8% of total revenues, respectively.
The Company's strategy of developing products based on the Windows 95 and
Windows NT operating systems, and releasing these products immediately prior to
or at the time of Microsoft's release of new and upgraded Windows 95 and Windows
NT products, is substantially dependent on the Company's ability to gain pre-
release access to, and to develop expertise in, current and future versions of
Windows 95 and Windows NT. The ability of the Company to provide products
compatible with future Windows 95 or Windows NT releases on a timely basis will
continue to depend on the cooperation of Microsoft.
<PAGE>
Distribution, Sales, and Marketing
The Company markets its products domestically through software distributors
for resale to the retail sales channel. In 1996, Ingram Micro and Tech Data
accounted for approximately 14% and 29% of product sales, respectively. These
same distributors accounted for approximately 58% and 17% of 1995 product sales,
respectively. The loss of or reduction in orders from either of these
distributors 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 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 at tempts 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 distribu tors and substantial product
returns.
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 is 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, competition for shelf space will also increase. Since utility
software typically constitutes a relatively small percentage of a retailer's
sales volume, there can be no assurance that 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.
The Company's primary marketing and sales efforts in 1996 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, which was begun in 1994,
includes using outside representatives to present the Company's products to
store employees in such retail stores as CompUSA, Micro Center, Egghead,
Computer City, Fry's Electronics, Office Depot, and Best Buy. In addition, the
Company engaged in a variety of merchandising promotions, such as end-caps,
shelf- talkers, in-store posters, contests, and rebate coupons in order to
increase sales. The Company has also improved its product packaging to better
attract attention of retail consumers to help the Company's products sell off
the shelf. Management estimates the number of retail stores which carry the
Company's products increased from approximately 1,700 in 1993 to approximately
7,500 in 1996. Licensed end-users of the Company's products include individual
personal computer owners, government agencies, utilities, educational
institutions, software development compa nies, computer product manufacturers,
and others.
In November 1995, TouchStone established an enterprise sales group. This
group's focus is to promote TouchStone's products directly to Fortune 1000
companies and to provide product sales support through corporate resellers such
as CompUSA, Egghead, Stream, and Software Spectrum. 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. 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 marketing programs directly with certain distributors and
retailers, whereby the Company receives marketing opportunities through
advertisements, brochures, and catalogs initially paid for by the distributors
or retailers.
Management anticipates that the Company's e.Support product will address
problems faced by the service-management market, and that the Company's entry
into this market will supplement the utilities software market that TouchStone
has traditionally served. The Company's enterprise sales group will concentrate
heavily on marketing e.Support to technical support departments and internal
help desks at large corporations. The Company will also target these same
customers for multiple-user packages of its other products.
<PAGE>
Internationally, the Company markets its products through distributors and
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 has an independent sales
representative in Australia and a software publisher/distributor in the United
Kingdom. Subsequent to December 31, 1996, TouchStone appointed an individual
located in Austria to serve as Managing Director of TouchStone in Europe, in
order to expand and improve existing channels of product distribution. The
Company is also evaluating further expansion into Asia and Latin America.
The Company's sales force at March 1, 1997 consisted of ten people based in
the Company's office, all of whom receive salaries, commissions, and/or
incentive bonus compensation. In addition, the Company maintains an in-house
marketing department that handles most of the design and development of product
packaging, advertisements, and promotional items.
Duplication and Packaging
The Company's packaging material, manuals, and duplication services are
provided by third-party suppliers. Management believes that relations with these
suppliers are good, and that alternative sources exist, and if necessary, can be
obtained with minimal disruption of the Company's 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 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, IBM,
Symantec, McAfee, CyberMedia, Quarterdeck, and others. 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. 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 competitors from developing and selling competing products in
the Company's markets. 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.
The Company may face increasing pricing pressures from current and future
competitors and, accordingly, competitive pressures may require the Company to
reduce its prices. In addition, to the extent that Microsoft or other companies
incorporate applications comparable or superior, or perceived as comparable or
superior, to those offered by the Company into Windows 95, Windows NT, or other
products (or separately offer such products), sales of the Company's products
could be materially adversely affected, and the Company's Windows 95 or Windows
NT-based products could be rendered noncompetitive or obsolete.
The Company will also face competition in the developing market of
providing services and products to technical support organizations with its
e.Support family of products. This is a new industry and the Company is in the
process of developing products and services with less resources than other
companies who are already leaders in the related industry of help-desk software.
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.
<PAGE>
Under existing law, software products have been difficult to patent, and
copyright laws offer limited protection. The Company routinely applies for
federal trademark registrations for its products. 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 will
provide meaningful protection to the Company or that the Company will be able to
afford the expense of any litigation which might be necessary to enforce its
rights. However, 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. 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 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.
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 indus try 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 March 1, 1997, the Company had 68 employees, all full- time. None of the
Company's employees is covered by a collective bargaining agreement. The Company
considers its relationship with its employees to be good.
Item 2. Properties
- - --------------------
The Company currently leases approximately 15,700 square feet of office
space in Huntington Beach, California. The annual rent payments under this lease
are currently $214,000.
Item 3. 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. The complaint alleges that this was done, 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.
<PAGE>
Under the principal terms of the agreement, the Company established a
settlement fund consisting of $500,000 and 200,000 newly-issued shares of the
Company's common stock. The Company also adopted a written policy on insider
trading.
The Court granted preliminary approval to the terms of the settlement and
has authorized the mailing of notice of the terms of the settlement to the
class. The Company is informed by counsel for the class that the notice has been
mailed. A final hearing was held in December 1996, and the Court has taken the
matter under submission.
On October 9, 1996 an entity known as Intervention, Incorporated
("Intervention") filed an action against the Company in the Superior Court of
the State of California, Santa Clara County (C 96-04476). Intervention claims
that it is a non-profit corporation bringing an action for the interests of the
general public. In essence, Intervention claims that the Company is engaged in
unfair competition and is violating California's Fair Packaging and Labeling Act
by filling the Software packages to "substantially less than their capacities."
Intervention seeks injunctive relief, unspecified attorneys' fees and damages of
$1,000,000. The Company understands that eight other software companies have
been named as defendants in identical lawsuits in three different counties, and
that a petition to coordinate these actions has been filed. The Company believes
this suit is without merit and intends to defend itself vigorously. Based on its
current knowledge the Company does not believe that this matter will have a
material adverse effect on the financial condition or results of operations of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- - -------------------------------------------------------------
During the quarter ended December 31, 1996, the Company solicited votes by
proxy for the following matters:
1. To elect six directors of the Company
2. To approve a change in the Company's state of incorporation
from California to Delaware
3. To approve and adopt a new 1997 Stock Incentive Plan with
the maximum aggregate number of shares registered for issuance
totaling 1,200,000 shares of the Company's common stock
Following are the results of votes cast as reported at the Company's annual
meeting on December 16, 1996, and the continuation of such meeting on January
17, 1997:
Proposal #1 Election of Directors For Withheld
- - --------------------------------- --- --------
Larry W. Dingus 6,122,847 88,803
C. Shannon Dingus 6,104,603 107,047
Ronald R. Maas 6,129,700 81,950
Kenneth C. Welch, III 6,131,066 80,584
Richard W. Brail 6,127,718 83,932
Larry S. Jordan 6,125,768 85,882
Proposal #2 To approve a change in the Company's state of incorporation
- - ---------------------------------------------------------------------------
from California to Delaware:
----------------------------
For Against Abstain Not voted
--- ------- ------- ---------
4,390,808 294,911 68,904 1,743,903
Proposal #3 To adopt the 1997 Stock Incentive Plan:
- - ------------------------------------------------------
For Against Abstain Not voted
--- ------- ------- ---------
2,888,547 296,714 43,949 2,955,520
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
- - ---------------------------------------------------------------------------
Matters
-------
The Company's securities have been traded on the NASDAQ National Market
since May 19, 1995. Prior to May 19, 1995, the Company's securities traded in
the over-the-counter market. The CompanyOs securities are reported under the
symbol "TSSW".
<TABLE>
<CAPTION>
In 1996 and 1995, the high and low bid prices quoted for a share of common
stock were:
1996 Low High
- - ---- --- ----
<S> <C> <C>
Quarter ended December 31, 1996 $2.19 $3.63
Quarter ended September 30, 1996 2.63 3.88
Quarter ended June 30, 1996 3.13 5.50
Quarter ended March 31, 1996 3.00 6.25
1995 Low High
- - ---- --- ----
Quarter ended December 31, 1995 $3.00 $10.00
Quarter ended September 30, 1995 5.00 16.38
Quarter ended June 30, 1995 1.06 5.88
Quarter ended March 31, 1995 0.75 1.50
</TABLE>
These market quotations reflect inter-dealer prices without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
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. Any shortfall
in revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. Finally, the Company participates in a highly
dynamic industry, which often results in significant volatility of the Company's
common stock price.
As of March 1, 1997, there were approximately 3,300 holders of record of
TouchStone's common stock, including stock held by affiliates and excluding an
undetermined number of shareholders whose shares are held in "street" or
"nominee" names.
TouchStone has not paid cash dividends on its common stock since its
inception. TouchStone intends to employ all available funds for the development
of its business, and, accordingly, does not intend to declare or pay any cash
dividends in the foreseeable future. Additionally, the Company's line of credit
prohibits the payment of dividends without prior approval of the bank.
Item 6. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------------------
Results of Operations
---------------------
This report on Form 10-KSB contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to those discussed under
the caption "Business Risks" contained herein.
General
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.
<PAGE>
Product revenues are recorded at the time products are shipped, less
estimated reserves for product returns. Currently the Company uses historical
experience for international shipments and retail sell-through information for
domestic shipments to establish these reserves. 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. 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. 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 Statement of Financial Accounting Standards (SFAS) No. 86.
In June 1996 the Company reached an agreement-in-principle 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 the Company's common stock in June 1996. The Company
recorded costs of $1,812,000 in 1996 for this settlement and related litigation
expenses.
The Company's performance during the last half of 1995 and in 1996 was
adversely affected by an unanticipated slowdown in the sale of some of its
Windows 95 related products and significantly greater than expected product
return. 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 elected to increase the calculation for the required
reserves on the shipment of all products commencing in 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 consolidated
financial statements, have adversely affected profitability and resulted in net
losses of $1,625,000 and $4,529,000 during the years ended December 31, 1995 and
1996, respectively. In order to improve operating results, the Company's plans
include the introduction of new software products in 1997 and the expansion of
marketing channels by the promotion of products directly to corporate and
institutional customers and to other software developers and publishers.
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.
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.
<PAGE>
The demands on the Company's management and resources has increased over
the past two years. 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, service, and
finance functions. The Company's future operating results will depend on
management's ability to successfully maintain controls and build the
infrastructure.
The following information should be read in conjunction with the audited
consolidated financial statements included herein. All dollar amounts presented
have been rounded to the nearest thousand and all percentages are approximate.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
The following table sets forth certain statement of
operations data as a percentage of total revenues for the years
ended December 31:
1996 1995
---- ----
<S> <C> <C>
Revenues:
Product sales .................... 95.7% 96.6%
Royalty income ................... 4.3 3.4
---- ----
Total revenues ................... 100.0 100.0
Cost of sales ......................... 45.8 46.0
---- ----
Gross profit ..................... 54.2 54.0
Sales and marketing ................... 61.8 48.8
General and administrative ............ 18.9 15.3
Research and development .............. 19.2 7.8
Litigation settlement and related costs 23.6
---- ----
Loss from operations .................. (69.3) (17.9)
Other income, net ..................... 10.3 3.5
---- ----
Loss before taxes ..................... (59.0) (14.4)
Provision for income taxes ............ 2.9
---- ----
Net loss ......................... (59.0)% (17.3)%
===== =====
</TABLE>
Comparison of Years Ended December 31, 1996 and 1995
Revenues. Total product sales declined from 1995 to 1996 because sales of
the Company's best selling products, PC-cillin and CheckIt Diagnostic Kit, did
not grow fast enough to offset the declining sales of WINCheckIt. Sales of
WINCheckIt in 1996 were not consistent with the performance in 1995 due to
increased competition in the utility software market.
Royalty income did not change significantly in 1996 from 1995 levels.
Royalty income increased as a percentage of total revenues, from 3.4% in 1995 to
4.3% in 1996.
Gross Profit. Gross profit as a percentage of total revenues remained
relatively constant, increasing from 54.0% in 1995 to 54.2% in 1996. Increased
royalty costs paid to other software companies, primarily incurred in connection
with sales of the Company's PC-cillin products, were offset by a decline in
amortization of software development costs and by lower freight costs.
Sales and Marketing Expense. The increase in sales and marketing expense
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 48.8% in 1995 to 61.8% in 1996.
<PAGE>
General and Administrative Expense. General and administrative expense for
1996 was consistent with 1995 levels. A decline in profit-sharing bonuses paid
to employees was partially offset by compensation expense related to a severance
payment incurred in connection with the resignation of a Company officer.
Additionally, investor relations, audit, rent, and depreciation costs increased
in 1996. As a percentage of total revenues, general and administrative expenses
increased from 15.3% in 1995 to 18.9% in 1996.
Research and Development Expense. The increase in research and development
expense in 1996 from 1995 was attributable primarily to the hiring of additional
programmers and increased use of outside programmers to develop existing product
upgrades and new products. Approximately $500,000 was attributable to
development of new products including e.Support. Research and development
expense also increased as a percentage of total revenues, from 7.8% in 1995 to
19.2% in 1996.
Litigation Settlement and Related Costs. 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 the Company's common
stock in June 1996, valued at $625,000 which was the fair market value of the
stock at the date of settlement.
Other Income. Interest income exceeded interest expense by approximately
$327,000 in 1995 and by approximately $789,000 in 1996 as interest-bearing
investments increased in the latter part of 1995 as a result of the completion
of the Company's secondary public offering of common stock.
Income Tax. The Company's effective tax rate decreased from 1995 to 1996
because the 1995 provision included non-deductible amounts for product return
reserves.
Comparison of Years Ended December 31, 1995 and 1994
Revenues. The increase in product sales from 1994 to 1995 was attributable
to increased sales of the Company's WINCheckIt product which was first released
in August 1994, and sales of FastMove! and PC-cillin 95, released in March 1995
and November 1995, respectively. Product sales for 1995 was reported net of
reserves that were accrued for price protection (price reduction on resellers'
inventories), reseller rebates, and expected returns, aggregating approximately
$3,100,000.
Royalty income did not change significantly in 1995 from 1994 levels.
Royalty income declined as a percentage of total revenues, from 4.3% during the
year ended December 31, 1994 to 3.4% during the year ended December 31, 1995.
Gross Profit. Gross profit as a percentage of total revenues declined from
67.8% in 1994 to 54.0% in 1995. This decrease was primarily attributable to
increased customer price protection, product returns without corresponding
decreases in cost, and to increased inventory obsolescence reserves, which were
required in connection with product returns of WIN`95 Advisor and WINCheckIt
2.0. Additionally, royalty costs paid to other software development companies
increased in 1995 from 1994 levels, primarily incurred in connection with sales
of the Company's FastMove! and PC-cillin 95 products. Other costs which
increased in 1995 from 1994 levels included freight, resulting from increases in
units shipped and higher freight-in costs for certain product components, and
amortization of software development costs, which included a one-time charge of
$70,000 in 1995 to write off costs capitalized to develop WIN'95 Advisor.
Sales and Marketing Expense. The increase in sales and marketing expense
for the year ended December 31, 1995 was primarily attributable to increased
promotional and merchandising expenditures for the Company's products associated
with its retail strategy. Additional promotional costs were incurred with the
release of new products, primarily FastMove! in March 1995, WIN'95 Advisor in
July 1995, and PC-cillin 95 in November 1995. Further, in order to support the
substantial increase in sales volume experienced in the first nine months of
1995, the Company was required to add sales, customer service, and technical
support personnel. Sales and marketing expense in 1995 also includes costs
aggregating $125,000 in connection with sales and marketing activities of the
Company's wholly-owned subsidiary, TouchStone Europe Ltd., which commenced
operations in the United Kingdom in July 1995. Due to these additional
expenditures, sales and marketing expenses increased as a percentage of total
revenues from 31.5% in 1994 to 48.8% in 1995.
<PAGE>
General and Administrative Expense. General and administrative expenses in
1995 increased from 1994 levels due to increased accounting, legal and investor
relations cost resulting from the Company's secondary public offering of common
stock and subsequent listing on the NASDAQ National Market ("NASDAQ exchange").
These increased costs were somewhat offset by a decrease in profit-sharing
bonuses in 1995 as compared to 1994. As a percentage of total revenues, general
and administrative expenses declined from 17.3% in 1994 to 15.3% in 1995.
Research and Development Expense. Research and development expense
increased in 1995 as compared to 1994 as the Company hired additional
programmers during 1995 to develop new products. Research and development
expense also increased as a percentage of total revenues, from 6.1% for the year
ended December 31, 1994 to 7.8% for the year ended December 31, 1995.
Other Income, Net. During the year ended December 31, 1994, the Company's
interest expense exceeded its interest revenue by approximately $28,000. As the
Company's cash resources improved in 1995, primarily as a result of the
completion of its secondary public offering of common stock, the Company's
interest revenue exceeded interest expense in the year ended December 31, 1995,
by approximately $327,000, as the Company was able to reduce debt and increase
interest-bearing investments in 1995.
Provision for Income Taxes. The Company's effective tax rate for the year
ended December 31, 1994 was 11%. The difference between the provision for income
taxes by applying the federal statutory tax rate to pre-tax income and the
actual provision for income taxes results primarily from the elimination of
valuation allowances on deferred tax assets and the utilization of net operating
loss carry-forwards which were previously available to the Company.
The Company's provision for taxes of $276,000 in 1995 relates primarily to
the change in valuation allowances on net deferred tax assets.
Liquidity and Capital Resources
During the year ended December 31, 1996, the Company used cash resources of
$2,718,000 for operating activities, invested $182,000 in capitalized software
development, and purchased equipment totaling $378,000. The Company invested its
cash in debt securities totaling $21,091,000 which was funded primarily by cash
received from the sale of such investments of $14,232,000, for a net amount used
to purchase investments of $6,851,000. The Company also received proceeds from
sales of common stock aggregating $104,000.
