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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, 1997
[ ] 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 Identification No.)
Incorporation or Organization)
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 common stock held by non-affiliates of the
registrant as of March 2, 1998 was $15,545,380.
The issuer's revenues for the year ended December 31, 1997 were $7,915,365.
The number of shares outstanding of the registrant's classes of common stock as
of March 2, 1998 was 7,886,085 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None
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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
developer and publisher of utility software used to set up, maintain, and manage
personal computers and networks. The Company's utility software can be
classified into three areas: diagnostic software, anti-virus software, and file
transfer software. The CheckIt product line, a family of system diagnostics, is
designed to meet the needs of consumers and service technicians. The CheckIt
products, utilizing the Company's core technology, have continued to evolve
since they were first introduced in 1988, as new versions are released
periodically to provide updated hardware tests for the latest technology. The
CheckIt products are sold worldwide through the retail channels with some
penetration into the enterprise and OEM market. The Company also publishes
PC-cillin, a popular and easy to use anti-virus product that was co-developed
with a third party developer. PC-cillin, sold exclusively by the Company in
North America, is marketed to the retail channel and small enterprise accounts.
The Company's file transfer utility, marketed under the name of FastMove!, is
primarily a retail product.
The newest additions to the diagnostic product line are CheckIt version
5 for Windows 95 and CheckIt Professional Edition. CheckIt v.5 is completely
re-engineered to take full advantage of 32-bit technology, providing in-depth
hardware testing, system crash recovery, and accurate system information.
CheckIt Professional Edition is a bundle of CheckIt v.5, CheckIt for DOS,
PC-cillin, loop back plugs, and a screwdriver. The bundle combines the high-end
diagnostic and analysis features of CheckIt and the award winning anti-virus
capabilities of PC-cillin into one package, designed for PC service technicians.
The Company's expansion into the anti-virus market came in the Fall of
1995 with the introduction of PC-cillin 95, the industry's first complete
anti-virus for Windows 95 and the Internet. The product's advanced protection
technology and user-friendly interface have received favorable reviews in
industry publications. PC-cillin is certified by the National Computer Security
Association for detecting 100% of viruses known to be "in the wild."
Updated in 1996 and 1997, the latest release of PC-cillin Anti-Virus,
which includes versions for Windows 95, Windows NT, Windows 3.x, and DOS, adds
to the power and ease of the original version to protect users from all types of
viruses. The program utilizes the power of the Internet with the Internet Virus
Lab to keep users' protection continuously updated 24 hours a day. Plus, its
patent-pending MacroTrap technology provides the top macro virus protection in
the anti-virus market. PC-cillin is now widely considered a leading contender in
the anti-virus category.
TouchStone has also established a position in the file synchronization
market with its FastMove! program. Designed to fit the needs of a flourishing
laptop industry and an increasing number of multiple-PC owners, the new version
of FastMove! with ZIPSync provides a fast, easy, and affordable way to transfer,
organize, and update files, folders, and directories on a desktop PC, laptop,
network, or Zip drive.
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., for
resale through the retail channel. The Company's primary sales and marketing
efforts in 1997 were directed at increasing demand for products by expanded
marketing programs with dealers, retailers, education units, government
resellers, catalog houses, and on-line resellers. Such efforts included the use
of outside representatives to present the Company's products to retail store
employees, and to promote in-store merchandising, point of sale displays,
advertising, and promotional programs in such retail stores as CompUSA, Computer
City, and Best Buy. The Company estimates that the number of worldwide resellers
which carry the Company's products increased from approximately
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1,700 in 1993 to approximately 8,500 in 1997. Additionally, the Company's
enterprise sales group is focused primarily on selling product site licenses
directly to large enterprise customers and the technical marketplace.
Organized in 1982 as a California corporation, the Company
reincorporated in Delaware in January 1997. The Company's 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. The Company believes that the market will continue to expand in the
future as technological advances and increased functionality, combined with
lower pricing, will increasingly make personal computers common for use in both
homes and businesses. Future changes in the operating systems that run personal
computers may contain some of the functionality of certain utility software of
the kind marketed by the Company. The software industry, including the utility
market, is increasingly being dominated by a few very large competitors.
However, the Company believes that the complexities created by multimedia
systems utilizing CD-ROM drives and enhanced video, storage, animation, and
sound capability, will continue to drive the demand for new, sophisticated,
separately installed, utility software.
