<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to _________________
Commission file No. 0-12969
TOUCHSTONE SOFTWARE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3778226
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2124 Main Street, Huntington Beach, CA 92648
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 969-7746
--------------
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 Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
As of May 2, 1997 there were
7,842,235 shares of Common Stock outstanding
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
TOUCHSTONE SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
A S S E T S
- -----------
Current assets:
Cash and cash equivalents $ 2,217,637
Restricted cash 500,000
Investments 6,983,444
Income tax refund receivable 32,790
Accounts receivable, net 427,812
Inventories 452,724
Prepaid expenses and other current assets 307,748
-----------
Total current assets 10,922,155
Investments 3,930,895
Property, net 497,922
Software development costs, net 156,055
Other assets 30,177
-----------
$15,537,204
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 1,771,471
Accrued payroll and related expenses 331,640
Accrued cooperative advertising costs 764,303
Other accrued liabilities 748,170
-----------
Total current liabilities 3,615,584
Deferred compensation 72,000
Deferred lease obligation 56,292
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,
7,820,235 shares 7,820
Additional paid-in capital 18,622,165
Accumulated deficit (6,812,568)
Notes receivable from sale of common stock (24,089)
-----------
Total shareholders' equity 11,793,328
-----------
$15,537,204
===========
See accompanying notes to consolidated financial statements
2
<PAGE> 3
TOUCHSTONE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months Three months
ended ended
March 31, 1997 March 31, 1996
-------------- --------------
Revenue:
Product sales $2,868,212 $ 654,544
Royalty income 70,811 101,526
---------- -----------
Total revenue 2,939,023 756,070
Cost of revenue 1,084,797 698,961
---------- -----------
Gross profit 1,854,226 57,109
Operating expenses:
Sales and marketing 1,365,977 950,308
General and administrative 328,210 457,316
Research and development 555,650 260,550
Litigation costs 436,941
---------- -----------
Total costs and expenses 2,249,837 2,105,115
---------- -----------
Loss from operations (395,611) (2,048,006)
Other income, net 179,505 190,270
---------- -----------
Net loss $ (216,106) $(1,857,736)
========== ===========
Net loss per share $ (0.03) $ (0.25)
========== ===========
Weighted average shares 7,811,000 7,366,000
========== ===========
See accompanying notes to consolidated financial statements
3
<PAGE> 4
TOUCHSTONE SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (216,106) $(1,857,736)
Adjustments to reconcile net loss to net
cash flows (used in) provided by operating activities:
Depreciation and amortization 61,465 67,077
Provision for doubtful accounts 22,444 20,063
Provision for obsolete inventories 48,432 38,375
Amortization of investment premium (discount) (4,554) 1,798
Change in deferred lease obligation 6,648 7,425
Changes in operating assets and liabilities:
Income tax refund receivable 657,400
Accounts receivable 17,486 (28,136)
Inventories 226,298 (149,923)
Prepaid expenses and other current assets 11,436 (41,803)
Other assets 45 (1,630)
Accounts payable (936,223) 512,893
Accrued liabilities 79,687 306,741
----------- -----------
Net cash used in operating activities (682,942) (467,456)
Cash flows from investing activities:
Capitalized software development costs (43,748)
Purchase of investments (9,085,021) (1,990,105)
Sale of investments 9,148,443 3,500,000
Purchases of property (82,541) (71,492)
----------- -----------
Net cash provided by (used in) investing activities (19,119) 1,394,655
Cash flows from financing activities:
Proceeds from exercise of stock warrants and
options and repayment on notes receivable 26,222 17,077
----------- -----------
Net cash provided by financing activities 26,222 17,077
----------- -----------
Net increase (decrease) in cash and cash equivalents (675,839) 944,276
Cash and cash equivalents, beginning of period 2,893,476 12,918,643
----------- -----------
Cash and cash equivalents, end of period $ 2,217,637 $13,862,919
=========== ===========
Supplemental cash flow information:
Interest paid $ 584 $ -
=========== ===========
Income taxes paid $ - $ -
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
TOUCHSTONE SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. GENERAL
-------
The consolidated financial statements of TouchStone Software
Corporation (the Company) include the financial statements of the Company's
wholly-owned subsidiary, TouchStone Europe Ltd. These consolidated financial
statements have been prepared by the Registrant, without audit, and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three months ended March 31,
1997 and 1996, the financial position at March 31, 1997, and the cash flows
for the three months ended March 31, 1997 and 1996, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Registrant
believes that the disclosures in such financial statements are adequate to make
the information presented not misleading. However, the results of operations
for the three months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the full year. These condensed consolidated
financial statements should be read in conjunction with the TouchStone Software
Corporation financial statements and notes thereto included in the TouchStone
Software Corporation Annual Report filed with the Securities and Exchange
Commission on Form 10-KSB for the year ended December 31, 1996.
2. ACCOUNTS RECEIVABLE
-------------------
At March 31, 1997, accounts receivable is presented net of allowance
for doubtful accounts, reseller rebate reserves, and product return reserves of
approximately $104,300, $752,900, and $356,700, respectively. Certain
distributors' accounts resulted in credit balances and therefore were
reclassified to accounts payable.