The Company's cash, cash equivalents, restricted cash, and investments
totaled $14,367,000 at December 31, 1996. Working capital decreased from
$15,373,000 at December 31, 1995 to $7,152,000 at December 31, 1996. Cash and
cash equivalents decreased from $12,919,000 at December 31, 1995 to $2,893,000
at December 31, 1996. The decrease in working capital and cash and cash
equivalents was due primarily to increased holdings of long- term investments
and the net loss incurred by the Company in the year ended December 31, 1996.
Management believes that the Company will use approximately $600,000 for
equipment and other capital expenditures during 1997.
In September 1996 the Company negotiated a bank line of credit which allows
for borrowings up to $500,000 and expires in September 1997. Borrowings will
bear interest at the bank prime rate, and are collateralized by a $500,000
certificate of deposit. The bank prime rate at December 31, 1996 was 8.25%.
There were no borrowings under the bank line of credit at March 1, 1997. This
borrowing facility requires the Company to maintain minimum shareholders' equity
of $10,000,000 and minimum aggregate cash, cash equivalents and investments of
$12,000,000. This line of credit also prohibits acquisitions of other entities
without the prior approval of the bank.
Management believes that the Company's existing cash, and periodic
borrowings under the line of credit will be sufficient to fund the Company's
operations at currently anticipated levels through December 31, 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.
<PAGE>
Business Risks
This report on Form 10-KSB contains forward-looking statements that involve
risks and uncertainties. The actual future results of the 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.
These risk factors include 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 planned products 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 having
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, as well as research and
development costs. 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 non-competing 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 the planned
products identified in this report, along with market acceptance of the
Company's products currently being sold at retail.
The Company has made significant commitments of time, effort, and expense
in its efforts to develop and bring to market the e.Support product. The success
of e.Support depends largely on the Company's ability to market and sell
e.Support directly to computer hardware manufacturers, software publishers, and
on-line service providers. The Company has limited experience in marketing and
selling its software products to such businesses. There is a risk that the
Company will not be able to successfully market and sell e.Support to such
customers. There is a similar risk that e.Support products will not gain
sufficient consumer/marketplace acceptance.
The Company is significantly dependent upon the continued availability of
certain key executives. The loss or unavailability of any of these executives
for an extended period of time could have a material adverse effect on the
Company's business operations and prospects. To the extent that the services of
any of these executives would be unavailable to the Company for any reason, the
Company would be required to procure other personnel to manage and operate the
Company. There can be no assurance that the Company would be able to locate or
employ such qualified personnel on acceptable terms.
<PAGE>
Item 7. Financial Statements Page
- - ------- -------------------- ----
Index to Financial Statements:
1. Independent Auditors' Report 17
2. Consolidated Financial Statements:
Consolidated Balance Sheet as of December 31, 1996. 18
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995. 19
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996 and 1995. 20
Consolidated Statements of Cash Flows for
the years ended December 31, 1996 and 1995. 21
Notes to Consolidated Financial Statements. 22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
TouchStone Software Corporation:
We have audited the accompanying consolidated balance sheet of TouchStone
Software Corporation as of December 31, 1996 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period then ended. 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 consolidated financial statements present fairly, in
all material respects, the consolidated financial position of TouchStone
Software Corporation as of December 31, 1996 and the results of their operations
and their cash flows for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 13, 1997
<PAGE>
<TABLE>
<CAPTION>
TouchStone Software Corporation
Consolidated Balance Sheet
December 31, 1996
<S> <C>
A S S E T S
Current assets:
Cash and cash equivalents $2,893,476
Restricted cash 500,000
Investments 6,683,965
Income tax refund receivable 32,790
Accounts receivable, net 467,742
Inventories 727,454
Prepaid expenses and other current assets 319,184
----------
Total current assets 11,624,611
Investments 4,289,242
Property, net 470,104
Software development costs, net 162,842
Other assets 30,177
----------
$16,576,976
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,707,694
Accrued payroll and related expenses 359,621
Accrued cooperative advertising costs 705,571
Other accrued liabilities 699,234
-------
Total current liabilities 4,472,120
Deferred compensation 72,000
Deferred lease obligation 49,644
Commitments and contingencies -
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,
7,772,735 shares 7,773
Additional paid-in capital 18,595,990
Accumulated deficit (6,596,462)
Notes receivable from sale of common stock (24,089)
----------
Total shareholders' equity 11,983,212
----------
$16,576,976
===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
TouchStone Software Corporation
Consolidated Statements of Operations
Years ended December 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Revenue:
Product sales .............................. $ 7,339,192 $ 9,035,620
Royalty income .............................. 327,843 320,125
--------- ---------
Total revenue ........................... 7,667,035 9,355,745
Cost of revenue .............................. 3,514,794 4,303,217
--------- ---------
Gross profit ............................. 4,152,241 5,052,528
Operating expenses:
Sales and marketing ......................... 4,737,533 4,569,990
General and administrative .................. 1,449,661 1,430,283
Research and development .................... 1,470,356 728,624
Litigation settlement and related costs ..... 1,811,941
--------- ---------
Total costs and expenses ................ 9,469,491 6,728,897
--------- ---------
Loss from operations ......................... (5,317,250) (1,676,369)
Other income, net ............................ 788,581 326,852
--------- ---------
Loss before provision
for income taxes ........................ (4,528,669) (1,349,517)
Provision for income taxes ................... 800 275,500
--------- ---------
Net loss .................................... $(4,529,469) $(1,625,017)
=========== ===========
Net loss per share ......................... $ (0.60) $ (0.26)
=========== ===========
Weighted average shares ...................... 7,573,000 6,367,000
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TouchStone Software Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1996 and 1995
Notes
receivable Total
from sale share-
Common stock Paid-in Accumulated of common holders'
Shares Amount capital deficit stock equity
------ ------ ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 ............ 5,833,469 $ 5,833 $ 2,324,111 $ (441,976) $ (272,603) $ 1,615,365
Stock options exercised ....... 207,649 208 94,243 -- -- 94,451
Collections of notes receivable -- -- -- -- 245,137 245,137
Issuance of common stock
in secondary offering, net
of costs ..................... 1,300,000 1,300 15,270,838 -- -- 15,272,138
Tax benefit from stock
option exercises ............. -- -- 176,820 -- -- 176,820
Forgiveness of note in
lieu of fees ................. -- -- -- -- 3,377 3,377
Net loss ...................... -- -- -- (1,625,017) -- (1,625,017)
--------- ------ ---------- --------- ------ ----------
Balances at
December 31, 1995 ............ 7,341,118 7,341 17,866,012 (2,066,993) (24,089) 15,782,271
Stock options exercised ....... 231,617 232 103,495 -- -- 103,727
Issuance of common stock
in litigation settlement ..... 200,000 200 624,800 -- -- 625,000
Compensation expense related
to stock option grants ....... -- -- 1,683 -- -- 1,683
Net loss ...................... -- -- -- (4,529,469) -- (4,529,469)
--------- ------ ---------- --------- ------ ----------
Balances at
December 31, 1996 ............ 7,772,735 $ 7,773 $ 18,595,990 $ (6,596,462) $ (24,089) $ 11,983,212
========= ======== ============ ============ ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TouchStone Software Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(4,529,469) $(1,625,017)
Adjustments to reconcile net loss to net
cash flows (used in) provided by operating activities:
Depreciation and amortization .......................... 319,189 506,679
Change in deferred income taxes ........................ -- 218,400
Provision for doubtful accounts ........................ 38,594 118,598
Provision for obsolete inventories ..................... 124,300 562,553
Amortization of investment premium ..................... 5,096 --
Change in deferred lease obligation .................... 27,369 22,275
(Gain) loss on sale of assets .......................... (1,382) 947
Issuance of common stock in litigation settlement ...... 625,000 --
Changes in operating assets and liabilities:
Income tax refund receivable ........................... 966,100 (998,890)
Accounts receivable .................................... (281,283) 1,337,961
Inventories ............................................ (553,476) (471,651)
Prepaid expenses and other current assets .............. (182,742) (86,644)
Other assets ........................................... 4,182 (18,324)
Accounts payable ....................................... 673,403 1,330,767
Accrued liabilities .................................... 47,269 652,842
---------- ---------
Net cash (used in) provided by operating activities (2,717,850) 1,550,496
Cash flows from investing activities:
Capitalized software development costs .................. (182,061) (360,160)
Purchase of investments ................................. (21,091,481) (4,505,096)
Sale of investments ..................................... 14,232,274 --
Purchases of property ................................... (377,576) (215,329)
Sale of property ........................................ 7,800 --
--------- ---------
Net cash used in investing activities ............... (7,411,044) (5,080,585)
Cash flows from financing activities:
Net repayments under bank
line of credit .......................................... -- (300,000)
Principal payments on notes payable ..................... -- (156,071)
Principal payments under capital
lease obligations ...................................... -- (4,124)
Proceeds from exercise of stock warrants and
options and repayment on notes receivable .............. 103,727 245,137
Issuance of common stock, net ........................... -- 15,366,589
Other prepaid financing costs ........................... -- (1,000)
--------- ----------
Net cash provided by financing activities .......... 103,727 15,150,531
--------- ----------
Net (decrease) increase in cash and cash equivalents .... (10,025,167) 11,620,442
Cash and cash equivalents, beginning of period 12,918,643 1,298,201
---------- ---------
Cash and cash equivalents, end of period ............... $ 2,893,476 $ 12,918,643
============ ============
Supplemental cash flow information:
Interest paid ............................................ $ 69 $ 7,966
============ ============
Income taxes paid ........................................ $ -- $ 1,170,701
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Operations. TouchStone Software Corporation ("TouchStone" or the
"Company") designs, develops, markets, and supports a line of computer
problem-solving utility software and supporting products which simplify personal
computer (PC) installation, support, and maintenance. The Company markets its
products domestically through software distributors for resale through the
retail channel which includes approximately 7,500 stores. Ongoing customer
evaluations are performed with respect to the Company's receivables, and
collateral is generally not required. In January 1997 the Company reincorporated
in the state of Delaware.
The Company's strategy of developing products based on the Windows 95 and
Windows NT operating systems, and releasing these products immediately prior to
or at the time of Microsoft's release of new and upgraded Windows 95 and Windows
NT products, is substantially dependent on its ability to gain pre-release
access to, and to develop expertise in, current and future versions of Windows
95 and Windows NT. There can be no assurance as to the ability of the Company to
provide products compatible with future Windows 95 or Windows NT releases on a
timely basis without the cooperation of Microsoft.
Consolidation. The consolidated financial statements of the Company include
the financial statements of the Company's wholly-owned subsidiary, TouchStone
Europe Ltd. All inter-company transactions and balances have been eliminated.
Customer Information. The Company operates primarily in the U.S. 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.
Two customers who are distributors accounted for approximately 58% and 17%
of product sales during the year ended December 31, 1995. Two customers who are
distributors accounted for approximately 29% and 14% of product sales during the
year ended December 31, 1996. International product sales were approximately
$912,000 and $1,031,000 during the years ended December 31, 1996 and 1995,
respectively, and accounted for approximately 12.4% and 9.7% of total product
sales, respectively.
Cash Equivalents. Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Investments. Investments classified as current assets at December 31, 1996
consist of investments in debt securities, all maturing within one year and
classified as held-to-maturity securities. Such investments are recorded at
cost.
Inventories. Inventories are stated at the lower of first- in, first-out
cost, 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 assets (three to
five years). Leasehold improvements are amortized over the shorter of the useful
life or the life of the related lease.
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 the Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, until the product is available for sale.
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
12 to 24 months. Amortization of software development costs was approximately
$169,000 and $446,000 for the years ended December 31, 1996 and 1995, respec
tively.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Software development costs in the accompanying balance sheet are net of
accumulated amortization of approximately $350,000 at December 31, 1996.
The Company accounts for long-lived assets under Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. This statement requires
impairment losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the assets' carrying amount. The statement also requires
that assets to be disposed of should be written down to fair value less selling
costs.
Revenue Recognition. Revenues are recognized upon the later of shipment of
the related product or transfer of title and are in accordance with Statement of
Position 91-1, Software Revenue Recognition, as there are no significant vendor
obligations or post-contract support at the time of delivery. The Company offers
its distributors certain rights of return, price protection, and exchange
privileges on sales.
The Company records estimates for rights of return, price protection, and
exchange privileges at the time of product sale, based on historical experience,
or sell-through information obtained from its distributors and certain
retailers. 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.
Income Taxes. The Company accounts for income taxes under SFAS 109,
Accounting for Income Taxes.
Net Loss per Share. Common equivalent shares include warrants and options
to purchase common stock. Common equivalent shares were not included in the
calculation of the net loss per share in 1996 or in 1995 as their effect would
have been antidilutive.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires TouchStone management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the periods then ended. Actual results, including those related to sales
returns, could differ from those estimates.
Fair Value of Financial Instruments. The Company's balance sheet includes
the following financial instruments: cash and cash equivalents, investments,
accounts receivable, and accounts payable. The Company considers the carrying
amounts in the financial statements to approximate fair value for the financial
instruments because of the relatively short period of time between origination
of the instruments and their expected realization.
2. Balance Sheet Detail
<TABLE>
<CAPTION>
Current investments at December 31, 1996 consist of the following:
Cost of Fair Market Value
Investments of investments
----------- --------------
<S> <C> <C>
Certificates of deposit $1,131,000 $1,126,982
Commercial paper 5,552,965 5,560,258
--------- ---------
$6,683,965 $6,687,240
========== ==========
</TABLE>
Investments classified as non-current assets at December 31, 1996 consist
primarily of investments in debt securities which are classified as
held-to-maturity securities. Such investments are reported at cost.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
2. Balance Sheet Detail (continued)
<TABLE>
<CAPTION>
Non-current investments at December 31, 1996 consist of the following which
are classified as held-to-maturity:
Cost of Fair Market Value
Investments of Investments
----------- --------------
<S> <C> <C>
Certificates of deposit $1,456,000 $1,445,467
Commercial paper 2,761,242 2,809,098
Other 72,000 84,889
---------- ---------
$4,289,242 $4,339,454
========== ==========
</TABLE>
Accounts Receivable. At December 31, 1996, accounts receivable is presented
net of allowance for doubtful accounts, reseller rebate reserves, and product
return reserves of approximately $97,300, $600,000, and $361,000, respectively.
Certain distributors' accounts resulted in credit balances and, therefore, were
reclassified to accounts payable.
<TABLE>
<CAPTION>
Property. At December 31, 1996, property consists of the following:
<S> <C>
Office equipment and furniture $846,263
Automobiles 72,762
Leasehold improvements 41,393
--------
$960,418
Less accumulated depreciation and amortization (490,314)
--------
$470,104
========
</TABLE>
3. Financing Arrangements
At December 31, 1996, the Company had a bank line of credit which provides
for borrowings up to $500,000, bears interest at the bank's prime rate (8.25% at
December 31, 1996) and expires in September 1997. Borrowings are collateralized
by a $500,000 certificate of deposit which is recorded as restricted cash on the
accompanying consolidated balance sheet. There were no borrowings under this
line of credit at December 31, 1996. This borrowing facility requires the
Company to maintain minimum shareholders' equity of $10,000,000 and minimum
aggregate cash, cash equivalents and investments of $12,000,000. This line of
credit also prohibits acquisitions of other entities without the prior approval
of the bank and restricts the payment of cash dividends.
4. Shareholders' Equity
Stock Option Plans. The Company has various stock option plans for
directors, officers, employees and certain consultants, which provide for
non-qualified and incentive stock options. The Board of Directors determines the
option price (not to be less than fair market value for incentive options) at
the date of grant. Options granted prior to 1996 generally vest over periods
ranging from one to two years and expire two to five years from the date of
grant. Options granted in 1996 vest over four years and expire ten years from
date of grant. At December 31, 1996, options for 1,194,301 shares were available
for future grants under the plans.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
4. Shareholders' Equity (continued)
All options granted under these plans were granted at fair market value at
date of issuance. In August 1995, the Company granted its underwriter warrants
to purchase 230,000 shares of the Company's common stock for $21.60 per share,
which exceeded the fair market value of the Company's common stock at that date.
A summary of the status of the Company's stock option plans and stock warrants
as of December 31, 1996 and 1995, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options
outstanding,
beginning of
year .................. 1,109,651 $ 5.05 962,300 $ 0.37
Granted ............... 419,200 $ 2.66 410,000 $ 13.05
Exercised ............. (231,617) $ 0.45 (207,649) $ 0.45
Canceled .............. (103,500) $ 3.63 (55,000) $ 0.27
-------- -------
Options
outstanding,
end of year ........... 1,193,734 $ 5.23 1,109,651 $ 5.05
========= =========
Options
exercisable ........... 860,533 $ 6.22 999,651 $ 5.32
at year end ======= =======
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes other information about stock
options outstanding at December 31, 1996:
Weighted
Number Average Weighted Number Weighted
Range of Outstand- Remaining Average Exercis- Average
Exercise ing Contract- Exercise able Exercise
Price 12/31/96 ual Life Price 12/31/96 Price
- - -------- -------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$0.22-$1.00 ......... 575,034 0.5 $ 0.43 575,033 $ 0.43
$1.85-$3.00 ......... 388,700 9.5 $ 2.63 55,500 $ 2.51
$ 21.60 230,000 3.5 $ 21.60 230,000 $ 21.60
------- -------
1,193,734 4.0 $ 5.23 860,533 $ 6.22
========= =======
</TABLE>
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
4. Shareholders' Equity (continued)
The weighted average fair value of options granted during 1996 and 1995 was
$2.91 and $10.14 per share, respectively. SFAS 123, Accounting for Stock-Based
Compensation, encourages but does require companies to record compensation cost
for employees stock option grants. The Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option and purchase plans. Accordingly, no compensation
cost has been recognized for its stock option plans. Had compensation cost for
the Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method prescribed
by SFAS Statement 123, the Company's net loss and loss per share for the years
ended December 31, 1996 and 1995 would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss: As reported $(4,529,469) $(1,625,017)
Pro forma $(4,712,820) $(1,734,232)
Net loss per share: As reported $(0.60) $(0.26)
Pro forma $(0.62) $(0.27)
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1996 and 1995 was estimated on the date of grant using the Black-Sholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 125.1% in 1996 and 157.7% in 1995, risk-
free interest rate of 5.25%, in both 1996 and 1995, and expected lives of ten
years in 1996 and four years in 1995.