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PRODUCTS
The following table sets forth the products currently marketed by the Company:
<TABLE>
<CAPTION>
INITIAL RELEASE
PRODUCT TITLE DESCRIPTION DATE
- ------------- ----------- ----
<S> <C> <C>
CheckIt(R) CheckIt version 5 for Windows 95 collects detailed system October 1997
information, tests system components, pinpoints problems,
locates hidden conflicts, and restores critical system files
for fast and easy PC troubleshooting. CheckIt automatically
detects problems, identifies exactly what isn't working, and
guides the user directly to the information and tests needed
to fix it.
CheckIt The CheckIt Professional Edition features the portable, October 1997
Professional self-booting diagnostics of CheckIt for DOS, new CheckIt v.5
Edition(R) for Windows 95 and the award-winning PC-cillin 3.0
Anti-Virus. Professional technicians use this product to
troubleshoot PC problems, test hardware components, diagnose
setup conflicts, optimize modem configuration, calibrate video
components, benchmark PC performance, and conduct burn-in and
certification tests. The CheckIt Professional Edition includes a
year of free program upgrades via the Internet.
PC-cillin(R) PC-cillin provides automatic protection from computer November 1995
viruses. PC-cillin monitors virus sources, adjusts (last update
protection automatically, and removes viruses. July 1997)
PC-cillin's exclusive patent-pending MacroTrap(R)
technology detects both known and unknown macro viruses.
PC-cillin includes versions for Windows 95, Windows NT, Windows
3.x, and DOS,.
FastMove!(R) A file synchronization and transfer program with ZIPSync that March 1995
keeps the files and directories on desktop PCs, (last update
laptops, networks and Zip drives, synchronized and October 1996)
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>
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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 works closely with hardware and
software manufacturers to anticipate user problems with new products. 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 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 utility software business is part of a fast changing industry and
the ability of the Company to grow or to achieve reliable sources of cash flow
is dependent to a large extent on the ability of the Company to develop new
products and new versions of existing products. Given the results of the last
two years, and the competitive factors affecting the software industry, as
discussed elsewhere in this report, management is unable to predict at this time
whether the Company can be successful at designing and developing products that
can compete profitably in this industry. Furthermore, several of the products
currently under consideration involve complicated diagnostic technologies which
are significantly more complex than those previously encountered in the
development of the Company's products. This may result in significant delays and
greater expense than normally encountered by the Company in the development of
its products.
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, and were subsequently modified by the Company.
During 1997 and 1996, royalty expenses were approximately $1,076,000 and
$1,314,000, respectively. Research and development expenses during 1997 and 1996
were approximately $2,146,000 and $1,470,000, respectively. In addition, the
Company capitalized costs of approximately $182,000 in 1996 for the development
of new software products and the enhancement of existing products. The Company
did not capitalize any software development costs in 1997. When these amounts
are combined the resulting totals represent 40.7% and 38.7% of total revenues
for 1997 and 1996, 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
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Windows 95 or Windows NT releases on a timely basis will continue to depend on
the cooperation of Microsoft.
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DISTRIBUTION, SALES, AND MARKETING
The Company markets its products domestically through software
distributors for resale to the retail sales channel. In 1997, Ingram Micro and
Tech Data accounted for approximately 32% and 20% of product sales,
respectively. These same distributors accounted for approximately 14% and 29% of
1996 product sales. 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. The Company's resellers 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 attempts to monitor and manage the volume of
sales to its customers, large shipments in anticipation of demand which is
subsequently unrealized can lead to overstocking by the distributors and
substantial product returns.
The 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. As
the number of software products available in the marketplace increases,
competition for shelf space also increases. 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 1997 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, Computer City, 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 the attention of retail consumers. Licensed end-users of the
Company's products include individual personal computer owners, government
agencies, utilities, educational institutions, software development companies,
computer product manufacturers.
In November 1995, TouchStone established an enterprise sales group.
Although this group has had limited success, the primary focus is to promote
TouchStone's products directly to enterprise and small to medium-sized business
customers, and the technical marketplace. Subsequent to December 31, 1997, in
order to pursue a better focused sales effort, the Company entered into an
agreement with an independent manufacturer's representative firm, Technology
Associates Marketing Company (TAMCO). TAMCO will focus its relationship as
Touchstone's new manufacturer representative firm with coverage in the Western
and Southeastern states to expand the Company's coverage with value added
resellers, corporate resellers, distributor channels, system integrators, online
resellers, catalogs, and other retail channels. By using this firm, along with
the Company's sales force, TouchStone plans to expand into the enterprise and
small to medium-sized business customers. This sales model is an important
leverage point as the Company expands its product line into the corporate
sector.