3. FINANCING ARRANGEMENTS
----------------------
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 prime rate was 8.5% at March 31, 1997. There were
no borrowings under this line of credit at March 31, 1997. This borrowing
facility requires the Company to maintain minimum shareholders' equity of
$10,000,000, minimum aggregate cash, cash equivalents and investments of
$12,000,000, prohibits acquisitions of other entities without the prior
approval of the bank, and restricts the payments of cash dividends.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
This quarterly report on Form 10-QSB 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.
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. The Company did not capitalize any software development costs
during the three months ended March 31, 1997.
Due to its experience with product returns, the Company increased
product sale reserves substantially in the first quarter of 1996, and deferred
revenue recognition on all shipments of WINCheckIt 4.0 and CheckIt Diagnostic
Kit during that period.
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.
6
<PAGE> 7
In addition, the software industry has seasonal elements. In recent
years the software industry has experienced decreased demand for software
products in the second and third quarters. These seasonal elements, together
with the other factors which impact quarterly results, can cause revenues and
net income to vary.
The 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.
7
<PAGE> 8
PRODUCTS
The following table sets forth the products currently marketed by the Company:
<TABLE>
<CAPTION>
INITIAL RELEASE
PRODUCT TITLE DESCRIPTION DATE
- ----------------- ---------------------------------------------------------------- ----------------
<S> <C> <C>
e.Support(TM) e.Support is an electronic support system which allows users to December 1996
communicate with multiple vendors from one simple user interface (Testing)
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 II(R) PC-cillin II provides automatic protection from computer viruses. October 1996
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(TM) that detects known and unknown macro viruses. A
new version, PC-cillin NT, is now available to operate on Windows NT.
CheckIt(R) For use with DOS, Windows 3.1 and Windows 95, this multi-utility March 1996
Diagnostic Kit package 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(R) 4.0 This Windows-based utility provides a suite of diagnostic tools, October 1995
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!(R) A file synchronization and transfer program with ZIPSync that March 1995
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.
</TABLE>
8
<PAGE> 9
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
unaudited consolidated financial statements included herein. All dollar
amounts presented have been rounded to the nearest thousand and all percentages
are approximate
The following table sets forth certain statement of operations data as
a percentage of total revenues for the three months ended March 31, 1997 and
1996:
1997 1996
----- ------
Revenue:
Product sales 97.6% 86.6%
Royalty income 2.4 13.4
----- ------
Total revenue 100.0 100.0
Cost of sales 36.9 92.4
----- ------
Gross profit 63.1 7.6
Sales and marketing 46.5 125.7
General and administrative 11.2 60.5
Research and development 18.9 34.5
Litigation costs 57.8
------ ------
Loss from operations (13.5) (270.9)
Other income, net 6.2 25.2
------ ------
Net loss (7.3)% (245.7)%
====== ======
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenue. Product sales increased from 1996 to 1997 due to improved
sales of the Company's PC-cillin and CheckIt Diagnostic Kit products at the
retail store level. Sales of WINCheckIt 4.0 also increased in 1997 as compared
to 1996, but still lag management's expectations.
Royalty income declined due to decreased sales of the Company's
products by European copublishers. Due to this decline and the increase in
product sales, royalty income decreased as a percentage of total revenues, from
13.4% in 1996 to 2.4% in 1997.
Gross Profit. Gross profit as a percentage of total revenues
increased from 7.6% in 1996 to 63.1% in 1997. Gross profit in 1996 was
unusually low due to inventory write-offs resulting from returned product which
could not be resold. Additionally, 1997 gross profit is higher due to lower
per-unit royalty costs, and decreased amortization of software development
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 1997 as compared to 1996.
Additionally, direct mail, media advertising and customer support costs
increased in 1997 as compared to 1996. Due to the increase in product sales,
sales and marketing expenses declined as a percentage of total revenues from
125.7% in 1996 to 46.5% in 1997.
General and Administrative Expense. General and administrative
expense in the three months ended March 31, 1996 included compensation expense
recorded in connection with the resignation of a Company officer. Excluding
this cost, general and administrative expense remained relatively constant in
1997 from 1996 levels. As a percentage of total revenues, general and
administrative expenses decreased from 60.5% in 1996 to 11.2% in 1997.
Research and Development Expense. The increase in research and
development expense in 1997 from 1996 was attributable primarily to the hiring
of additional programmers and increased use of outside programmers to develop
existing product upgrades and new products. A substantial portion of the
increase in research and development expenses relate to the development of the
e.Support product line. Due to the increase in product sales, research and
development expense decreased as a percentage of total revenues, from 34.5% in
1996 to 18.9% in 1997.
9
<PAGE> 10
Litigation Costs. During the first quarter of 1996 the Company
incurred legal expense in the defense against class action and derivative suits
against the Company and certain of its officers and directors.