Shareholder Rights Plan. In September 1996 the Board of Directors approved
the adoption of a Shareholder Rights Plan. The Rights Plan provides for the
distribution to TouchStone Software Corporation's stockholders of one preferred
stock purchase "Right" for each outstanding share of TouchStone common stock.
The Rights have an exercise price of $15 per Right, subject to subsequent
adjustment. Initially, the Rights will trade with the Company's common stock,
and will not be exercisable until the occurrence of certain takeover-related
events.
The Rights Plan provides that if a person or group acquires 15 percent or
more of the Company's common stock without the approval of the Board of
Directors, the holders of the Rights, other than the acquiring person or group,
would, under certain circumstances, have the right to purchase additional shares
of the Company's common stock having a market value equal to two times the
exercise price of the Right. In addition, if the Company is thereafter merged
into another entity, or if 50 percent or more of the Company's consolidated
assets or earning power are sold, then the Right will entitle its holder, other
than the acquiring person or group, to buy common shares of the acquiring entity
having a market value equal to two times the exercise price of the Right.
The Rights were distributed to holders of the Company's common stock of
record on October 4, 1996, as a dividend, and will expire, unless earlier
redeemed, on September 26, 2006.
Public Offering of Common Stock. On August 30, 1995, the Company completed
a secondary public offering of 2,300,000 shares of the Company's common stock,
including 1,000,000 shares sold by certain shareholders of the Company. The net
proceeds of the offering, after deducting the underwriter's commission and
offering costs, were approximately $15,272,000.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
5. Income Taxes
<TABLE>
<CAPTION>
The provision for income taxes consists of:
Year ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Current:
Federal .............................. $ -- $ 16,200
State ................................ 800 40,800
-------- -------
800 57,000
Deferred:
Federal .............................. -- 368,400
State ............................ -- (149,900)
-------- --------
-- 218,500
-------- -------
Total provision ....................... $ 800 $ 275,500
========= =========
</TABLE>
A reconciliation of the Company's effective tax rate compared to the U.S.
statutory rate of 34% for the years ended December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Income taxes at statutory rates ............ $(1,539,800) $ (458,800)
State taxes, net of federal benefit ........ 500 (72,000)
Loss of foreign subsidiary ................. 10,400 34,400
Change in valuation allowance .............. 1,561,600 792,500
Other ...................................... (31,900) (20,600)
--------- -------
Provision for income taxes ................. $ 800 $ 275,500
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) consist of the following at December 31,
1996 and 1995:
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carry-forwards ... $ 2,595,200 $ 17,000
Sales return reserves ............................ 156,200 739,800
Other reserves and accruals ...................... 319,500 277,600
------- -------
3,070,900 1,034,400
Valuation allowance .............................. (3,000,400) (958,400)
---------- --------
70,500 76,000
--------- --------
Deferred tax liabilities:
Capitalized research & development ............... (70,500) (76,000)
--------- --------
Net deferred tax asset (liability) ............. $ -- $ --
=========== ===========
</TABLE>
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
Based on the Company's assessment of future realizability of deferred tax
assets, a valuation allowance has been provided as it is more likely than not
that sufficient taxable income will not be generated to realize certain
temporary differences and tax credit carry-forwards. Additionally, at December
31, 1996, approximately $300,000 of the valuation allowance was attributable to
the potential tax benefit of stock option transactions, which will be credited
directly to additional paid- in capital if realized.
At December 31, 1996, the Company had federal and state net operating loss
carry-forwards of approximately $6.7 million and $2.9 million, respectively,
which will expire after the years 2111 and 2001, respectively. At December 31,
1996, the Company had general business credit carry-forwards for federal
purposes of approximately $59,200, of which $11,400 expire in 2000 and $5,600
expire in 2004.
6. Statements of Cash Flows
In 1996 there were no significant non-cash investing and financing
activities.
Supplemental information concerning significant non-cash investing and
financing activities for the year ended December 31, 1995 are presented below.
In 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. Also in 1995, the
Company forgave notes receivable from sale of common stock and related interest
receivable aggregating $3,377 due from a consultant to the Company in lieu of
fees.
7. Commitments and Contingencies
At December 31, 1996, 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>
1997 $245,000
1998 225,000
1999 214,000
2000 214,000
2001 36,000
--------
$934,000
========
</TABLE>
Rent expense totaled approximately $266,000 and $204,000 for the years
ended December 31, 1996 and 1995, 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 agrees to pay the software developers
a percentage royalty based on actual product sales. The Company recorded total
royalty expense of approximately $1,314,000 and $575,000 for the years ended
December 31, 1996 and 1995, respectively.
<PAGE>
TouchStone Software Corporation
Notes to Consolidated Financial Statements
7. Commitments and Contingencies (continues)
Contingent Liabilities. 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. The complaint alleges that this was done 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 the
Company's common stock, valued at $625,000, which was the fair market value at
the date of settlement. The Company also adopted a written policy on insider
trading.
The Court granted preliminary approval to the terms of the settlement and
has authorized the mailing of notice of the terms of the settlement to the
class. The Company is informed by counsel for the class that the notice has been
mailed. A final hearing was held in December 1996, and the Court has taken the
matter under submission.
On October 9, 1996 an entity known as Intervention, Incorporated
("Intervention") filed an action against the Company in the Superior Court of
the State of California, Santa Clara County (C 96-04476). Intervention claims
that it is a non-profit corporation bringing an action for the interests of the
general public. In essence, Intervention claims that the Company is engaged in
unfair competition and is violating California's Fair Packaging and Labeling Act
by filling the Software packages to "substantially less than their capacities."
Intervention seeks injunctive relief, unspecified attorneys' fees and damages of
$1,000,000. The Company understands that eight other software companies have
been named as defendants in identical lawsuits in three different counties, and
that a petition to coordinate these actions has been filed. The Company believes
this suit is without merit and intends to defend itself vigorously. Based on its
current knowledge the Company does not believe that this matter will have a
material adverse effect on the financial condition or results of operations of
the Company.
8. Transactions with Related Parties
The Company paid royalties to a software programming company whose majority
shareholder is a former Company officer aggregating approximately $27,000 during
the year ended December 31, 1995.
The Company incurred interest expense in connection with notes payable to
related parties of $1,741 for the year ended December 31, 1995.
The Company recorded interest income in connection with notes receivable
from related parties of $9,032 for the year ended December 31, 1995.
In April 1995, the Company made a $23,000 loan to a member of the Board of
Directors. This loan bore interest at 8% per annum, and was repaid in December
1995.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------------------
Financial Disclosure
- - --------------------
NONE
PART III
Item 9. Directors, Executive Officers, and Key Employees
--------------------------------------------------------
The directors and executive officers of the Company at March 1, 1997 are as
follows:
N A M E A G E T I T L E
- - ------- ----- ---------
Larry W. Dingus 52 Chairman of the Board of Directors
Larry S. Jordan 53 President, Chief Executive Officer and
Director
C. Shannon Dingus 49 Chief Technology Officer and Director
Ronald R. Maas 50 Executive Vice President, Chief Financial
Officer, Director, and Secretary
Kenneth C. Welch III 40 Director
Richard W. Brail 55 Director
Mr. Dingus 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 served as Chief Executive Officer from
September 1982 to February 1989.
Mr. Jordan joined the Company in January 1996 as President and Chief
Operating Officer. In June 1996, Mr. Jordan replaced C. Shannon Dingus as Chief
Executive Officer of the Company. 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.
Ms. Dingus has served as the Company's Chief Technology Officer since June
1996. Between February 1989 and June 1996, Ms. Dingus served as the Company's
Chief Executive Officer. She served as the Company's President from March 1988
until January 1996, and since September 1982, she has also served as a Director.
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 of the Company, and was elected to the Company's Board
of Directors. In October 1995 he was elected Corporate Secretary.
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.
<PAGE>
In addition to its executive officers, the following individuals are
considered to be key employees of the Company:
Charles D'Angelo joined the Company in May 1996 as Vice President of Sales.
Prior to joining TouchStone, Mr. D'Angelo served as Vice President of Sales and
Marketing for Zenographics, a developer and producer of advanced printing tools
for Windows. From 1992 to 1995, Mr. D'Angelo was Director of Sales for Digitalk,
Inc., a producer of object-oriented software solutions for the client/server
market.
Mary Bartlett joined the Company as Director of Operations in May of 1995.
In January 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.).
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of the
Company's common stock to file reports of ownership and changes in ownership
with the Securities and Exchange Commission (SEC). Officers, directors, and
greater than 10 percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file. Management
believes all such individuals were in compliance with Section 16(a) at December
31, 1996, except Mr. L. W. Dingus who failed to timely file a Form 4. This
report was subsequently filed.
<PAGE>
Item 10. Executive Compensation
- - ------------------------------------
Summary Compensation Table
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 officers identified above.
<TABLE>
<CAPTION>
Other Restri-
Name & Annual cted All
Principal Compen- Stock Options/ LTIP Other
Position Year Salary Bonus sation Awards SAR Pay- Compen-
(1) ($) ($) ($) ($) (#) outs sation
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L.W Dingus 1996 51,429 0 0 0 0 0 0
Chairman 1995 71,489 73,289 0 0 0 0 0
of the 1994 95,333 73,683 0 0 138,300 0 0
Board of
Directors
L.S Jordan 1996 162,824 0 0 0 200,000 0 0
CEO, and 1995 -- -- -- -- -- -- --
Director 1994 -- -- -- -- -- -- --
C.S Dingus 1996 126,659 0 0 0 0 0 0
Chief 1995 125,750 88,911 0 0 0 0 0
Technology 1994 112,400 89,657 0 0 138,300 0 0
Officer
R.R. Maas 1996 95,141 0 20,024(2) 0 0 0 0
Exec. V.P 1995 85,862 43,444 0 0 0 0 0
and Director 1994 83,800 47,449 0 0 92,467 0 0
<FN>
(1) Mr. Jordan was first employed as President in January 1996.
(2) Represents income recognized upon the exercise of 8,467 stock purchase
warrants in July 1996.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The Company did not grant stock appreciation rights in 1996 to any of the
executive officers named above. Grants of stock options to executive officers in
1996 are summarized in the following table.
<TABLE>
<CAPTION>
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise Expiration
Name Granted in 1996 Price Date
- - ---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
L.S. Jordan 200,000 47.7% $2.55 12-28-2005
</TABLE>
<PAGE>
Aggregated Option Exercises in 1996 and Option Values as of December 31,
1996
<TABLE>
<CAPTION>
The value of options exercised in 1996 and the value of unexercised options
at December 31, 1996, for each of the officers named above are:
Number of Value of
Unexercised Unexercised
Options/SARs In-the-Money
at 12/31/96(#) Options/SARs
Shares at 12/31/96
Acquired on Value Exercisable(1)/ Exercisable(1)/
Name Exercise(#) Realized ($) Unexercisable(2) Unexercisable(2)
<S> <C> <C> <C> <C>
L.W. Dingus ........ 0 0 134,883(1) $ 262,078(1)
L.S. Jordan ........ 0 0 50,000(1) 0(1)
150,000(2) 0(2)
C.S. Dingus ........ 0 0 134,000(1) $ 260,845(1)
R.R. Maas .......... 8,467 21,083 80,000(1) $ 155,600(1)
</TABLE>
The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price at December 31,
1996.
Board of Director Meetings and Committees
During 1996, the Company's Board of Directors held 4 regular and 2 special
meetings and otherwise took action by written consent. The Board has established
an Executive Committee comprised of Ms. Dingus, Mr. Jordan and Mr. Maas and an
Options Committee comprised of Mr. Jordan and Mr. Maas. The Executive Committee
acts on behalf of the Board in all day to day operating activities. The Options
Committee determines the persons entitled to participate in stock option plans.
The Board has also established an Audit Committee, comprised of
non-employee directors, Mr. Dingus, Mr. Welch, and Mr. Brail, which meets to
consult with the Company's independent auditors concerning their engagement and
audit plan, and thereafter concerning the auditors' report, and management
letter, and with the assistance of the independent auditors, also monitors the
adequacy of the Company's internal accounting controls.
The Compensation Committee, which also consisted of non- employee directors
Mr. Dingus, Mr. Welch and Mr. Brail in 1996, held one regularly scheduled
meeting during the last fiscal year. The Compensation Committee reviews and
makes recommendations to the Board concerning the Company's executive
compensation policy, bonus plans and incentive stock option plans, and approves
the granting of stock options to officers.
The Board of Directors meets as a committee of the 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.
<PAGE>
Compensation of Directors
Each non-employee director is paid an annual retainer of $1,200 plus $100
per each board meeting attended and each board meeting and committee meeting
attended. The Company pays the expenses incurred by its non-employee directors
in attending Board meetings. In April 1995, the Company issued warrants to
purchase 10,000 shares of Common Stock, at the exercise price of $1.00 per
share, to each of Mr. Welch and Mr. Brail for serving on the Company's Board of
Directors. No additional compensation is paid to any of the employee directors.
Employment Agreements
The Company has entered into an employment agreement with each of its three
executive officers. Ms. Dingus and Mr. Maas have one-year agreements that
automatically renew, on January 1 of each year unless either party gives notice
by December 1. Mr. Jordan has a three-year agreement commencing January 16, 1996
that automatically renews, for a one-year term each year on January 16, unless
either party gives notice by December 16. Each agreement 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 contract 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
The Company established a bonus plan for the years ending December 31, 1995
and 1996 (the "Bonus Plan"). Under the Bonus Plan, participants selected by the
Board of Directors were eligible to receive bonuses (which, in the case of any
individual participant, will not exceed an amount equal to 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 maximum
payable to all participants in the Bonus Plan, as a group, is that amount which
does not exceed 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 eligible to participated in the Bonus Plan. No bonuses were
paid to any of these executive officers in 1996 under the Bonus Plan.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 1, 1997, certain information
concerning ownership of the Company's common stock by each director and all
officers and directors as a group. At March 1, 1997, no other person nor entity
owns more than 5% of the Company's outstanding shares, as indicated by the
Company's securities transfer agent.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage
Beneficial Owner Beneficially Owned (*) of Class
- - ---------------- ---------------------- --------
<S> <C> <C>
C. Shannon Dingus ............................. 721,518 (1) 9.1%
2124 Main Street
Huntington Beach, CA 92648
Ronald R. Maas ................................ 381,610 (2) 4.8%
2124 Main Street
Huntington Beach, CA 92648
Larry W. Dingus ............................... 267,253 (3) 3.4%
2124 Main Street
Huntington Beach, CA 92648
Larry S. Jordan ............................... 258,000 (4) 3.3%
2124 Main Street
Huntington Beach, CA 92648
Kenneth C. Welch III .......................... 238,574 (5) 3.0%
2124 Main Street
Huntington Beach, CA 92648
Richard W. Brail .............................. -- --
2124 Main Street
Huntington Beach, CA 92648
All Officers and Directors as a
Group (6 persons at
March 1, 1997) ................................ 1,866,955 (6) 22.6%
<FN>
(*) Excludes options that do not vest within 60 days after the Company's
fiscal year end.
(1) Includes options for 134,300 shares. Does not include 267,253 shares
beneficially owned by Larry Dingus (husband).
(2) Includes options for 80,000 shares.
(3) Includes options for 134,883 shares. Does not include 721,518 shares
beneficially owned by C. Shannon Dingus (wife).
(4) Includes options for 50,000 shares.
(5) Includes options for 52,000 shares.
(6) Includes options for 451,183 shares.
Item 12. Certain Relationships and Related Transactions
Mr. Dingus and Ms. Dingus are husband and wife.
</FN>
</TABLE>
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
- - ------------------------------------------
(a) Documents filed with Report
- - ---------------------------------
1. Financial Statements.
The financial statements listed in the index to financial statements at
Item 7 are filed as part of this report.
2. Exhibits.
The Exhibits listed on the accompanying Index to Exhibits are filed as part
of this report.
(b) Reports on Form 8-K
- - -------------------------
1. An 8-K dated January 21, 1997 with respect to changing the state of
incorporation from California to Delaware effective January 17, 1997.
2. An 8-K dated September 20, 1996 with respect to Preferred Share Purchase
Rights.
(c) Exhibits
- - --------------
See Item 13 (a) 2 above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the under-signed, thereunto duly authorized.
TouchStone Software Corporation
By /s/ Ronald R. Maas
---------------------
Ronald R. Maas,
Executive Vice President, Secretary,
Chief Financial Officer, and Director
(Principal Accounting Officer)
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Larry W. Dingus Chairman of the Board of Directors
- - ----------------------------
Larry W. Dingus Date: 03/27/97
/s/ Larry Jordan Chief Executive Officer,President
- - -----------------------------
Larry Jordan Date: 03/27/97 and Director
/s/ C. Shannon Dingus Chief Technology Officer and Director
- - -----------------------------
C. Shannon Dingus Date: 03/27/97
---------------------------- Director
Kenneth C. Welch III
--------------------------- Director
Richard W. Brail
<PAGE>
TouchStone Software Corporation
INDEX TO EXHIBITS
3.1 Certificate of Incorporation of Registrant in Delaware.
3.2 By-Laws of Registrant.
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. (5)
10.1 E 1994 Non-Qualified Stock Option Plan. (6)
10.1 F 1995 Non-Qualified Stock Option Plan.
10.1 G Preferred Share Purchase Rights (7)
10.1 H 1997 Incentive Stock Plan. (8)
10.2 Line of Credit Agreement dated September 12,1996.
10.3 Office Lease dated February 7,1995. (6)
21. Subsidiaries of the Registrant. (6)
23. Consent of Independent Auditors.
27. Financial Data Schedule.
(1) Incorporated by reference to the Exhibits to the Registration
Statements on Form S-18, as amended, Registration Number 2-92450-LA as filed
with the Securities and Exchange Commission.
(2) Incorporated by reference to the Company's filing on Form S-8 with the
Securities and Exchange Commission, Registration Number 33-25989.
(3) Incorporated by reference to the Exhibits to the Company's Form 10-KSB
for the year ended December 31, 1992 as filed with the Securities and Exchange
Commission.
(4) Incorporated by reference to the Exhibits to the CompanyOs 10-KSB for
the year ended December 31, 1993 as filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to the Exhibits to the CompanyOs 10-KSB for
the year ended December 31, 1993 as filed with the Securities and Exchange
Commission.
(6) Incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, as amended; Registration number 33-94352 as filed with the
Securities and Exchange Commission.
(7) Incorporated by reference to the Exhibits to the Registration Statement
on Form 8-A, Registration number 00112237 as filed with the Securities and
Exchange Commission.