The Company also uses online advertising (Internet), print media
advertising, direct mail, attendance at industry trade shows such as Comdex,
Retail Vision, and Retail Exchange; press releases: and direct contacts through
its marketing and sales force as other means of generating new sales. The
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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. These activities include endcaps,
in-store advertising, promotions, brochures, catalog advertising, and software
detailing to increase the effectiveness of the sales activities.
The Company's e.Support product was developed to address problems faced
by the service-management market. This product has not achieved any marketplace
acceptance, and the Company has reduced its sales activity for this product to
marketing e.Support to technical support departments and internal help desks at
large corporations.
Internationally, the Company markets its products through distributors.
The Company has an independent sales representative in Australia and, in 1997,
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 2, 1998 consisted of four 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 software duplication
services are provided by third-party suppliers. Management believes that
relations with these suppliers are good, 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, Network Associates, CyberMedia, Quarterdeck, and others. Each of these
firms has substantially greater financial, technical, personnel, and marketing
resources than the Company. Moreover, there are no proprietary barriers to entry
into the utilities market that could keep competitors from developing and
selling products which compete with those marketed by the Company . 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 faces increasing pricing pressures from 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 is in the process of developing products while possessing
considerably less financial and human resources than other companies who are
already leaders in the software industry.
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
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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.
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. 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 industry increases and the functionality of these
products further overlaps, software developers may become increasingly subject
to infringement claims. There can be no assurances that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products or that any such assertion may not require the
Company to enter into royalty arrangements or result in costly litigation.
EMPLOYEES
On March 2, 1998, the Company had 46 full-time employees and two
part-time employees. 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. DESCRIPTION OF PROPERTIES
The Company has a five year lease for approximately 15,700 square feet
of office space in Huntington Beach, California, expiring on March 31, 2000. The
annual rent payments under this lease are currently $225,000.
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ITEM 3. LEGAL PROCEEDINGS
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, Contra Costa 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. Eight other software companies have been named as defendants in
identical lawsuits in three different counties; all of the actions have been
coordinated in the San Francisco Superior Court (No. 4006). The Court sustained
the Company's demurrer to the complaint without leave to amend on January 23,
1998 and is in the process of filing an order to this effect. In the event of an
appeal, the Company will continue 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, 1997, the Company solicited votes
by proxy for the following matters:
1. To elect five directors of the Company
Following are the results of votes cast as reported at the Company's
annual meeting on October 27, 1997:
<TABLE>
<CAPTION>
Proposal #1 Election of Directors For Withheld
- --------------------------------- --- --------
<S> <C> <C>
Larry W. Dingus 6,539,631 137,409
C. Shannon Dingus 6,539,483 135,557
Ronald R. Maas 6,543,839 131,751
Kenneth C. Welch, III 6,531,372 144,218
Larry S. Jordan 6,499,190 177,850
</TABLE>
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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. The Company's securities are reported under the symbol
"TSSW." The high and low closing sales prices set forth below are as reported on
the Nasdaq National Market:
<TABLE>
<CAPTION>
1998 - Quarter ended Low High
- -------------------- --- ----
<S> <C> <C>
March 31, 1998 (through March 2) $1.72 $3.88
1997 - Quarter ended
December 31, 1997 $1.81 $4.75
September 30, 1997 1.44 3.13
June 30, 1997 1.81 2.50
March 31, 1997 2.44 3.25
1996 - Quarter ended
December 31, 1996 $2.19 $3.63
September 30, 1996 2.63 3.88
June 30, 1996 3.13 5.50
March 31, 1996 3.00 6.25
</TABLE>
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 2, 1998, there were approximately 3,400 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 OR PLAN OF OPERATION
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 from international sales of the Company's products
under agreements with co-publishers, and OEM customers in the U.S.
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
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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, compact disks,
software duplication, packaging materials and user manuals, in addition to
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 achieve 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. During the year ended December 31, 1997,
technological feasibility was reached concurrently with the release of the
related product. Accordingly, the Company did not capitalize any software
development costs during 1997.
Due to its experience with product returns, the Company increased
product sale reserves substantially in the first and second quarters of 1996,
and deferred a significant portion of revenue on shipments of WINCheckIt 4.0 and
CheckIt Diagnostic Kit during those periods. The Company continues to carry a
large amount of deferred revenue under the accounts payable category on the
balance sheet.
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.