Other Income. Other income is comprised primarily of interest earned
on the Company's investments. Investment income declined in the first quarter
of 1997 compared to the first quarter of 1996 as the Company reduced investment
holdings in 1997 to fund operations.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1997 the Company used cash
resources of $683,000 for operating activities and purchased equipment totaling
$83,000. The Company sold investments in debt securities totaling $9,148,000,
and reinvested $9,085,000 of the proceeds from such sales in similar
securities. The Company also received proceeds from exercises of common stock
options aggregating $26,000.
The Company's cash, cash equivalents, restricted cash, and investments
totaled $13,632,000 at March 31, 1997. Working capital increased from
$7,152,000 at December 31, 1996 to $7,307,000 at March 31, 1997. Cash and cash
equivalents decreased from $2,894,000 at December 31, 1996 to $2,217,637 at
March 31, 1997. The increase in working capital was due primarily to
reclassification of certain investments from long-term to current assets as
they approach maturity. The decrease in cash and cash equivalents was
primarily due to the net loss incurred by the Company in the first quarter of
1997. Management believes that the Company will use approximately $400,000 for
equipment and other capital expenditures during the remainder of 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 March 31, 1997 was 8.5%. There
were no borrowings under the bank line of credit at March 31, 1997. This
borrowing facility requires the Company to maintain minimum shareholders'
equity of $10,000,000, minimum aggregate cash, cash equivalents and investments
of $12,000,000, prohibits acquisitions of other entities without the prior
approval of the bank, and restricts the payments of cash dividends.
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 March 31, 1998. 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.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS
128) which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 requires the disclosure of basic and
diluted earnings per share. For the three months ended March 31, 1997, the
amount reported as net loss per share is not materially different than would
have been reported for basic and diluted loss per share in accordance with SFAS
No. 128.
10
<PAGE> 11
BUSINESS RISKS
This report on Form 10-QSB 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.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
On January 26, 1996, a purported class and derivative action entitled
DARRIN J. CARAMONTA v. LARRY W. DINGUS, ET AL. was filed in United States
District Court for the Central District of California, in which Mr. Caramonta,
on behalf of himself and all others who purchased the Company's Common Stock
between May 2, 1995 and December 21, 1995, alleges that the Company and certain
of its officers violated Section 10(b) and Rule 10b-5 promulgated under the
Securities Exchange Act of 1934, as amended, and various state statutes
sounding in fraud, by reporting earnings for the first three quarters of 1995
that allegedly were knowingly inflated due to inadequate reserves for product
returns, in part, in order to assist the Company and the individual defendants
in selling Common Stock at an inflated price in the Company's August 25, 1995
public offering. The derivative claims essentially assert that the allegations
sounding in fraud constituted a breach of the individual defendants' fiduciary
duties.
On March 13, 1996, and on March 21, 1996, substantially similar
purported class and derivative actions entitled JACK BODNER v. Larry W. Dingus,
et al. and MARC JAFFE v. LARRY W. DINGUS, ET AL., respectively, were also filed
in the same Court.
On March 11, 1996, defendants moved to dismiss the Caramonta action
pursuant to Fed. R. Civ. P. 12(b) (6) and Rule 9(b). A ruling on the motion to
dismiss was pending at the time the parties reached an agreement-in-principle
to settle the litigation.
Under the principal terms of the agreement, the parties stipulated to
the definition of the class set forth above, and the Company established a
settlement fund consisting of $500,000 and 200,000 newly-issues shares of
common stock. The Company also adopted a written policy on insider trading.
On April 17, 1997 the Court entered a "Final Judgment and Order of
Dismissal" approving the settlement and dismissing the class action in its
entirety.
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 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
12
<PAGE> 13
ITEM 5. OTHER INFORMATION
-----------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits
Exhibit 27 -- Financial Data Schedule
b. Reports on Form 8-K
None
13
<PAGE> 14
S I G N A T U R E S
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOUCHSTONE SOFTWARE CORPORATION
(Registrant)
/s/ Larry S. Jordan President, Chief Executive
- --------------------------- Officer and Director
Larry S. Jordan Dated: May 9, 1997
/s/ Ronald R. Maas Executive Vice President,
- --------------------------- Chief Financial Officer,
Ronald R. Maas Dated: May 9, 1997 Principal Accounting Officer
and Director
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,217,637
<SECURITIES> 7,483,444
<RECEIVABLES> 427,812
<ALLOWANCES> 0
<INVENTORY> 452,724
<CURRENT-ASSETS> 10,922,155
<PP&E> 497,922
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,537,204
<CURRENT-LIABILITIES> 3,615,584
<BONDS> 0
0
0
<COMMON> 7,820
<OTHER-SE> 11,785,508
<TOTAL-LIABILITY-AND-EQUITY> 15,537,204
<SALES> 0
<TOTAL-REVENUES> 2,939,023
<CGS> 1,084,797
<TOTAL-COSTS> 3,334,634
<OTHER-EXPENSES> (179,505)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (216,106)
<INCOME-TAX> 0
<INCOME-CONTINUING> (216,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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</TABLE>