(8) Incorporated by reference to the Exhibits to the Registration Statement
on Form S-8, Registration number 333-21395 as filed with the Securities and
Exchange Commission.
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TOUCHSTONE SOFTWARE CORPORATION
I.
The name of the corporation is TouchStone Software Corporation (the
"Corporation").
II.
The address of the Corporation's registered office in the State of Delaware
is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent and the name
of its registered agent at such address is The Prentice-Hall Corporation System,
Inc.
III.
The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
IV.
The Corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of all classes of stock which the Corporation has authority to issue is
Twenty-Three Million (23,000,000) shares, consisting of Twenty Million
(20,000,000) shares of Common Stock, each having a par value of one-tenth of one
cent ($.001) (the "Common Stock") and Three Million (3,000,000) shares of
Preferred Stock, each having a par value of one-tenth of one cent ($.001) (the
"Preferred Stock").
As to the Preferred Stock of the Corporation, One Hundred Thousand
(100,000) shares shall be designated as "Series A Preferred Stock." The Board of
Directors shall have the power to issue any additional shares of Preferred Stock
from time to time in one or more series. The Board of Directors is hereby
authorized to fix or alter from time to time the voting powers and such
designations, preferences and relative, participating, optional or other special
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series, or any of
them.
The Board of Directors is further authorized to increase or decrease (but
not below the number of shares of any such series then outstanding) the number
of shares of any series, the number of which was fixed by it, subsequent to the
issue of shares of such series then outstanding, subject to the limitations and
restrictions stated in the resolution of the Board of Directors originally
fixing the number of shares of such series. If the number of shares of any
series is so decreased, then the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
The relative rights, preferences and limitations of the Series A Preferred
Stock are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Preferred Stock" (the "Series A Preferred Stock") and
the number of shares constituting the Series A Preferred Stock shall be One
Hundred Thousand (100,000), none of which have been issued as of the date
hereof. Such number of shares may be increased or decreased by resolution of the
Board of Directors; provided, that no decrease shall reduce the number of shares
of Series A Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Series A
Preferred Stock.
<PAGE>
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Preferred Stock with respect to dividends, the holders
of shares of Series A Preferred Stock shall be entitled to receive when, as
and if declared by the Board of Directors out of funds legally available
for the purpose, quarterly dividends payable in cash on the last day of
September, December, March and June in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a
share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to, subject to the provision for
adjustment hereinafter set forth, 1,000 times the aggregate per share
amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions
other than a dividend payable in shares of Common Stock or a subdivision of
the outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock of the Corporation (the "Common Stock") since
the immediately preceding Quarterly Dividend Payment Date, or, with respect
to the first Quarterly Dividend Payment Date, since the first issuance of
any share or fraction of a share of Series A Preferred Stock. In the event
the Corporation shall at any time after October 4, 1996 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) above immediately
after it declares a dividend or distribution on the Common Stock (other
than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue until paid in full on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares of Series A Preferred
Stock, unless the date of issue of such shares is prior to the record date
for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date
after the record date for the determination of holders of shares of Series
A Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue from such Quarterly Dividend Payment Date. Accrued
but unpaid dividends shall not bear interest. Dividends paid on the shares
of Series A Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared thereon, which
record date shall be no more than 30 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to
1,000 votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
7
<PAGE>
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common
Stock shall vote together as one class on all matters submitted to a vote
of shareholders of the Corporation.
(C) Except as required by law, holders of Series A Preferred Stock
shall have no special voting rights and their consent shall not be required
(except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) The Corporation shall not declare any dividend on, make any
distribution on, or redeem or purchase or otherwise acquire for
consideration any shares of Common Stock after the first issuance of a
share or fraction of a share of Series A Preferred Stock unless
concurrently therewith it shall declare a dividend on the Series A
Preferred Stock as required by Section 2 hereof.
(B) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred
Stock outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends on, make any other distributions on
any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with Series A Preferred
Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such
shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Participating Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the Corporation
ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Participating Preferred
Stock;
(iv) purchase or otherwise acquire for consideration any shares
of Series A Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders
of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(C) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of
the Corporation unless the Corporation could, under paragraph (A) of this
Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
8
<PAGE>
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders
of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Participating
Preferred Stock unless, prior thereto, the holders of shares of Series A
Participating Preferred Stock shall have received $1,000.00 per share, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the "Series A
Liquidation Preference"). Following the payment of the full amount of the
Series A Liquidation Preference, no additional distributions shall be made
to the holders of shares of Series A Participating Preferred Stock unless,
prior thereto, the holders of shares of Common Stock shall have received an
amount per share (the "Common Adjustment") equal to the quotient obtained
by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as
appropriately adjusted as set forth in subparagraph (C) below to reflect
such events as stock splits, stock dividends and recapitalization with
respect to the Common Stock) (such number in clause (ii), the "Adjustment
Number"). Following the payment of the full amount of the Series A
Liquidation Preference and the Common Adjustment in respect of all
outstanding shares of Series A Participating Preferred Stock and Common
Stock, respectively, holders of Series A Participating Preferred Stock and
holders of shares of Common Stock shall receive their ratable and
proportionate share of the remaining assets to be distributed in the ratio
of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full to the Series A Liquidation Preference
and the liquidation preferences of all other series of Preferred Stock, if
any, which rank on a parity with the Series A Participating Preferred
Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common
Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares
of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then
in each such case the Adjustment Number in effect immediately prior to such
event shall be adjusted by multiplying such Adjustment Number by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Participating Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Participating Preferred Stock shall be adjusted by
multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not
be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series of
any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Preferred Stock so as to
affect them adversely without the affirmative vote of the holders of at least a
majority of the outstanding shares of Series A Preferred Stock, voting together
as a single class.
9
<PAGE>
Section 11. Fractional Shares. Series A Participating Preferred Stock may
be issued in fractions of a share which shall entitle the holder, in proportion
to such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Participating Preferred Stock.
V.
The name and mailing address of the incorporator are as follows:
Lezli E. Beach
Brobeck, Phleger & Harrison LLP
4675 MacArthur Court, Suite 1000
Newport Beach, California 92660
VI.
The Corporation is to have perpetual existence.
VII.
The election of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
VIII.
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation. Subject to
the rights of the holders of any series of Preferred Stock, no director shall be
removed without cause. Subject to any limitations imposed by law, the Board of
Directors or any individual director may be removed from office at any time with
cause by the affirmative vote of the holders of a majority of the voting power
of all the then- outstanding shares of voting stock of the Corporation entitled
to vote at an election of directors.
IX.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation. Subject to Section 6.1 of the Bylaws, the Bylaws
may also be altered or amended or new Bylaws adopted by the affirmative vote of
least two-thirds (2/3) of the combined voting power of all the then-outstanding
shares of the Corporation entitled to vote.
X.
To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or as may hereafter be amended, no director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
XI.
<PAGE>
Each director shall serve until his or her successor is duly elected and
qualified or until his or her death, resignation or removal. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director. No stockholder will be permitted to cumulate votes at
any election of directors.
Subject to the rights of the holders of any series of Preferred Stock, any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes, and any newly created directorships
resulting from any increase in the number of directors, shall, unless the Board
of Directors determines by resolution that any such vacancies or newly created
directorships shall be filled by the stockholders, except as otherwise provided
by law, be filled only by the affirmative vote of a majority of the directors
then in office, even though less than a quorum of the Board of Directors, and
not by the stockholders. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the director
for which the vacancy was created or occurred and until such director's
successor shall have been elected and qualified.
XII.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
XIII.
No action shall be taken by the stockholders of the Corporation except at
an annual or special meeting of stockholders called in accordance with the
Bylaws and no action shall be taken by the stockholders by written consent in
lieu of a meeting.
XIV.
Notwithstanding any other provisions of this Certificate of Incorporation
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of the capital stock
required by law or this Certificate of Incorporation, the affirmative vote of
the holders of at least two-thirds (2/3) of the combined voting power of all of
the then-outstanding shares of the Corporation entitled to vote shall be
required to alter, amend or repeal Articles VII, VIII, IX, X, XI, XIII, XIV, XV
or any provision thereof.
XV.
The Board of Directors of the Corporation, when evaluating any offer of
another party, to make a tender or exchange offer for any shares of the capital
stock of the Corporation entitled to vote generally in the election of directors
(hereinafter referred to as the "Voting Stock") or to consummate any merger,
consolidation, sale of all or substantially all of the assets of the
Corporation, liquidation or dissolution of the Corporation, shall, in connection
with the exercise of its judgment in determining what is in the best interests
of the Corporation as a whole, be authorized to give due consideration to such
factors as the Board of Directors determines to be relevant, including, without
limitation:
(i) the interests of the Corporation's stockholders;
(ii) whether the proposed transaction might violate federal or state
laws;
(iii) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also the market price for
the capital stock of the Corporation over a period of years, the estimated
price that might be achieved in a negotiated sale of the Corporation as a
whole or in part or through orderly liquidation, the premiums over market
price for the securities of other corporations in similar transactions,
current political, economic and other factors bearing on securities prices
and the Corporation's financial condition and future prospects; and
(iv) the social, legal and economic effects upon employees, suppliers,
customers and others having similar relationships with the Corporation, and
the communities in which the corporation conducts its business.
In connection with any such evaluation, the Board of Directors is
authorized to conduct such investigations and to engage in such legal
proceedings as the Board of Directors may determine.
XVI.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in Article XIV, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
EXHIBIT 3.2
BYLAWS
OF
TOUCHSTONE SOFTWARE CORPORATION
(a Delaware corporation)
ARTICLE 1 - Offices
1.1 Registered Office. The registered office of the corporation shall be
fixed in the Certificate of Incorporation of the corporation.
1.2 Other Offices. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE 2 - Meetings of Stockholders
2.1 Place of Meetings. All meetings of stockholders shall be held at such
place within or without the State of Dela ware as may be designated from time to
time by the Board of Directors or the President or, if not so designated, at the
principal executive office of the corporation.
2.2 Annual Meeting. Annual meetings of the stockholders, commencing with
the year 1996, shall be held at such date and time as shall be designated from
time to time by the Board of Directors and stated in the notice of the meeting.
At the meeting, directors shall be elected, and any other proper business may be
transacted.
2.3 Special Meetings. Special meetings of stockhold ers may be called, for
any purpose or purposes, only by (i) the Chairman of the Board of Directors,
(ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized
directorships) at the time any such resolution is presented to the Board of
Directors for adoption, on such date, and at such time as the Board of Directors
shall fix.
If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 2.4 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.
<PAGE>
2.4 Notice of Meetings. Except as otherwise provided by law, written notice
of each meeting of stockholders, whether annual or special, shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notices of all meetings shall
state the place, date and hour of the meeting. The notice of a special meeting
shall state, in addition, the purpose or purposes for which the meeting is
called. The notice of an annual meeting shall state those matters which the
Board of Directors, at the time of giving the notice, intends to present for
action by the stockholders (but any proper matter may be presented at the
meeting for such action). If mailed, notice is given when deposited in the
United States mail, postage prepaid, directed to the stockholder at his or her
address as it appears on the records of the corporation.
2.5 Advance Notice of Stockholder Nominees and Stockholder Business.
(a) At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (A) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (B) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not later than the close of
business on the sixtieth (60th) day nor earlier than the close of business on
the ninetieth (90th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, notice by the stockholder to be timely must be
so received not earlier than the close of business on the ninetieth (90th) day
prior to such annual meeting and not later than the close of business on the
later of the sixtieth (60th) day prior to such annual meeting or, in the event
public announcement of the date of such annual meeting is first made by the
corporation fewer than seventy (70) days prior to the date of such annual
meeting, the close of business on the tenth (10th) day following the day on
which public announcement of the date of such meeting is first made by the
corporation. A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1943, as amended (the "1934 Act"), in his or her
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's meeting,
stockholders must provide notice as required by the regulations promulgated
under the 1934 Act. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with the
procedures set forth in this paragraph (a). The chairman of the annual meeting
shall, if the facts warrant, determine and declare at the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this paragraph (a), and, if he or she should so determine, such
chairman shall so declare at the meeting that any such business not properly
brought before the meeting shall not be transacted.
(b) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (b) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of
<PAGE>
the corporation may be made at a meeting of stockholders by or at the
direction of the Board of Directors or by any stockholder of the corporation
entitled to vote in the election of directors at the meeting who complies with
the notice procedures set forth in this paragraph (b). Such nominations, other
than those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the corporation in
accordance with the provisions of paragraph (b) of this Section 2.5. Such
stockholder's notice shall set forth (i) as to each person, if any, whom the
stockholder proposes to nominate for election or re- election as a director: (A)
the name, age, business address and residence address of such person, (B) the
principal occupation or employment of such person, (C) the class and number of
shares of the corporation which are beneficially owned by such person, (D) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nominations are to be made by the stockholder, and (E) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the 1934 Act (including without
limitation such person's written consent to being named in the proxy statement,
if any, as a nominee and to serving as a director if elected); and (ii) as to
such stockholder giving notice, the information required to be provided pursuant
to paragraph (a) of this Section 2.5. At the request of the Board of Directors,
any person nominated by a stockholder for election as a director shall furnish
to the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (b). The chairman
of the meeting shall, if the facts warrant, determine and declare at the meeting
that a nomination was not made in accordance with the procedures prescribed by
these Bylaws, and if he or she should so determine, such chairman shall so
declare at the meeting, and the defective nomination shall be disregarded.
(c) For purposes of this Section 2.5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
2.6 Quorum. The holders of a majority of the stock issued and outstanding
and entitled to vote thereat, present in person or represented by proxy duly
authorized, shall constitute a quorum at all meetings of the stockholders for
the transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) by vote of the holders of a majority of the shares
represented thereat present in person or represented by proxy duly authorized,
shall have power to adjourn the meeting in accordance with Section 2.7 of these
Bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the statutes or the Certificate of
Incorporation, a different vote is required, in which case such express
provision shall govern and control the decision of the question. The
stockholders present at a duly called or held meeting at which a quorum is
initially present may continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the stock
required to initially constitute a quorum.
2.7 Adjourned Meeting; Notice. When a meeting is adjourned to another time
and place, unless these Bylaws otherwise require, notice need not be given of
the adjourned meeting if the time and place thereof are announced at the meeting
at which the adjournment is taken. At the adjourned meeting the corporation may
transact any business that might have been transacted at the original meeting.
If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
<PAGE>
2.8 Voting. The stockholders entitled to vote at any meeting of
stockholders shall be determined in accordance with the provisions of Section
2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the
General Corporation Law of Delaware (relating to voting rights of fiduciaries,
pledgors and joint owners, and to voting trusts and other voting agreements).
Except as may otherwise be provided in the Certificate of Incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder. No stockholder will be permitted to cumulate votes at
any election of directors.
2.9 Validation of Meetings; Waiver of Notice; Consent. The transactions of
any meeting of stockholders, either annual or special, however called and
noticed, and wherever held, shall be as valid as though they had been taken at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each person
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to the holding of the meeting or an approval of
the minutes thereof. The waiver of notice or consent or approval need not
specify either the business to be transacted or the purpose of any annual or
special meeting of stockholders. All such waivers, consents, and approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting. Any stockholder so waiving notice of such meeting shall be bound by the
proceedings of any such meeting in all respects as if due notice thereof had
been given.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 Stockholder Action by Written Consent Without a Meeting. The
stockholders of the corporation may not take action by written consent without a
meeting. Any such actions must be taken at a duly called annual or special
meeting.
2.11 Record Date for Stockholder Notice; Voting; Giving Consents. For
purposes of determining the stockholders entitled to notice of any meeting or to
vote thereat, the Board of Directors may fix, in advance, a record date, which
shall not be more than sixty (60) days or less than ten (10) days before the
date of any such meeting, and in such event only stockholders of record on the
date so fixed are entitled to notice and to vote, notwithstanding any transfer
of any shares on the books of the corporation after the record date.
If the Board of Directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the Board of Directors fixes a new record date for the adjourned meeting,
but the Board of Directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 7.5
of these Bylaws.
<PAGE>
2.12 Proxies. Every person entitled to vote for directors, or on any other
matter, shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the corporation, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.13 Inspectors of Election. Before any meeting of stockholders, the Board
of Directors may appoint an inspector or inspectors of election to act at the
meeting or its adjournment. If no inspector of election is so appointed, then
the chairman of the meeting may, and on the request of any stockholder or
stockholder's proxy shall, appoint an inspector or inspectors of election to act
at the meeting. The number of inspectors shall be either one (1) or three (3).
If inspectors are appointed at a meeting pursuant to the request of one (1) or
more stockholders or proxies, then the holders of a majority of shares or their
proxies present at the meeting shall determine whether one (1) or three (3)
inspectors are to be appointed. If any person appointed as inspector fails to
appear or fails or refuses to act, then the chairman of the meeting may, and
upon the request of any stockholder or a stockholder's proxy shall, appoint a
person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in anyway arising
in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all stockholders.
2.14 Organization. The Chairman of the Board of Directors, or if a Chairman
has not been appointed or is absent, the President, or in the absence of the
President, the most senior Vice President present, shall call the meeting of the
stockholders to order, and shall act as chairman of the meeting. In the absence
of the Chairman of the Board, the President, and all of the Vice Presidents, the
stockholders shall appoint a chairman for such meeting. The Board of Directors
of the corporation shall be entitled to make such rules or regulations for the
conduct of meetings of stockholders as it shall deem necessary, appropriate or
convenient. Subject to such rules and regulations of the Board of Directors, if
any, the chairman of any meeting of stockholders shall determine the order of
business and the procedures at the meeting, including such matters as the
regulation of the manner of voting and the conduct of business. Unless and to
the extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with the
rules of parliamentary procedure. The Secretary of the corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
Secretary at any meeting of the stockholders, the presiding officer may appoint
any person to act as secretary of the meeting.
<PAGE>
2.15 List of Stockholders Entitled to Vote. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least ten (10)
days before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present. Such list shall presumptively determine the identify
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
ARTICLE 3 - Directors
3.1 General Powers. The business and affairs of the corporation shall be
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
3.2 Number; Election; Tenure and Qualification.
The Board of Directors shall consist of one or more members. The initial
number of directors shall be six (6), and thereafter shall be fixed from time to
time by resolution of the Board of Directors.