The Company has spent more than $2.5 million during 1996 and 1997 for
costs associated with the development, sales, marketing, and administration of
the e.Support product. The Company has not been successful in commercially
marketing e.Support and, as of December 31, 1997, no revenue had been realized.
The Company's financial and human resources are limited and the
e.Support development project created a demand for a large portion of those
resources in the latter half of 1996 and the first quarter of 1997. The
Company's concentrated efforts to develop and market e.Support during 1996 and
1997 has had a negative impact on development schedules and has caused new
product introductions to be delayed and sporadic.
The negative results of e.Support and the impact of the delayed
development schedules were analyzed by management during the first part of 1997.
Subsequently the Company began a series of cost reduction measures in the second
quarter that included a reduction in headcount of approximately 33%, and overall
expense reductions, including salaries, of approximately 40%. There can be no
assurances
12
<PAGE> 13
that those expense reductions were substantial enough to allow the Company to be
profitable in future quarters.
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
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Revenues:
Product sales 96.5% 95.7%
Royalty income 3.5 4.3
------ ------
Total revenues 100.0 100.0
Cost of revenue 36.0 45.8
------ ------
Gross profit 64.0 54.2
Sales and marketing 55.2 61.8
General and administrative 16.3 18.9
Research and development 27.1 19.2
Litigation settlement and related costs -- 23.6
------ ------
Loss from operations (34.6) (69.3)
Other income, net 8.6 10.2
------ ------
Loss before taxes (26.0) (59.1)
Provision for income taxes -- --
------ ------
Net loss (26.0)% (59.1)%
====== ======
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Total product sales increased slightly from 1996 to 1997 as
sales of PC-cillin and CheckIt product increased. Royalty income decreased in
1997 as the product mix changed from royalty based sales to direct sales.
Gross Profit. Gross profit as a percentage of total revenues improved
from 54.2% in 1996 to 64.0% in 1997 because of lower royalty expense, lower
inventory reserve expense, and there was no amortization of capitalized software
costs in 1997.
Sales and Marketing Expense. The decrease in sales and marketing expense
was primarily attributable to a decrease in direct mail campaigns, lower
commissions and salary, and lower advertising costs. Due to these reductions,
sales and marketing expenses decreased as a percentage of total revenues from
61.8% in 1996 to 55.2% in 1997.
General and Administrative Expense. The decrease in general and
administrative expense for 1997 was attributable to reductions in financial
public relations expense and reduction in headcount. Certain overhead reductions
were offset by an increase in legal expense pertaining to a terminated
acquisition and for a legal action filed by Intervention, Incorporated. As a
percentage of total revenues, general and administrative expenses decreased from
18.9% in 1996 to 16.3% in 1997.
Research and Development Expense. The increase in research and
development expense is attributable to increased staff and overhead which was
offset somewhat by a reduction in consultant expense. Additionally, the expense
was higher in 1997 as there was no capitalization of software development costs
and there was a direct write off of $162,000 in software development costs.
Research
13
<PAGE> 14
and development expense also increased as a percentage of total revenues from
19.2% in 1996 to 27.1% in 1997
Other Income. Interest income exceeded interest expense by approximately
$789,000 in 1996 and by approximately $685,000 in 1997 as interest-bearing
investments decreased.
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.
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.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, the Company used cash resources
of $2,608,000 for operating activities, and purchased equipment totaling
$227,000. The Company also received proceeds from the sale of common stock and
repayment of notes receivable aggregating $88,000.
The Company's cash, cash equivalents, restricted cash, and investments
totaled $11,651,000 at December 31, 1997. Working capital increased from
$7,152,000 at December 31, 1996 to $8,401,000 at December 31, 1997. Cash and
cash equivalents decreased from $2,893,000 at December 31, 1996 to $1,434,000 at
December 31, 1997. The increase in working capital and the decrease in cash and
cash equivalents was due primarily to decreased holdings of long-term
investments, the decrease in accounts payable, and the net loss incurred by the
Company in the year ended December 31, 1997. Management believes that the
Company will use approximately $150,000 for equipment and other capital
expenditures during 1998.
In September 1997, the Company negotiated a bank line of credit which
allows for borrowings up to $500,000 and expires in September 1998. 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, 1997 was 8.5%. There
were no borrowings under the bank line of credit at March 2, 1998. This
borrowing facility requires the Company to maintain minimum shareholders' equity
of $9,000,000, minimum aggregate cash, cash equivalents and investments of
$10,000,000, 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 December 31, 1998. The
Company plans to use its cash resources to finance new product development and
existing product enhancements, expand internationally, and expand the direct
sales force for corporate customers. The execution of such plans may include
strategic acquisitions of or investments in businesses, products, or
technologies.