Each director shall be elected by the stockholders at the annual meeting
and shall hold office until the next annual meeting and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal. No reduction in the authorized number of directors shall
have the effect of removing any director before that director's term of office
expires. Directors need not be stockholders of the corporation.
3.3 Resignation and Vacancies. Any director may resign effective on giving
written notice to the Chairman of the Board, the President, the Secretary or the
Board of Directors, unless the notice specifies a later time for that
resignation to become effective. If the resignation of one or more directors is
effective at a future time, a majority of the directors then in office,
including those who have so resigned, shall have the power to fill such vacancy
or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective.
Vacancies in the Board of Directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the stockholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
until then next annual meeting of the stockholders and until a successor has
been elected and qualified.
<PAGE>
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of
the Certificate of Incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the
directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent (10%) of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.4 Removal of Directors. Subject to the rights of the holders of any
series of Preferred Stock, no director shall be removed without cause. Subject
to any limitations imposed by law or the Certificate of Incorporation, the Board
of Directors, or any individual director, may be removed from office at any time
with cause by the affirmative vote of holders of at least a majority of the
voting power of all the then-outstanding shares of voting stock of the
corporation entitled to vote at an election of directors.
3.5 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place, within or without the State of
Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
3.6 Special Meetings. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.
3.7 Notice of Special Meetings. Notice of any special meeting of directors
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be given to each director in person,
by telephone, by facsimile transmission or by telegram sent to his or her
business or home address at least 48 hours in advance of the meeting, or by
written notice mailed to his or her business or home address at least three (3)
days in advance of the meeting. A notice or waiver of notice of a meeting of the
Board of Directors need not specify the purposes of the meeting.
<PAGE>
3.8 Meetings by Telephone Conference Calls. Directors or any members of any
committee designated by the directors may participate in a meeting of the Board
of Directors or such com mittee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
3.9 Quorum. A majority of the authorized number of directors shall
constitute a quorum at all meetings of the Board of Directors. In the event one
or more of the directors shall be disqualified to vote at any meeting, then the
required quorum shall be reduced by one for each such director so disqualified;
provided, however, that in no case shall less than one-third (1/3) of the number
of directors so fixed constitute a quorum.
3.10 Action at Meeting. At any meeting of the Board of Directors at which a
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorpora tion or these Bylaws. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for that meeting.
3.11 Waiver of Notice. Notice of a meeting need not be given to any
director (i) who signs a waiver of notice or a consent to holding the meeting or
an approval of the minutes thereof, whether before or after the meeting, or (ii)
who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such directors. All such waivers, consents,
and approvals shall be filed with the corporate records or made part of the
minutes of the meeting. A waiver of notice need not specify the purpose of any
regular or special meeting of the Board of Directors.
Adjournment. A majority of the directors present, whether or not
constituting a quorum, may adjourn any meeting to another time and place.
3.12 Notice of Adjournment. Notice of the time and place of holding an
adjourned meeting need not be given unless the meeting is adjourned for more
than twenty-four (24) hours. If the meeting is adjourned for more than
twenty-four (24) hours, then notice of the time and place of the adjourned
meeting shall be given before the adjourned meeting takes place, in the manner
specified in Section 3.7 of these Bylaws, to the directors who were not present
at the time of the adjournment.
3.13 Action by Consent. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee of the Board of Directors
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent to the action in writing, and the written consents are
filed with the minutes of proceedings of the Board or committee.
3.14 Committees. The Board of Directors may, by resolution passed by a
majority of the authorized number of directors, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he, she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
<PAGE>
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine, any com mittee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same manner
as is provided in these Bylaws for the Board of Directors.
3.15 Compensation of Directors. Directors may be paid such compensation for
their services and such reimbursement for expenses of attendance at meetings as
the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
3.16 Approval of Loans to Officers. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiary, including any officer or employee who
is a director of the corporation or its subsidiary, whenever, in the judgment of
the directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE 4 - Officers
4.1 Enumeration. The officers of the corporation shall consist of a
President, a Secretary, a Chief Financial Officer and such other officers with
such other titles as the Board of Directors shall determine, including a
Chairman of the Board, a Vice Chairman of the Board, and one or more Vice
Presidents and Assistant Secretaries. The Board of Directors may appoint, or may
empower the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform such duties as are provided in these Bylaws or as
the Board of Directors may from time to time determine.
4.2 Election. The President, Chief Financial Officer and Secretary shall be
elected by the Board of Directors at its first meeting following the annual
meeting of stockholders.
4.3 Qualification. The President need not be a director. No officer need be
a stockholder. Any two or more offices may be held by the same person.
4.4 Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these Bylaws, each officer shall hold office until his or
her successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing him, or until his or her earlier death,
resignation or removal.
4.5 Resignation and Removal. Any officer may resign by delivering his or
her written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
<PAGE>
Subject to the rights, if any, of any officer under any contract of
employment, any officer may be removed, either with or without cause, by the
Board of Directors at any regular or special meeting of the Board or, except in
case of an officer chosen by the Board of Directors, by any officer upon whom
such power of removal may be conferred by the Board of Directors.
4.6 Vacancies. The Board of Directors may fill any vacancy occurring in any
office for any reason and may, in its discretion, leave unfilled for such period
as it may determine any offices other than those of President, Chief Financial
Officer and Secretary. Each such successor shall hold office for the unexpired
term of his or her predecessor and until such successor is elected and
qualified, or until his or her earlier death, resignation or removal.
4.7 Chairman of the Board and Vice Chairman of the Board. If the Board of
Directors appoints a Chairman of the Board, he or she shall, when present,
preside at all meetings of the Board of Directors. He or she shall perform such
duties and possess such powers as are usually vested in the office of the
Chairman of the Board or as may be vested in him by the Board of Directors. If
the Board of Directors appoints a Vice Chairman of the Board, he or she shall,
in the absence or disability of the Chairman of the Board, perform the duties
and exercise the powers of the Chairman of the Board and shall perform such
other duties and possess such other powers as may from time to time be vested in
him by the Board of Directors.
4.8 President. The President shall be the chief operating officer of the
corporation. He or she shall also be the chief executive officer of the
corporation unless such title is assigned to a Chairman of the Board. The
President shall, sub ject to the direction of the Board of Directors, have
general supervision and control of the business of the corporation. Unless
otherwise provided by the directors, he or she shall preside at all meetings of
the stockholders and of the Board of Directors (except as provided in Section
4.7 above). The President shall perform such other duties and shall have such
other powers as the Board of Directors may from time to time prescribe.
4.9 Vice Presidents. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restric tions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
4.10 Secretary and Assistant Secretaries. The Secre tary shall perform such
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
<PAGE>
4.11 Chief Financial Officer. The Chief Financial Officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The books
of account shall at all reasonable times be open to inspection by any director.
The Chief Financial Officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the Board of Directors. He or she shall disburse the funds of the
corporation as may be ordered by the Board of Directors, shall render to the
President and directors, whenever they request it, an account of all of his or
her transactions as Chief Financial Officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the Board of Directors or these Bylaws.
4.12 Authority and Duties of Officers. In addition to the foregoing
authority and duties, all officers of the corporation shall respectively have
such authority and perform such duties in the management of the business of the
corporation as may be designated from time to time by the Board of Directors or
the stockholders.
4.13 Bonded Officers. The Board of Directors may require any officer to
give the corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors upon such terms and conditions
as the Board of Directors may specify, including without limitation a bond for
the faithful performance of his or her duties and for the restoration to the
corporation of all property in such officer's possession or under such officer's
control belonging to the corporation.
4.14 Salaries. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 5 - Capital Stock
5.1 Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
5.2 Certificates of Stock. Every holder of stock of the corporation shall
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
him in the corporation. Each such certificate shall be signed by, or in the name
of the corporation by, the Chairman or Vice Chairman, if any, of the Board of
Directors, or the President or a Vice Presi dent, and the Chief Financial
Officer, or the Secretary or an Assistant Secretary of the corporation. Any or
all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent or registrar at the date of issue.
<PAGE>
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the Bylaws, applicable
securities laws or any agreement among any number of stockholders or among such
holders and the corporation shall have conspicuously noted on the face or back
of the certificate either the full text of the restriction or a statement of the
existence of such restriction.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
5.3 Transfers. Subject to the restrictions, if any, stated or noted on the
stock certificates, shares of stock may be transferred on the books of the
corporation by the surrender to the corporation or its transfer agent of the
certificate repre senting such shares properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or the authenticity of signature as the cor poration or its
transfer agent may reasonably require. Except as may be otherwise required by
law, by the Certificate of Incor poration or by these Bylaws, the corporation
shall be entitled to treat the record holder of stock as shown on its books as
the owner of such stock for all purposes, including the payment of dividends and
the right to vote with respect to such stock, regardless of any transfer, pledge
or other disposition of such stock until the shares have been transferred on the
books of the corporation in accordance with the requirements of these Bylaws.
5.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new
certificate of stock in place of any previously issued certificate alleged to
have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
ARTICLE 6 - Indemnification
6.1 Indemnification of Directors, Officers, Employees and other Agents. The
corporation shall, to the fullest extent permitted by Section 145 of the General
Corporation Law of Delaware, as that Section may be amended and supplemented
from time to time, indemnify any director or officer which it shall have power
to indemnify under that Section against any expenses, liabilities or other
matters referred to in or covered by that Section. The indemnification provided
for in this Article (i) shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any bylaw, agreement or vote of
stockholders or disinterested directors or otherwise, both as to action in their
official capacities and as to action in another capacity while holding such
office, (ii) shall con tinue as to a person who has ceased to be a director or
officer and (iii) shall inure to the benefit of the heirs, executors and
administrators of such a person. The corporation's obligation to provide
indemnification under this Article shall be offset to the extent of any other
source of indemnification or any otherwise applicable insurance coverage under a
policy maintained by the corporation or any other person.
Expenses incurred by a director of the corporation in defending a civil or
criminal action, suit or proceeding by reason of the fact that he or she is or
was a director of the corporation (or was serving at the corporation's request
as a director or officer of another corporation) shall be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
<PAGE>
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation as authorized by relevant sections
of the General Corporation Law of Delaware. Notwithstanding the foregoing, the
corporation shall not be required to advance such expenses to an agent who is a
party to an action, suit or proceeding brought by the corporation and approved
by a majority of the Board of Directors of the corporation which alleges willful
misappropriation of corporate assets by such agent, disclosure of confidential
information in violation of such agent's fiduciary or contractual obligations to
the corporation or any other willful and deliberate breach in bad faith of such
agent's duty to the corporation or its stockholders.
The foregoing provisions of this Section 6.1 shall be deemed to be a
contract between the corporation and each director who serves in such capacity
at any time while this Bylaw is in effect, and any repeal or modification
thereof shall not affect any rights or obligations then existing with respect to
any state of facts then or theretofore existing or any action, suit or
proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The Board of Directors in its discretion shall have power on behalf of the
corporation to indemnify any person, other than a director, made a party to any
action, suit or proceeding by reason of the fact that such person, his or her
testator or intestate, is or was an officer or employee of the corporation.
To assure indemnification under this Article of all such persons who are
determined by the corporation or otherwise to be or to have been "fiduciaries"
of any employee benefit plan of the corporation which may exist from time to
time, such Sec tion 145 shall, for the purposes of this Article, be interpreted
as follows: an "other enterprise" shall be deemed to include such an employee
benefit plan, including, without limitation, any plan of the corporation which
is governed by the Act of Congress entitled "Employee Retirement Income Security
Act of 1974," as amended from time to time; the corporation shall be deemed to
have requested a person to serve an employee benefit plan where the performance
by such person of his or her duties to the corporation also imposes duties on,
or otherwise involves ser vices by, such person to the plan or participants or
benefici aries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to such Act of Congress shall be deemed "fines";
and action taken or omitted by a person with respect to an employee benefit plan
in the performance of such person's duties for a purpose reasonably believed by
such person to be in the interest of the participants and benefici aries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
6.2 Insurance. The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.
6.3 Indemnification Contracts. The Board of Directors is authorized to
cause the corporation to enter into indemnification contracts with any director,
officer, employee or agent of the corporation or any person serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
employee benefit plans, providing indemnification rights to such person. Such
rights may be greater than those provided in this Article 6.
<PAGE>
ARTICLE 7 - General Provisions
7.1 Fiscal Year. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
7.2 Corporate Seal. The corporate seal shall be in such form as shall be
approved by the Board of Directors.
7.3 Execution of Instruments. The President or the Chief Financial Officer
shall have power to execute and deliver on behalf and in the name of the
corporation any instrument requiring the signature of an officer of the
corporation, except as otherwise provided in these Bylaws, or where the
execution and delivery of such an instrument shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.
7.4 Checks; Drafts; Evidences of Indebtedness. From time to time, the Board
of Directors shall determine by resolution which person or persons may sign or
endorse all checks, drafts, other orders for payment of money, notes or other
evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
7.5 Record Date for Purposes Other than Notice and Voting. For purposes of
determining the stockholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or the stockholders entitled to
exercise any rights in respect of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
(60) days before any such action. In that case, only stockholders of record at
the close of business on the date so fixed are entitled to receive the dividend,
distribution or allotment of rights, or to exercise such rights, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date so fixed, except as otherwise provided by law.
If the Board of Directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the applicable
resolution or the sixtieth (60th) day before the date of that action, whichever
is later.
7.6 Voting of Securities. Except as the directors may otherwise designate,
the President, any Vice President, the Secretary or Chief Financial Officer may
waive notice of, and act as, or appoint any person or persons to act as, proxy
or attorney- in-fact for this corporation (with or without power of
substitution) at, any meeting of stockholders or shareholders of any other
corporation or organization, the securities of which may be held by this
corporation.
7.7 Evidence of Authority. A certificate by the Secretary, or an Assistant
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a commit tee or any officer or representative of the corporation
shall as to all persons who rely on the certificate in good faith be conclusive
evidence of such action.
7.8 Reliance Upon Books and Records. A member of the Board of Directors, or
a member of any committee designated by the Board of Directors shall, in the
performance of his or her duties, be fully protected in relying in good faith
upon records of the corporation and upon such information, opinions, reports or
statements presented to the corporation by any of the corporation's officers or
employees, or committees of the Board of Directors, or by any other person as to
matters the member reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the corporation.
<PAGE>
7.9 Certificate of Incorporation. All references in these Bylaws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
These Bylaws are subject to the provisions of the Certificate of Incorporation
and applicable law.
7.10 Severability. Any determination that any pro vision of these Bylaws is
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these Bylaws.
7.11 Certification and Inspection of Bylaws. The original or a copy of
these Bylaws, as amended or otherwise altered to date, certified by the
Secretary, shall be kept at the corporation's principal executive office and
shall be open to inspection by the stockholders of the corporation, at all
reasonable times during office hours.
ARTICLE 8 - Amendments
The Bylaws may be altered or amended or new Bylaws may be adopted by the
affirmative vote of sixty-six and two-thirds percent 66 2/3% of the voting power
of all of the then- outstanding shares entitled to vote. The Board of Directors
shall also have the power, if such power is conferred upon the Board of
Directors in the Certificate of Incorporation, to adopt, amend or repeal the
Bylaws.
ARTICLE 9 - Dissolution
If it should be deemed advisable in the judgment of the Board of Directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's being
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent becoming effective in accordance
with Section 103 of the General Corporation Law of Delaware, the corporation
shall be dissolved. If the consent is signed by an attorney, then the original
power of attorney or a photocopy thereof shall be attached to and filed with the
consent. The consent filed with the Secretary of State shall have attached to it
the affidavit of the Secretary or some other officer of the corporation stating
that the consent has been signed by or on behalf of all the stockholders
entitled to vote on a dissolution; in addition, there shall be attached to the
consent a certification by the Secretary or some other officer of the
corporation setting forth the names and residences of the directors and officers
of the corporation.
<PAGE>
ARTICLE 10 - Custodian
10.1 Appointment of a Custodian in Certain Cases. The Court of Chancery,
upon application of any stockholder, may appoint one or more persons to be
custodians and, if the corporation is insolvent, to be receivers, of and for the
corporation when:
(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to directors whose
terms have expired or would have expired upon qualification of their
successors;
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for
action by the Board of Directors cannot be obtained and the stockholders
are unable to terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
10.2 Duties of Custodian. The custodian shall have all the powers and title
of a receiver appointed under Section 291 of the General Corporation Law of
Delaware, but the authority of the custodian shall be to continue the business
of the corporation and not to liquidate its affairs and distribute its assets,
except when the Court of Chancery otherwise orders and except in cases arising
under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of
Delaware.
1
EXHIBIT 10.1 F
TOUCHSTONE SOFTWARE CORPORATION
1995 STOCK OPTION PLAN
1. PURPOSE. The Plan is intended to provide incentive to key employees and
directors of, and key consultants, vendors, customers, and others expected to
provide significant services to, the Corporation, to encourage proprietary
interest in the Corporation, to encourage such key employees to remain in the
employ of the Corporation and its Subsidiaries, to attract new employees with
outstanding qualifications, and to afford additional incentive to consultants,
vendors, customers, and others to increase their efforts in providing
significant services to the Corporation.
2. DEFINITIONS.
(a) "Board" shall mean the Board of Directors of the Corporation.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the committee, if any, appointed by the
Board in accordance with Section 4 of the Plan.
(d) "Common Stock" shall mean the Common Stock, par value $.001 per
share, of the Corporation.
(e) "Corporation" shall mean TouchStone Software Corporation, a
California corporation.
(f) "Disability" shall mean the condition of an Employee who is unable
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result
in death or which has lasted or can be expected to last for a continuous
period of not less than twelve (12) months.
(g) "Employee" shall mean an individual who is employed (within the
meaning of Code Section 3401 and the regulations thereunder) by the
Corporation or a Subsidiary.
(h) "Exercise Price" shall mean the price per Share of Common Stock,
determined by the Board or the Committee, at which an Option may exercised.
(i) "Fair Market Value" shall mean the value of one (1) Share of
Common Stock, determined as follows:
(1) If the Shares are traded on an exchange, the price at which
Shares traded at the close of business on the date of valuation;
(2) If the Shares are traded over-the-counter on the NASDAQ
System, the closing price if one is available, or the mean between the
bid and asked prices on said System at the close of business on the
date of valuation; and
(3) If neither (1) nor (2) applies, the fair market value as
determined by the Board or the Committee in good faith. Such
determination shall be conclusive and binding on all persons.
(j) "Incentive Stock Option" shall mean an option described in Section
422A(b) of the Code.
(k) "Nonstatutory Stock Option" shall mean an option not described in
Section 422(b), 422A(b), 423(b) or 424(b) of the Code.
<PAGE>
(l) "Option" shall mean any stock granted pursuant to the Plan.
(m) "Optionee" shall mean an employee who has received an Option.
(n) "Plan" shall mean the TouchStone Software Corporation 1995 Stock
Option Plan, as it may be amended from time to time.
(o) "Purchase Price" shall mean the Exercise Price times the number of
Shares with respect to which an Option is exercised.
(p) "Retirement" shall mean the voluntary termination of employment by
an Employee upon the attainment of age sixty- five (65) and the completion
of not less than twenty (20) years of service with the Corporation or a
Subsidiary.
(q) "Share" shall mean one (1) share of Common Stock, adjusted in
accordance with Section 10 of the Plan (if applicable).
(r) "Subsidiary" shall mean any corporation at least fifty percent
(50%) of the total combined voting power of which is owned by the
Corporation or by another Subsidiary.
3. EFFECTIVE DATE. The Plan was adopted by the Board on October 18, 1995,
which shall be the effective date of the Plan.
4. ADMINISTRATION. The Plan shall be administered by the Board, or by a
committee appointed by the Board which shall consist of not less than three (3)
members. The Board shall appoint one of the members of the Committee, if there
be one, as Chairman of the Committee. If a Committee has been appointed, the
Committee shall hold meetings at such times and places as it may determine. Acts
of a majority of the Committee at which a quorum is present, or acts reduced to
or approved in writing by a majority of the members of the Committee, shall be
the valid acts of the Committee. The Board, or the Committee if there be one,
shall from time to time at its discretion select the Employees, directors and
consultants who are to be granted Options, determine the number of Shares to be
granted to each Optionee and designate such Options such as Incentive Stock
Options or Non- statutory Stock Options, except that no Incentive Stock Option
may be granted to a non-Employee director or a non-Employee consultant.
Notwithstanding the foregoing, no Incentive Stock Options may be granted under
the Plan unless and until the Plan has been approved by the Corporation's
shareholders. A member of the Board or a Committee member shall in no event
participate in any determination relating to Options held by or to be granted to
such Board or Committee member. The interpretation and construction by the
Board, or by the Committee if there be one, of any provision of the Plan or of
any Option granted thereunder shall be final. No member of the Board or of the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option granted thereunder.
5. PARTICIPATION.
(a) Eligibility. The Optionees shall be such persons as the Committee
may select from among the following classes of persons, subject to the
terms and conditions of (b) below:
(1) Employees of the Corporation or of a Subsidiary (who may be
officers, whether or not they are directors);
(2) Directors of the Corporation or of a Subsidiary; and
(3) Consultants, vendors, customers, and others expected to
provide significant services to the Corporation or a Subsidiary.
<PAGE>
For purposes of this Plan, an Optionee who is a director or a consultant,
vendor, customer, or other provider of significant services to the Corporation
or a Subsidiary shall be deemed to be an Employee, and service as a director,
consultant, vendor, customer, or other provider of significant services to the
Corporation or a Subsidiary shall be deemed to be employment, except that no
Incentive Stock Option may be granted to a non- Employee director or
non-Employee consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary, and except that no Nonstatutory
Stock Option may be granted to a non-Employee director or non-Employee
consultant, vendor, customer, or other provider of significant services to the
Corporation or a Subsidiary other than upon a vote of a majority of
disinterested directors finding that the value of the services rendered or to be
rendered to the Corporation or a Subsidiary by such non-Employee director or
non-Employee consultant, vendor, customer, or other provider of services is at
least equal to the value of the option or options granted.
(b) Ten-Percent Shareholders. An Employee who owns more than ten
percent (10%) of the total combined voting power of all classes of
outstanding stock of the Corporation, its parent or any of its Subsidiaries
shall not be eligible to receive an Option unless (i) the Exercise Price of
the Shares subject to such Option is at least one hundred ten percent
(110%) of the Fair Market Value of such Shares on the date of grant and
(ii) such Option by its terms is not exercisable after the expiration of
five (5) years from the date of grant.
(c) Stock Ownership. For purposes of (b) above, in determining stock
ownership an Employee shall be considered as owning the stock owned,
directly or indirectly, by or for his brothers, sisters, spouses, ancestors
and lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be considered as being
owned proportionately by or for its shareholders, partners or
beneficiaries. Stock with respect to which such Employee holds an Option
shall not be counted.
(d) Outstanding Stock. For purposes of (b) above, "outstanding stock"
shall include all stock actually issued and outstanding immediately after
the grant of the Option to the Optionee. "Outstanding stock" shall not
include shares authorized for issue under outstanding Options held by the
Optionee or by any other person.
6. STOCK. The stock subject to Options granted under the Plan shall be
Shares of the Corporation's authorized but unissued or reacquired Common Stock.
The aggregate number of Shares which may be issued upon exercise of Options
under the Plan shall not exceed 300,000 shares. The number of Shares subject to
Options outstanding at any time shall not exceed the number of Shares remaining
available for issuance under the Plan. In the event that any outstanding Option
for any reason expires or is terminated, the Shares allocable to the unexercised
portion of such Option may again be made subject to any Option. The limitations
established by this Section 6 shall be subject to adjustment in the manner
provided in Section 10 hereof upon the occurrence of an event specified therein.
7. TERMS AND CONDITIONS OF OPTIONS.
(a) Stock Option Agreements. Options shall be evidenced by written
stock option agreements in such form as the Committee shall from time to
time determine. Such agreements shall comply with and be subject to the
terms and conditions set forth below.
(b) Number of Shares. Each Option shall state the number of Shares to
which it pertains and shall provide for the adjustment thereof in
accordance with the provisions of Section 10 hereof.
(c) Exercise Price. Each Option shall state the Exercise Price. The
Exercise Price in the case of any Incentive Stock Option shall not be less
than the Fair Market Value on the date of grant and, in the case of any
Option granted to an Optionee described in Section 5(b) hereof, shall not
be less than one hundred ten percent (110%) of the Fair Market Value on the
date of grant. The Exercise Price in the case of any Nonstatutory Stock
Option shall not be less than 85% of the Fair Market Value on the date of
grant.
<PAGE>
(d) Medium and Time of Payment. The Purchase Price shall be payable in
full in United States dollars upon the exercise of the Option; provided,
however, that if the applicable Option Agreement so provides the Purchase
Price may be paid (i) by the surrender of Shares in good form for transfer,
owned by the person exercising the Option and having a Fair Market Value on
the date of exercise equal to the Purchase Price, or in any combination of
cash and Shares, as long as the sum of the cash so paid and the Fair Market
Value of the Shares so surrendered equal the Purchase Price, (ii) by
cancellation of indebtedness owed by the Corporation to the Optionee, (iii)
with a full recourse promissory note executed by the Optionee, or (iv) any
combination of the foregoing. The interest rate and other terms and
conditions of such note shall be determined by the Committee. The Committee
may require that the Optionee pledge his or her Shares to the Corporation
for the purpose of securing the payment of such note. In no event shall the
stock certificate(s) representing such Shares by released to the Optionee
until such note shall be been paid in full. In the event the Corporation
determines that it is required to withhold state or Federal income tax as a
result of the exercise of an Option, as a condition to the exercise
thereof, an Employee may be required to make arrangements satisfactory to
the Corporation to enable it to satisfy such withholding requirements.
(e) Term and Nontransferability of Options. Each Option shall state
the time or times which all or part thereof becomes exercisable. No Option
shall be exercisable after the expiration of ten (10) years from the date
it was granted, and no Option granted to an Optionee described in Section
5(b) hereof shall be exercisable after the expiration of five (5) years
from the date it was granted. During the lifetime of the Optionee, the
Option shall be exercisable only by the Optionee and shall not be
assignable or transferable. In the event of the Optionee's death, the
Option shall not be transferable. In the event of the Optionee's death, the
Option shall not be transferable by the Optionee other than by will or the
laws of descent and distribution.
(f) Termination of Employment, Except by Death, Disability or
Retirement. If an Optionee ceases to be an Employee for any reason other
than his or her death, Disability or Retirement, such Optionee shall have
the right, subject to the restrictions of (e) above, to exercise the Option
at any time within three (3) months after termination of employment, but
only to the extent that, at the date of termination of employment, the
Optionee's right to exercise such Option had accrued pursuant to the terms
of the applicable option agreement and had not previously been exercised;
provided, however, that if the Optionee was terminated for cause (as
defined in the applicable option agreement) any Option not exercised in
full prior to such termination shall be canceled. For this purpose, the
employment relationship shall be treated as continuing intact while the
Optionee is on military leave, sick leave or other bona fide leave of
absence (to be determined in the sole discretion of the Committee). The
foregoing notwithstanding, in the case of an Incentive Stock Option,
employment shall not be deemed to continue beyond the ninetieth (90th) day
after the Optionee's reemployment rights are guaranteed by statute or by
contract.
(g) Death of Optionee. If an Optionee dies while an Employee, or after
ceasing to be an Employee but during the period while he or she could have
exercised the Option under this Section 7, and has not fully exercised the
Option, then the Option may be exercised in full, subject to the
restrictions of (e) above, at any time within twelve (12) months after the
Optionee's death, by the executors or administrators of his or her estate
or by any person or persons who have acquired the Option directly from the
Optionee by bequest or inheritance, but only to the extent that, at the
date of death, the Optionee's right to exercise such Option had accrued and
had not been forfeited pursuant to the terms of the applicable Option
Agreement and had not previously been exercised.
(h) Disability of Optionee. If an Optionee ceases to be an Employee by
reason of Disability, such Optionee shall have the right, subject to the
restrictions of (f) above, to exercise the Option at any time within twelve
(12) months after termination of employment, but only to the extent that,
at the date of termination of employment, the Optionee's right to exercise
such Option had accrued pursuant to the terms of the applicable Option
Agreement and had not previously been exercised.
(i) Retirement of Optionee. If an Optionee ceases to be an Employee by
reason of Retirement, such Optionee shall have the right, subject to the
restrictions of (e) above, to exercise the Option at any time within three
(3) months after termination of employment, but only to the extent that, at
the date of termination of employment, the Optionee's right to exercise
such Option had accrued pursuant to the terms of the applicable Option
Agreement and had not previously been exercised.
<PAGE>
(j) Rights as a Stockholder. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior to the
date such stock certificate is issued, except as provided in Section 10
hereof.
(k) Modification, Extension and Renewal of Option. Within the
limitations of the Plan, the Committee may 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. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair any
rights or obligations under any Option previously granted.
(l) Other Provosions. The stock option agreements authorized under the
Plan may contain such other provosions not inconsistent with the terms of
the Plan (including, without limitation, restrictions upon the exercise of
the Option) as the Committee shall deem advisable.
8. LIMITATION ON VALUE OF EXERCISABLE SHARES. In the case of Incentive
Stock Options granted hereunder, the aggregate Fair Market Value (determined as
of the date of the grant thereof) of the Shares with respect to which Incentive
Stock Options become exercisable by any employee of the Company for the first
time during any calendar year (under this Plan and all other plans maintained by
the Corporation, its parent or its Subsidiaries) shall not exceed $100,000.
9. TERM OF PLAN. Options may be granted pursuant to the Plan until the
expiration of ten (10) years from the effective date of the Plan.
10. RECAPITALIZATIONS. Subject to any required action by shareholders, the
number of Shares covered by the Plan as provided in Section 6 hereof, the number
of Shares covered by each outstanding Option and the Exercise Price thereof
shall be proportionately adjusted for any increase of decrease in the number of
issued Shares resulting from a subdivision or consolidation of Shares or the
payment of a stock dividend (but only of Common Stock) or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Corporation. Subject to any required action by
stockholders, if the Corporation is the surviving corporation in any merger or
consolidation, each outstanding Option shall pertain and apply to the securities
to which a holder of the number of Shares subject to the Option would have been
entitled. In the event of a merger or consolidation in which the Corporation is
not the surviving corporation, the date of exercisability of each outstanding
Option shall be accelerated to a date prior to such merger or consolidation,
unless the agreement of merger or consolidation provides for the assumption of
the Option by the successor to the Corporation. To the extent that the foregoing
adjustments relate to securities of the Corporation, such adjustments shall be
made by the Committee, whose determination shall be conclusive and binding on
all persons. Except as expressly provided in this Section 10, the Optionee shall
have no rights by reason of subdivision or consolidation of shares of stock of
any class, the payment of any stock dividend or any other increase or decrease
in the number of shares of stock of any class or by reason of any dissolution,
liquidation, merger or consolidation or spin-off of assets or stock of another
corporation, and any issue by the Corporation of shares of stock of any class,
or securities convertible into shares of stock of any class, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power to the Corporation to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business assets.
11. SECURITIES LAW REQUIREMENTS.
(a) Legality of Issuance. The issuance of any Shares upon the exercise of
any Option and the grant of any Option shall be contingent upon the following:
(1) the Corporation and the Optionee shall have taken all actions
required to register the Shares under the Securities Act of 1933, as
amended (the "Act"), and to qualify the Option and the Shares under any and
all applicable state securities or "blue sky" laws or regulations, or to
perfect an exemption from the respective registration and qualification
requirements thereof;
<PAGE>
(2) any applicable listing requirement of any stock exchange on which
the Common Stock is listed shall have been satisfied; and
(3) any other applicable provision of state of Federal law shall have
been satisfied.
(b) Restrictions on Transfer. Regardless of whether the offering and sale
of Shares under the plan has been registered under the Act or has been
registered or qualified under the securities laws of any state, the Corporation
may impose restrictions on the sale, pledge or other transfer of such Shares
(including the placement of appropriate legends on stock certificates) if, in
the judgment of the Corporation and its counsel, such restrictions are necessary
or desirable in order to achieve compliance with the provisions of the Act, the
securities laws of any state or any other law. In the event that the sale of
Shares under the Plan is not registered under the Act but an exemption is
available which required an investment representation or other representation,
each Optionee shall be required to represent that such Shares are being acquired
for investment, and not with a view to the sale or distribution thereof, and to
make such other representations as are deemed necessary or appropriate by the
Corporation and its counsel. Any determination by the Corporation and its
counsel in connection with any of the matters set forth in this Section 11 shall
be conclusive and binding on all persons. Stock certificates evidencing Shares
acquired under the Plan pursuant to an unregistered transaction shall bear the
following restrictive legend and such other restrictive legends as are required
or deemed advisable under the provisions of any applicable law.
"THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES
WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO
SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS
UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT."
(c) Registration or Qualification of Securities. The Corporation may, but
shall not be obligated to register or qualify the issuance of Options and/or the
sale of Shares under the Act or any other applicable law. The Corporation shall
not be obligated to take any affirmative action in order to cause the issuance
of Options or the sale of Shares under the plan to comply with any law.
(d) Exchange of Certificates. If, in the opinion of the Corporation and its
counsel, any legend placed on a stock certificate representing shares sold under
the Plan is no longer required, the holder of such certificate shall be entitled
to exchange such certificate for a certificate representing the same number of
Shares but lacking such legend.
12. AMENDMENT OF THE PLAN. The Board may from time to time, with respect to
any Shares at the time not subject to Options, suspend or discontinue the plan
or revise or amend it in any respect whatsoever except that, without the
approval of the Corporation's stockholders, no such revision or amendment shall:
(a) Increase the number of Shares subject to the Plan;
(b) Change the designation in Section 5 hereof with respect to the
classes of persons eligible to receive Options; or
(c) Amend this Section 12 to defeat its purpose.
13. APPLICATION OF FUNDS. The proceeds received by the Corporation from the
sale of Common Stock pursuant to the exercise of an Option will be used for
general corporate purposes.
14. EXECUTION. To record the adoption of the Plan in the form set forth
above by the Board effective as of October 18, 1995, the Corporation has caused
this Plan to be executed in the name and on behalf of the Corporation where
provided below by an officer of the Corporation thereunto duly authorized.
TOUCHSTONE SOFTWARE CORPORATION
By: /s/ C. Shannon Jenkins, President
----------------------------------------
By: /s/ Ronald R. Maas, Secretary
---------------------------------
EXHIBIT 10.2
CORPORATE RESOLUTION TO BORROW
Principal Loan Maturity Loan No. Call Collateral Account Officer Initials
Date
- - --------------------------------------------------------------------------------
$500,000.00 09-12- 09-12- 407269010 11 0024 804
1996 1997
- - --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
Borrower: Lender:
TOUCHSTONE SOFTWARE CORPORATION SOUTHERN CALIFORNIA BANK
(TIN:95-3778226) HUNTINGTON BEACH OFFICE
2124 MAIN STREET, SUITE 250 9042 Garfield Avenue
HUNTINGTON BEACH, CA 92648 Huntington Beach, CA 92646-2338
- - --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistance Secretary of TOUCHSTONE SOFTWARE
CORPORATION (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
California as a corporation for profit, with its principal office at 2124 MAIN
STREET, SUITE 250, HUNTINGTON BEACH, CA 92648, and is duly authorized to
transact business In the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held on September 12, 1996, at which a quorum was present and
voting, or by other duly authorized corporate action in lieu of a meeting, the
following resolutions were adopted:
BE IT RESOLVED, that any two (2) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES.
LARRY C. JORDAN PRESIDENT/CEO x /S/ LARRY JORDAN
- ----------------
RONALD R. MAAS EXECUTIVE VICE PRESIDENT/CFO x /S/ RONALD R. MAAS
- ------------------
acting for and on behalf of the Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from SOUTHERN CALIFORNIA BANK
("Lender"), on such terms as may be agreed upon between the Corporation and
Lender, such sum or sums of money as in their judgment should be borrowed;
however, not exceeding at any one time the amount of Five Hundred Thousand &
00/100 Dollars ($500,000.00), in addition to such sum or sums of money as may be
currently borrowed by the Corporation from Lender.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be agreed
upon, evidencing the sums of money so borrowed or any indebtedness of the
Corporation to Lender, and also to execute and deliver to Lender one or more
renewals, extensions, modifications, refinancing, consolidations, or
substitutions for one or more of the notes, any portion of the notes, or any
other evidence of credit accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of any
loans or credit accommodations so obtained, any promissory notes so executed
(including any amendments to or modifications, renewals, and extensions of such
promissory notes), or any other or further indebtedness of the Corporation to
Lender at any time owing. however the same may be evidenced, any property now or
hereafter belonging to the Corporation or in which the Corporation now or
hereafter may have an interest, including without limitation all real property
and all personal property (tangible or intangible) of the Corporation. Such
property may be mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered at the time such loans are obtained or such indebtedness is incurred,
or at any other time or times, and may be either in addition to or in lieu of
any property theretofore mortgaged, pledged, transferred, endorsed,
hypothecated, or encumbered.