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 products under development
prove more difficult to develop than currently anticipated, resulting in delays
in reaching the market, significantly greater development costs, 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. 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 product or technology currently
under-development.
The utility software business is part of a fast changing industry and
the ability of the Company to grow or to predict future revenue is dependent to
a large extent on the ability of the Company to develop new products and new
versions of existing products. Given the results of the last two years, and the
competitive factors affecting this industry, as discussed elsewhere in this
report, management is unable to predict at this time whether the Company can be
successful at designing and developing products that can compete profitably in
this industry. Furthermore, several of the products currently under
consideration involve complicated diagnostic technologies which are
significantly more complex than those previously encountered in the development
of the Company's products. This may result in significant delays and greater
expense than normally encountered by the Company in the development of its
products.
15
<PAGE> 16
With respect to statements regarding the sales force and the plan to
broaden the Company's customer base, the Company intends on entering new markets
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 planned expansion of the Company's presence at retail chains, the Company
competes against many other software vendors both directly, in the form of
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
new products or new versions of existing products, 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. As
of December 31, 1997, TouchStone had not realized any revenue from the e.Support
product. While the Company is engaging in efforts to market the product to
select customers, management has no expectations of recovering any significant
portion of its investment in this product.
Management has assessed the impact of the transition to the year 2000 on
its products and the software applications that are used internally. Management
believes that all current versions of the Company's products are, and future
releases will be, year 2000-compliant. Management has received confirmation from
vendors of certain purchased software used internally by the Company that
current releases or upgrades eliminate any year 2000-related issues. The Company
believes that becoming year 2000-compliant has not had a significant impact on
the financial position or results of operations of the Company. If the Company
has failed to become year 2000-compliant with respect to any of its products,
such failure could have a material adverse effect on the Company.
16
<PAGE> 17
<TABLE>
<CAPTION>
ITEM 7. FINANCIAL STATEMENTS PAGE
- ---------------------------- ----
<S> <C>
Index to Financial Statements:
1. Independent Auditors' Report 18
2. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997
and December 31, 1996. 19
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996. 20
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997 and 1996. 21
Consolidated Statements of Cash Flows for
the years ended December 31, 1997 and 1996. 22
Notes to Consolidated Financial Statements. 23
</TABLE>
17
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
TouchStone Software Corporation:
We have audited the accompanying consolidated balance sheets of TouchStone
Software Corporation and subsidiary (the Company) as of December 31, 1997 and
1996 and the related consolidated statements of operations, shareholders' equity
and cash flows for the years 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 and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Costa Mesa, California
February 6, 1998
18
<PAGE> 19
TouchStone Software Corporation
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,433,861 $ 2,893,476
Investments 8,410,133 6,683,965
Restricted cash 500,000 500,000
Accounts receivable, net 472,148 467,742
Inventories, net 283,141 727,454
Prepaid expenses and other current assets 263,202 351,974
------------ ------------
Total current assets 11,362,485 11,624,611
Investments 1,306,860 4,289,242
Property, net 420,033 470,104
Software development costs, net 162,842
Other assets 31,171 30,177
------------ ------------
$ 13,120,549 $ 16,576,976
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,352,300 $ 2,707,694
Accrued payroll and related expenses 273,628 359,621
Accrued cooperative advertising costs 854,134 705,571
Other accrued liabilities 481,474 699,234
------------ ------------
Total current liabilities 2,961,536 4,472,120
Other liabilities 130,792 121,644
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,
7,883,085 at December 31, 1997;
7,772,735 at December 31, 1996 7,883 7,773
Additional paid-in capital 18,673,682 18,595,990
Accumulated deficit (8,653,344) (6,596,462)
Notes receivable from sale of common stock (24,089)
------------ ------------
Total shareholders' equity 10,028,221 11,983,212
------------ ------------
$ 13,120,549 $ 16,576,976
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 20
TouchStone Software Corporation
Consolidated Statements of Operations
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Product sales $ 7,636,714 $ 7,339,192
Royalty income 278,651 327,843
----------- -----------
Total revenues 7,915,365 7,667,035
Cost of revenues 2,853,044 3,514,794
----------- -----------
Gross profit 5,062,321 4,152,241
Operating expenses:
Sales and marketing 4,367,892 4,737,533
General and administrative 1,289,715 1,449,661