Execute Security Documents. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and other
security agreements and financing statements which may be required by Lender,
and which shall evidence the terms and conditions under and pursuant to which
such liens and encumbrances, or any of them, are given; and also to execute and
deliver to Lender any other written instruments, any chattel paper, or any other
collateral, of any kind or nature, which Lender may deem necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.
Notwithstanding the foregoing, any one of the above authorized persons may
execute, deliver, or record financing statements.
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation In which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Lender, or to cause such
other disposition of the proceeds derived therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions. The following person or
persons currently are authorized to request advances and authorize payments
under the line of credit until Lender receives written notice of revocation of
their authority: LARRY C. JORDAN, PRESIDENT/CHIEF EXECUTIVE OFFICER; C. SHANNON
DINGUS, CHIEF TECHNOLOGY OFFICER; RONALD R. MAAS, EXECUTIVE VICE PRESIDENT/CHIEF
FINANCIAL OFFICER; and MICHAEL A. MILLER, CONTROLLER.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing
at Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation,, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever. The Corporation has no corporate seal, and
therefore, no seal is affixed to this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on September 12, 1996 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
x /S/ RONALD R. MAAS
---------------------
<PAGE>
BUSINESS LOAN AGREEMENT
Principal Loan Maturity Loan No. Call Collateral Account Officer Initials
Date
- - --------------------------------------------------------------------------------
$500,000.00 09-12- 09-12- 407269010 11 0024 804
1996 1997
- - --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
Borrower: Lender:
TOUCHSTONE SOFTWARE CORPORATION SOUTHERN CALIFORNIA BANK
(TIN:95-3778226) HUNTINGTON BEACH OFFICE
2124 MAIN STREET, SUITE 250 9042 Garfield Avenue
HUNTINGTON BEACH, CA 92648 Huntington Beach, CA 92646-2338
- - --------------------------------------------------------------------------------
THIS BUSINESS LOAN AGREEMENT between TOUCHSTONE SOFTWARE CORPORATION
("Borrower") and SOUTHERN CALIFORNIA BANK ("Lender") Is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, Including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, we referred to In this Agreement Individually as the "Loan'
and collectively as the "Loans." Borrower understands and agrees that: (a) In
granting, renewing, or extending any Loan, Lender Is relying upon Borrower's
representations, warranties, and agreements, as set forth In this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all limes shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of September 12, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word " Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
Borrower. The word "Borrower" means TOUCHSTONE SOFTWARE CORPORATION. The
word 'Borrower' also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted directly or indirectly, whether granted now
or in the future, and whether granted in the form of a security interest,
mortgage, dead of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien, charge,
Hen or title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether created by
law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or granting a Security Interest in any Collateral for the
Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by Lender
against Borrower, or any one or more of them; whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or jointly with
others; whether Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or hereafter
may become otherwise unenforceable.
Lender. The word "Lender" means SOUTHERN CALIFORNIA BANK, its successors
and assigns.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial accommodations described herein or
described on any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note or
notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender: (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, dead of trust, assignment, pledge, chattel mortgage, chattel
trust, factors lien, equipment trust, conditional sale, trust receipt, lien or
title retention contract, lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the
initial Loan Advance and each subsequent Loan Advance under this Agreement shall
be subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d) evidence of
insurance as required below; and (a) any other documents required under this
Agreement or by Lender or its counsel.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in this
Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
<PAGE>
09-12-1996 BUSINESS LOAN AGREEMENT
Page 2
Loan No 407269010
(Continued)
No Event of Default. There shall not exit at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which Is duty organized, validly
existing, and in good standing under the laws of the State of California and is
validly existing and in good standing in all states In which Borrower Is doing
business. Borrower has the full power and authority to own its properties and to
transact the businesses in which It is presently engaged or presently proposes
to engage. Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would have a
material adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed, delivered
or performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with, result in a violation
of, or constitute a default under (a) any provision of Its articles of
incorporation or organization, or bylaws, or any agreement or other instrument
binding upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of the
date of the statement, and there has been no material adverse change In
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligation except as disclosed In such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not presently
due and payable, Borrower owns and has good flue to all of Borrower's properties
free and clear of all Security Interests, and has not executed any security
documents or financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the last five (5)
years.
Hazardous Substances. The terms "hazardous waste", "hazardous
substance","disposal", "release", and "threatened release", as used in this
Agreement, shall have the same meanings as set forth In the 'CERCLA,' "SARA,'
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq.,
Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, et seq., or other applicable state or Federal laws, rules,
or regulations adopted pursuant to any of the foregoing. Except as disclosed to
and acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrowers ownership of the properties, there has been
no use, generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste or
substance on, under, about or from the properties by any prior owners or
occupants of any of the properties, or (ii) any actual or threatened litigation
or claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with all
applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those Laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any inspections
or tests made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or liability on the
part of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (b) agrees to indemnity and hold indemnify
Lender against any and all claims, losses, liabilities, damages, penalties, and
expenses which Lender may directly or Indirectly sustain or suffer resulting
from a breach of this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened release
occurring prior to Borrower's ownership or Interest in the properties, whether
or not the same was or should have been known to Borrower. The provisions of
this section of the Agreement, including the obligation to Indemnity, shall
survive the payment of the Indebtedness and the termination or expiration of
this Agreement and shall not be affected by Lender acquisition of any interest
in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which my materially
adversely affect Borrower's financial condition or properties, other than
litigation, claims, or other events, it any, that have been disclosed to and
acknowledged by Lender in writing.
Taxes. To the best of Borrowers knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or Indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or Indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor Prohibited
Transaction (as defined In ERISA) has occurred with respect to any such plan,
(ii) Borrower has not withdrawn from any such plan or initiated steps to do so,
(iii) no steps have been taken to terminate any such plan, and (iv) there are no
unfunded liabilities other than those previously disclosed to Lender in writing.
Investment Company Act. Borrower 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.
Public Utility Holding Company Act. Borrower is not a "holding company", or
a "subsidiary company" of a "holding company", or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company", within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
Regulations G, T and U. Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulations G, T and
U of the Board of Governors of the Federal Reserve System).
Location of Borrower's Offices and Records. Borrower's place of business,
or Boffower's Chief executive office, if Borrower has more than one place of
business, is located at 2124 MAIN STREET, SUITE 250, HUNTINGTON BEACH, CA 92648.
Unless Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or In connection with this
Agreement or any transaction contemplated hereby is, and all information
hereafter furnished by or on behalf of Borrower to Lender will be, true and
accurate in every material respect on the date as of which such Information is
dated or certified; and none of such information is or will be incomplete by
omitting to state any material fact necessary to make such information not
misleading.
Claims and Defenses. There are no defenses or counterclaims, offsets or
other adverse claims, demands or actions of any kind, personal or otherwise,
that Borrower, Grantor, or any Guarantor could assess with respect to the Note,
Loan, Indebtedness, this Agreement, or the Related Documents.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties In assessing Loan Advances to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect until such time
as Borrower's Indebtedness shall be paid in full, or until this Agreement shall
be terminated in the manner provided above, whichever is the last to occur.
<PAGE>
09-12-1996 BUSINESS LOAN AGREEMENT
Page 3
Loan No 407269010
(Continued)
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will:
Litigation. Promptly Inform Lender In writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing and
all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor which
could materially affect the financial condition of Borrower or the
financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other Insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least thirty (30) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Report. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such Information as Lender may reasonably
request, Including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more often than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual rash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and hens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a Hen or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lion or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lion, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
lions and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in a
timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under this
Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of any
change in executive and management personnel; conduct its business affairs
in a reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting Its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Environmental Studies. Promptly conduct and complete, at Borrower's
expense, all such investigations, studies, samplings and testing as may be
requested by Lender or any governmental authority relative to any substance
defined as toxic or a hazardous substance under any applicable federal,
state, or local law, rule, regulation, order or directive, or any waste or
by-product thereof, at or affecting any property or any facility owned,
[eased or used by Borrower.
Inspection. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and Borrowers
other properties and to examine or audit Borrowers books, accounts, and
records and to make copies and memoranda of Borrowers books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable limes and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender at least annually and at the Units of each disbursement of Loan
proceeds with a certificate executed by Borrowers chief financial officer,
or other officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as
of the date of the certificate, no Event of Default exists under this
Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part or
on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrowers part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any
law, rule, regulation or guidelines or the interpretation or application of any
thereof by any court or administrative or governmental authc4ity (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) Increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while
this Agreement is in effect, Borrower shall not, without the prior written
consent of Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lion, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest In, or
encumber any of Borrower's assets, or (c) sell with recourse any of
Borrowers accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (b) pay
any dividends on Borrowers stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a 'Subchapter S Corporation'
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
<PAGE>
09-12-1996 BUSINESS LOAN AGREEMENT
Page 4
Loan No 407269010
(Continued)
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan
to Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds it.,
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition In bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrowers financial
condition, In the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantees guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ADDITIONAL TERMS, CONDITIONS AND COVENANTS. An exhibit, titled "ADDITIONAL
TERMS, CONDITIONS AND COVENANTS,' is attached to this Agreement and by this
reference is made a part of this Agreement just as if all the provisions, terms
and conditions of the Exhibit had been fully set forth in this Agreement.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, convoys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account), including without limitation all accounts hold jointly with someone
else and all accounts Borrower may open In the future, excluding however all IRA
and Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or
to perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default In Favor of Third Parties. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement, purchase
or sales agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property or
Borrower's or any Grantor's ability to repay the Loans or perform their
respective obligations under this Agreement or any of the Related
Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as
a going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
Change In Ownership. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrowers
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Insecurity. Lender, In good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the 'Insolvency' subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's rights
and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lenders
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender In the State of California. It there Is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of the
courts of ORANGE County, the State of California. Subject to the provisions
on arbitration, this Agreement shall be governed by and construed In
accordance with the laws of the State of California.
Arbitration. Lender and Borrower agree that all disputes, claims and
controversies between them, whether Individual, joint, or class In nature,
arising from this Agreement or otherwise, Including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order: invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver: or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Lender and Borrower agree that in the event of an action for
judicial foreclosure pursuant to California Code of CiAl Procedure Section
726, or any similar provision in any other state, the commencement of such
an action will not constitute a waiver of the right to arbitrate and the
court shall refer to arbitration as much of such action, Including
counterclaims, as lawfully may be referred to arbitration. Judgment upon
any award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Agreement shall preclude any party from
seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrine
which would otherwise be applicable in an action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
their purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of the
persons signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lenders
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation Interests, as wall as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
<PAGE>
09-12-1996 BUSINESS LOAN AGREEMENT
Page 5
Loan No 407269010
(Continued)
Borrower Information. Borrower consents to the release of information
on or about Borrower by Lender in accordance with any court order, law or
regulation and In response to credit Inquiries concerning Borrower.
Non-Liability of Lender. The relationship between Borrower and Lender
Is a debtor and creditor relationship and not fiduciary In nature, nor is
the relationship to be construed as creating any partnership or joint
venture between Lender and Borrower. Borrower Is exercising its own
judgment with respect to Borrower's business. An Information supplied to
Lender Is for Lender's protection only and no other party is entitled to
rely on such information. There is no duty for Lender to review, inspect,
supervise, or Inform Borrower of any matter with respect to Borrowers
business. Lender and Borrower Intend that Lender may reasonably rely on all
information supplied by Borrower to Lender, together with all
representations and warranties given by Borrower to Lender, without
Investigation or confirmation by Lender and that any investigation or
failure to Investigate will not diminish Lenders right to so rely.
Notice of Lender's Breach. Borrower must notify Lender in writing of
any breach of this Agreement or the Related Documents by Lender and any
other claim, cause of action or offset against Lender within thirty (30)
days after the occurrence of such breach or after the accrual of such
claim, cause of action or offset. Borrower waives any claim, cause of
action or offset for which notice is not given In accordance with this
paragraph. Lender is entitled to rely on any failure to give such notice.
Borrower Indemnification. Borrower shall indemnity and hold Lender
harmless from and against all claims, costs, expenses. losses, damages. and
liabilities of any kind, including but not limited to attorneys' fees and
expenses, arising out of any matter relating directly or indirectly to the
Indebtedness, whether resulting from internal disputes of the Borrower,
disputes between Borrower and any Guarantor, or whether involving any third
parties, or out of any other matter whatsoever related to this Agreement or
the Related Documents, but excluding any claim or liability which arises as
a direct result of Lenders gross negligence or willful misconduct. This
indemnity shall survive full repayment and satisfaction of the Indebtedness
and termination of this Agreement.
Counterparts. This Agreement may be executed in multiple counterparts,
each of which, when so executed, shall be deemed an original, but all such
counterparts, taken together, shall constitute one and the same Agreement.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' to", Incurred In
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
Includes, subject to any limits under applicable law, Lender's attorney's
fees and Lenders legal expenses, whether or not there is a lawsuit,
Including attorneys' tees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunctions, appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall
be given in writing, may be sent by facsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first dm, postage prepaid,
addressed to the party to whom the notice is to be given at the address
shown above. Any party may change Its address for notices under this
Agreement by signing formal written notice to the other parties, specifying
that the purpose of the notice is to change the party's address. To the
extent permitted by applicable law, if there is more than one Borrower,
notice to any Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all times of Borrowers
current address(es).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word 'Borrower' as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or
on behalf of Borrower shall bind Ns successors and assigns and shall Inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or In any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be considered to
have been relied upon by Lender and will survive the making of the Loan and
delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lenders right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lenders rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent In subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
SEPTEMBER 12,1996.
BORROWER:
TOUCHSTONE SOFTWARE CORPORATION
_________________________________________________
By: LARRY C. JORDAN, PRESIDENT & CEO
_________________________________________________
By: RONALD R. MAAS, EXECUIVE VICE PRESIDENT/CFO
LENDER:
SOUTHERN CALIFORNIA BANK
By: _____________________________________________
Authorized Officer
5
<PAGE>
PROMISSORY NOTE
Principal Loan Maturity Loan No. Call Collateral Account Officer Initials
Date
- - --------------------------------------------------------------------------------
$500,000.00 09-12- 09-12- 407269010 11 0024 804
1996 1997
- - --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
Borrower: Lender:
TOUCHSTONE SOFTWARE CORPORATION SOUTHERN CALIFORNIA BANK
(TIN:95-3778226) HUNTINGTON BEACH OFFICE
2124 MAIN STREET, SUITE 250 9042 Garfield Avenue
HUNTINGTON BEACH, CA 92648 Huntington Beach, CA 92646-2338
- - --------------------------------------------------------------------------------
Principal Amount: $500,000.00 Initial Rate: 8.250%
Date of Note: September 12, 1996
PROMISE TO PAY. TOUCHSTONE SOFTWARE CORPORATION ("Borrower') promises to
pay to SOUTHERN CALIFORNIA BANK ("Lender'), or order, In lawful money of the
United States of America, the principal amount of Five Hundred Thousand & 00/100
Dollars ($500,000.00) or so much as may be outstanding, together with Interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan on demand, or If no demand Is made, In
one payment of all outstanding principal plus all accrued unpaid Interest on
September 12,1997. In addition, Borrower will pay regular monthly payments of
accrued unpaid Interest beginning October 12, 1996, and all subsequent Interest
payments are due on the same day of each month after that. Interest on this Note
is computed on a 365/360 simple interest basis; that is, by applying the ratio
of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lenders address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent Index which is the WALL
STREET JOURNAL PRIME RATE (the 'Index'). The Index is not necessarily the lowest
rate charged by Lender on its loans. If the Index becomes unavailable during the
term of this loan, Lender may designate a substitute index after notice to
Borrower. Lender will tell Borrower the current Index rate upon Borrowers
request. Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than each DAY. The
Index currently Is 8.250% per annum. The Interest rate to be applied to the
unpaid principal balance of this Note will be at a rate equal to the Index,
resulting In an Initial rate of 8.250% per annum. NOTICE: Under no circumstances
will the interest rate on this Note be more than the maximum rate allowed by
applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full
prepayment of this Note, Borrower understands that Lender is entitled to a
minimum Interest charge of $250.00. Other than Borrowers obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrowers obligation to continue to
make payments of accrued unpaid interest. Rather, they will reduce the principal
balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment or $5.00, whichever Is greater.
DEFALLT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower falls to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrowers ability to repay this Note or perform Borrowers
obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrowers behalf is false or misleading in any material respect either now or at
the time made or furnished. (a) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (I) Lender
in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Note and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon Borrower's failure
to pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.000
percentage points over the Index. Lender may hire or pay someone else to help
close this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a Lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post- judgment collection services Borrower also
will pay any court costs, in addition to all other sums provided by law. This
Note has been delivered to Lender and accepted by Lender In the State of
California. If there Is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of ORANGE County, the State of
California. Subject to the provisions on arbitration, this Note shall be
governed by and construed In accordance with the laws of the State of
California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $16.00 if
Borrower makes a payment on Borrower's loan and the check or preauthorized
charge with which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, convoys, delivers, pledges, and
transfers to Lender all Borrower's right, Life and interest in and to, Borrowers
accounts with Lender (whether checking, savings, or some other account),
including without limitation all accounts held jointly with someone else and all
accounts Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent permitted
by applicable law, to charge or setoff all sums owing on this Note against any
and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or by an authorized person.
All oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lenders office shown above. The following party or parties
are authorized to request advances under the line of credit until Lender
receives from Borrower at Lender's address shown above written notice of
revocation of their authority: LARRY C. JORDAN, PRESIDENT/CHIEF EXECUTIVE
OFFICER; C. SHANNON DINGUS, CHIEF TECHNOLOGY OFFICER; RONALD R. MAAS, EXECUTIVE
VICE PRESIDENT/CHIEF FINANCIAL OFFICER; and MICHAEL A. MILLER, CONTROLLER.
Borrower agrees to be liable for all sums either. (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this Note
at any time may be 9,Adericed by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantors guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (a) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether Individual, joint, or class In nature,
arising from this Note or otherwise, Including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or dispose
of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or temporary
restraining order; invoking a power of sale under any dead of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Lender and
Borrower agree that in the event of an action for judicial foreclosure pursuant
to California Code of Civil Procedure Section 726, or any similar provision in
any other state, the communication of such an action will not constitute a
waiver of the right to arbitrate and the court shall refer to arbitration as
much of such action, including counterclaims, as lawfully may be referred to
arbitration. Judgment upon any award rendered by any arbitrator may be entered
in any court having jurisdiction. Nothing in this Note shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable In an action
<PAGE>
09-12-1996 PROMISSORY NOTE
Page 2
Loan No 407269010 (Continued)
brought by a party shall be applicable in any arbitration proceeding, and
the commencement of an arbitration proceeding shall be deemed the Commencement
of an action for these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of
specific default provisions or rights of Lender shall not preclude Lender's
right to declare payment of this Note on Its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Borrower and any other person who signs. guarantees or endorses this Note, to
the extent allowed by law, waive any applicable statute of limitations,
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated In writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. At such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or Impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
doomed necessary by Lender without the consent of or notice to anyone. AN such
parties also agree that Lender may modify this Wan without the consent of or
notice to anyone other than the party with whom the modification Is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES
TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE
NOTE.
BORROWER:
TOUCHSTONE SOFTWARE CORPORATION
By: _______________________________________
LARRY C. JORDAN, PRESIDENT/CEO
By: _______________________________________
RONALD R. MAAS, EXECUTIVE VICE PRESIDENT/CFO
LENDER:
SOUTHERN CALIFORNIA BANK
By: ______________________________________
Authorized Officer
4
<PAGE>
ASSIGNMENT OF DEPOSIT ACCOUNT
Principal Loan Maturity Loan No. Call Collateral Account Officer Initials
Date
- - --------------------------------------------------------------------------------
$500,000.00 09-12- 09-12- 407269010 11 0024 804
1996 1997
- - --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
Borrower: Lender:
TOUCHSTONE SOFTWARE CORPORATION SOUTHERN CALIFORNIA BANK
(TIN:95-3778226) HUNTINGTON BEACH OFFICE
2124 MAIN STREET, SUITE 250 9042 Garfield Avenue
HUNTINGTON BEACH, CA 92648 Huntington Beach, CA 92646-2338
- - --------------------------------------------------------------------------------
THIS ASSIGNMENT OF DEPOSIT ACCOUNT Is entered into between TOUCHSTONE SOFTWARE
CORPORATION Preferred to below as 'Grantor"); and SOUTHERN CAUFORNIA BANK
(referred to below as "Lender")-
ASSIGNMENT. For valuable consideration, Grantor assigns and grants to
Lender a security interest in the Collateral, including without limitation the
deposit accounts described below, to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, In addition to all other rights which Lender my have by law.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. Any
references to dollar amounts shall mean amounts In lawful money of the United
States of America.
Account. The word 'Account' means the deposit account described below
in the definition for "Collateral."
Agreement. The word 'Agreement' means this Assignment of Deposit
Account, as this Assignment of Deposit Account may be amended or modified
from time to time, together with all exhibits and schedules attached to
this Assignment of Deposit Account from time to time.
Collateral. The word 'collateral means the following described deposit
account:
SOUTHERN CALIFORNIA BANK'S CERTIFICATE OF DEPOSIT NO. 427-060092
Issued by Lender In an amount not less than $500,000.00
together with (a) all interest, whether now accrued or hereafter
accruing; (b) all additional deposits hereafter made to the Account; lo)
any and all proceeds from the Account; and (d) all renewals, replacements
and substitutions for any of the foregoing.
Event of Default. The words 'Event of Default' mean and include
without limitation any of the Events of Default set forth below In the
section filled "Events of Default.'
Grantor. The word 'Grantor' means TOUCHSTONE SOFTWARE CORPORATION, its
successors and assigns.
Guarantor. The word 'Guarantor' means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word 'indebtedness means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under this
Agreement or under any of the Related Documents. In addition, the word
"Indebtedness' includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as well as
all claims by Lender against Grantor, or any one or more of them, whether
existing now or later; whether they are voluntary or involuntary, due or not
due, direct or indirect, absolute or contingent, liquidated or unliquidated;
whether Grantor may be liable individually or jointly with others; whether
Grantor may be obligated as guarantor, surety, accommodation party or otherwise;
whether recovery upon such indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such indebtedness may be or hereafter
may become otherwise unenforceable. Lender. The word 'Lender' means SOUTHERN
CALIFORNIA BANK, its successors and assigns.
Note. The word 'Note' means the note or credit agreement dated
September 12, 1996, in the principal amount of $500,000.00 from TOUCHSTONE
SOFTWARE CORPORATION to Lender, together with all renewals of, extensions
of, modifications of, refinancing of, consolidations of and substitutions
for the note or credit agreement.
Related Documents. The words 'Related document mean and include
without limitation all promissory notes, credit agreements. loan
agreements, enatonmental agreements, guarantees, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter e)dsting, executed in connection with
the Indebtedness.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL.
With respect to the Collateral, Grantor represents and warrants to Lender that:
Ownership. Grantor is the lawful owner of the Collateral free and
clear of all loans, liens, encumbrances, and claims except as disclosed to
and accepted by Lender in writing.
Right to Grant Security Interest. Grantor has the full right, power,
and authority to enter into this Agreement and to assign the Collateral to
Lender.
No Further Transfer. Grantor will not sell, assign, encumber, or
otherwise dispose of any of Grantees rights ! the Collateral except as
provided in in this Agreement.
No Defaults. There are no defaults relating to the Collateral, and
there are no offsets or counterclaims to the same. Grantor will strictly
and promptly do everything required of Grantor under the terms, conditions,
promises, and agreements contained in or relating to the Collateral.
Proceeds. Any and all replacement or renewal certificates,
instruments, or other benefits or proceeds related to the Collateral that
are borrowed by Grantor shall be held by Grantor in trust for Lender and
immediately shall be delivered by Grantor to Lender to be held as part of
the Collateral.
LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL. While this
Agreement is in effect, Lender may retain the rights to possession of the
Collateral, together with any and all evidence of the Collateral, such as
certificates or passbooks. This Agreement will remain in effect until (a) there
no longer is any Indebtedness owing to Lender; (b) all other obligations secured
by this Agreement have been fulfilled; and (c) Grantor, in writing, has
requested from Lender a release of this Agreement.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged Gr paid by (3rantor under this Agreement, including without
limitation all taxes, liens, security interest% encumbrances, and other claims,
at any time levied or placed on the Collateral. Lender also may (but shall not
be obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (I) the term of any applicable insurance policy or (if) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable
care in the physical preservation and custody of any certificate or passbook for
the Collateral but shall have no other obligation to protect the Collateral or
its value. In particular, but without limitation, Lender shall have no
responsibility (a) for the collection or protection of any income on the
Collateral, (b) for the preservation of rights against issuers of the Collateral
or against third persons; (c) for ascertaining any maturities, conversions,
exchanges, offers, tenders, or similar matters relating to the Collateral; nor
(d) for informing the Grantor about any of the above, whether or not Lender has
or is deemed to have knowledge of such matters.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when
due on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condibon contained in this Agreement or
in any of the Related Documents or in any other agreement between Lender
and Grantor.
Default In Favor of Third Parties. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement, purchase
or sales agreement, or any other agreement, In favor of any other creditor
or person that may materially affect any of Borrower's property or
<PAGE>
09-12-1996 ASSIGNMENT OF DEPOSIT ACCOUNT
Page 2
Loan No 407269010
(Continued)
Borrower's or any Grantor's ability to repay the Loans or perform
their respective obligations under this Agreement or any of the Related
Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
Defective Collaterailzation. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and deposited security Interest or
lien) at any time and for any reason.
Insolvency. The dissolution or termination of Guarantors e)existence
as a going business, the Insolvency of Grantor, the appointment of a
receiver for any part of Guarantors property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement of
any proceeding under any bankruptcy or insolvency laws by or against
Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Adverse Change. A material adverse change occurs in
Grantor's financial condition, or Lender believes the prospect of payment
or performance of the Indebtedness is Impaired.
Insecurity. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of an Event of Default,
or at any time thereafter, Lender may exercise any one or more of the following
rights and remedies, in addition to any rights or remedies that may be available
at Law, In equity, or otherwise:
Accelerate Indebtedness. Lender may declare all Indebtedness of
Grantor to Lender immediately due and payable, without notice of any kind
to Grantor.
Application of Account Proceeds. Lender may obtain all funds in the
Account from the issuer of the Account and apply them to the Indebtedness
in the same manner as if the Account had been issued by Lender. If the
Account is subject to an early withdrawal penalty, that penalty shall be
deducted from the Account before its application to the Indebtedness,
whether the Account is with Lender or some other institution. Any excess
funds remaining after application of the Account proceeds to the
Indebtedness will be paid to Grantor as the interests of Grantor may
appear. Grantor agrees, to the extent permitted by law, to pay any
deficiency after application of the proceeds of the Account to the
indebtedness. Lender also shall have all the rights of a secured party
under the California Uniform Commercial Code, even H the Account is not
otherwise subject to such Code concerning security interests, and the
parties to this Agreement agree that the provisions of the Code giving
rights to a secured party shall nonetheless be a part of this Agreement.
Other Rights and Remedies. Lender shall have and may exercise any or
all of the rights and remedies of a secured creditor under the provisions
of the California Uniform Commercial Code, at law, in equity, or otherwise.
Deficiency Judgment. If permitted by applicable law, Lender may obtain
a judgment for any deficiency remaining in the Indebtedness due to Lender
after application of all amounts received from the exercise of the rights
provided in this section.
Cumulative Remedies All of Lender's rights and remedies, whether
evidenced by this Agreement or by any other writing, shall be cumulative
and may be exercised singularly or concurrently. Election by Lender to
pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Grantor under this Agreement, after Grantor's failure to perform, shall not
affect Lender's right to declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of California. If there is a Lawsuit,
Grantor agrees upon Lender's request to submit to the jurisdiction of the
courts of ORANGE County, State of California Subject to the provisions on
arbitration, this Agreement shall be governed by and construed in
accordance with the laws of the State of California.
Arbitration. Lender and Grantor agree that all disputes, claims and
controversies between them, whether Individual, joint, or class In nature,
arising from this Agreement or otherwise, Including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a wdt of attachment or imposition of a receiver; or
exercising any rights relating to personal property, Including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Lender and Grantor agree that in the event of an action for judicial
foreclosure pursuant to California Code of Civil Procedure Section 726, or
any similar provision in any other state, the commencement of such an
action will not constitute a waiver of the right to arbitrate and the court
shall refer to arbitration as much of such action, including counterclaims,
as lawfully may be referred to arbitration. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction.
Nothing in this Agreement shall preclude any party from seeking equitable
relief from a court of competent jurisdiction. The statute of limitations,
estoppel, waiver, laches, and similar doctrines which would otherwise be
applicable in an action brought by a party shall be applicable in any
arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The
Federal Arbitration Act shall apply to the construction, interpretation,
and enforcement of this arbitration provision.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone also to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
Multiple Parties; Corporate Authority. All obligations of Grantor
under this Agreement shall be joint and several, and all references to
Grantor shall mean each and every Grantor. This means that each of the
persons signing below is responsible for all obligations In this Agreement.
Notices. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giang formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact, irrevocably, with full power of substitution to do
the following: (a) to demand, collect, receive, receipt for, sue and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to execute, sign and
endorse any and all claims, instruments, receipts, checks, drafts or
warrants issued in payment for the Collateral; (c) to settle or compromise
any and all claims arising under the Collateral, and, in the place and
stead of Grantor, to execute and deliver its release and settlement for the
claim; and (d) to file any claim or claims or to take any action or
institute or take part in any proceedings, either in its own name or in the
name of Grantor, or otherwise, which in the discretion of Lender may seem
to be necessary or advisable. This power is given as security for the
Indebtedness, and the authority hereby conferred is and shall be
irrevocable and shall remain in full force and effect until renounced by
Lender.
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, it the offending provision
cannot be so modified, it shall be stricken and all other prolusions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and Inure
to the benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by
<PAGE>
09-12-1996 ASSIGNMENT OF DEPOSIT ACCOUNT
Page 3
Loan No 407269010
(Continued)
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lenders right otherwise to demand strict compliance
with that provision or any other provision of this Agreement. No prior
waiver by Lender, nor any course of dealing between Lender and Grantor,
shall constitute a waiver of any of Lender's rights or of any of Grantor's
obligations as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender In
any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may
be granted or withheld In the sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS ASSIGNMENT OF
DEPOSIT ACCOUNT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER
12,1996.
GRANTOR:
TOUCHSTONE SOFTWARE CORPORATION
By: _______________________________________
LARRY C. JORDAN, PRESIDENT/CEO
By: ________________________________________
RONALD R. MAAS, EXECUTIVE VICE PRESIDENT/CFO
<PAGE>
ADDITIONAL TERMS, CONDITIONS AND COVENANTS
Principal Loan Maturity Loan No. Call Collateral Account Officer Initials
Date
- - --------------------------------------------------------------------------------
$500,000.00 09-12- 09-12- 407269010 11 0024 804
1996 1997
- - --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
Borrower: Lender:
TOUCHSTONE SOFTWARE CORPORATION SOUTHERN CALIFORNIA BANK
(TIN:95-3778226) HUNTINGTON BEACH OFFICE
2124 MAIN STREET, SUITE 250 9042 Garfield Avenue
HUNTINGTON BEACH, CA 92648 Huntington Beach, CA 92646-2338
- - --------------------------------------------------------------------------------
This ADDITIONAL TERMS, CONDITIONS AND COVENANTS Is attached to and by this
reference Is made a part of each Business Loan Agreement or Negative Pledge
Agreement, dated September 12, 1996, and executed In connection with a loan or
other financial accommodations between SOUTHERN CALIFORNIA BANK and TOUCHSTONE
SOFTWARE CORPORATION.
AFFIRMATIVE COVENANTS-OTHER: Borrower covenants and agrees with Lender
that, while this Agreement is in effect, Borrower will provide the following
financial information and statements and such additional information as
requested by the Lender from time to time:
(a) Borrower is to provide Lender with annual financial statements audited
by a CPA acceptable to Lender together with a 10-K, within 120 days of fiscal
year and.
(b) Borrower is to provide Lender with quarterly financial statements,
prepared by the Borrower's Chief Financial Officer together with the respective
10-0, within 60 days of quarter end.
(c) A Certificate of Compliance is to accompany financial statements
indicating compliance with required covenants.
(d) Promptly upon the Lender's request, such other statements, lists,
budgets, forecasts, projections, or reports as to the Borrower and as to each
guarantor of the Borrowers obligations to Lender as the Lender may request.
ADDITIONAL COVENANTS AND RATIOS: Borrower agrees to comply with the
following covenants and ratios:
(1) Borrower is to maintain minimum shareholders equity of $10,000,000.00.
(2) Borrower is to maintain minimum liquidity of $12,000,000.00. Liquidity
is defined as the sum of cash plus marketable securities.
(3) No acquisitions without Lender's prior written approval.
ADDITIONAL DEFINITIONS: For the purpose of calculating tangible not worth
and debt to tangible net worth, intangible assets shall include amounts due from
Officers, Stockholders and Affiliates.
THIS ADDITIONAL TERMS, CONDITIONS AND COVENANTS IS EXECUTED ON SEPTEMBER
12,1996.
BORROWER:
TOUCHSTONE SOFTWARE CORPORATION
By: __________________________________________
LARRY C. JORDAN, PRESIDENT/CEO
By: ___________________________________________
RONALD R. MAAS, EXECUTIVE VICE PRESIDENT/CFO
LENDER:
SOUTHERN CALIFORNIA BANK
By: ___________________________________________
Authorized Officer
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Principal Loan Maturity Loan No. Call Collateral Account Officer Initials
Date
- - --------------------------------------------------------------------------------
$500,000.00 09-12- 09-12- 407269010 11 0024 804
1996 1997
- - --------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
Borrower: Lender:
TOUCHSTONE SOFTWARE CORPORATION SOUTHERN CALIFORNIA BANK
(TIN:95-3778226) HUNTINGTON BEACH OFFICE
2124 MAIN STREET, SUITE 250 9042 Garfield Avenue
HUNTINGTON BEACH, CA 92648 Huntington Beach, CA 92646-2338
- - --------------------------------------------------------------------------------
LOAN TYPE. This Is a Variable Rate (at WALL STREET JOURNAL PRIME RATE,
making an initial rate of 8.250%), Revolving Line of Credit Loan to a
Corporation for $500,000.00 due on September 12, 1997.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] Personal, Family, or Household Purposes or Personal Investment.
[x] Business (including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: WORKING CAPITAL.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $500,000.00 as follows:
Undisbursed Funds: $500,000.00 Note Principal:
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWERIS MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED SEPTEMBER 12,1996.
BORROWER:
TOUCHSTONE SOFTWARE CORPORATION
By: ________________________________________
LARRY C. JORDAN, PRESIDENT/CEO
By: ________________________________________
RONALD R. MAAS, EXECUTIVE VICE PRESIDENT/CFO
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-21395 of TouchStone Software Corporation on Form S-8 of our report dated
February 13, appearing in the Annual Report on Form 10-KSB of TouchStone
Software Corporation for the year ended December 31, 1996.
/S/ Deloitte & Touche LLP
Costa Mesa, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,893,476
<SECURITIES> 6,683,965
<RECEIVABLES> 467,742
<ALLOWANCES> 0
<INVENTORY> 727,454
<CURRENT-ASSETS> 11,624,611
<PP&E> 470,104
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,579,976
<CURRENT-LIABILITIES> 4,472,120
<BONDS> 0
0
0
<COMMON> 7,773
<OTHER-SE> 11,975,439
<TOTAL-LIABILITY-AND-EQUITY> 16,576,976
<SALES> 0
<TOTAL-REVENUES> 7,667,035
<CGS> 3,514,794
<TOTAL-COSTS> 12,984,285
<OTHER-EXPENSES> (788,581)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,528,699)
<INCOME-TAX> 800
<INCOME-CONTINUING> (4,529,469)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,529,469)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> 0
</TABLE>