Research and development 2,145,766 1,470,356
Litigation settlement and related costs 1,811,941
----------- -----------
Total operating expenses 7,803,373 9,469,491
----------- -----------
Loss from operations (2,741,052) (5,317,250)
Other income, net 684,970 788,581
----------- -----------
Loss before provision
for income taxes (2,056,082) (4,528,669)
----------- -----------
Provision for income taxes 800 800
----------- -----------
Net loss $(2,056,882) $(4,529,469)
=========== ===========
Loss per share, basic and diluted $ (0 .26) $ (0 .60)
=========== ===========
Weighted average shares
7,840,000 7,573,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
TouchStone Software Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Notes
receivable Total
Common stock from sale share-
--------------------------- Paid-in Accumulated of common holders'
Shares Amount capital deficit stock equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1996 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
Stock options issued for
consulting services 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
Stock options exercised 110,350 110 63,856 63,966
Collections of notes receivable 24,089 24,089
Stock options issued for
consulting services 13,836 13,836
Net loss (2,056,882) (2,056,882)
----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1997 7,883,085 $ 7,883 $18,673,682 $(8,653,344) $ -- $10,028,221
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
TouchStone Software Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,056,882) $ (4,529,469)
Adjustments to reconcile net loss to net
cash flows used in operating activities:
Depreciation and amortization 246,266 316,124
Stock options issued for consulting expense 13,836 1,683
Provision for doubtful accounts 44,817 38,594
Provision for obsolete inventories 239,530 363,931
Write-off of software development costs 162,842
Issuance of common stock in litigation settlement 625,000
Change in deferred lease obligation 6,648 27,369
Changes in operating assets and liabilities:
Income tax refund receivable 966,100
Accounts receivable (49,223) (281,283)
Inventories 204,783 (793,107)
Prepaid expenses and other current assets 88,772 (182,742)
Other assets (994) 4,182
Accounts payable (1,355,394) 673,403
Accrued and other liabilities (152,690) 47,269
------------ ------------
Net cash used in operating activities (2,607,689) (2,722,946)
Cash flows from investing activities:
Capitalized software development costs (182,061)
Purchase of investments (31,377,389) (21,091,481)
Sale of investments 32,633,603 14,237,370
Purchases of property (226,545) (377,576)
Cash received on sale of property 30,350 7,800
------------ ------------
Net cash provided by (used in) investing activities 1,060,019 (7,405,948)
Cash flows from financing activities:
Proceeds from exercise of stock warrants and options 63,966
Cash received on repayment of notes receivable 24,089 103,727
------------ ------------
Net cash provided by financing activities 88,055 103,727
Net decrease in cash and cash equivalents (1,459,615) (10,025,167)
Cash and cash equivalents, beginning of period 2,893,476 12,918,643
------------ ------------
Cash and cash equivalents, end of period $ 1,433,861 $ 2,893,476
============ ============
Supplemental cash flow information:
Interest paid $ 1,577 $ 69
============ ============
Income taxes paid $ 800 $ 800
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
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 8,500 resellers worldwide. 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 intercompany transactions and balances have been
eliminated.
Translation of Foreign Currencies. Foreign subsidiary financial
statements are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 52, Foreign Currency Translations.
The functional currency of the Company's European subsidiary is the U.S. dollar,
therefore, translation gains and losses are included in results of operations.
Transaction and translation gains and losses were not significant in 1997 or
1996.
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 32% and
20% of product sales during the year ended December 31, 1997 and approximately
14% and 29% of product sales during the year ended December 31, 1996.
International product sales were approximately $907,000 and $912,000 during the
years ended December 31, 1997 and 1996, respectively, and accounted for
approximately 12% of total product sales in each year.
Cash Equivalents. Cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Investments. Investments at December 31, 1997 consist of investments in
certificates of deposit, commercial paper, and debt securities, and are
classified as held-to-maturity. 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 (two to
five years). Leasehold improvements are amortized over the shorter of the useful
life or the life of the related lease.
23
<PAGE> 24
TouchStone Software Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and costs are considered recoverable.
Thereafter, certain costs such as coding and testing are capitalized in
accordance with 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. During the year ended December 31, 1997, technological
feasibility was reached concurrently with the release of the related product.
Accordingly, the Company did not capitalize any software development costs
during 1997. Amortization of software development costs was approximately
$169,000 for the year ended December 31, 1996. During 1997, the Company wrote
off approximately $163,000 of previously capitalized costs related to its
e.Support products, as the recovery of such costs through anticipated future
sales was not reasonably assured.
Software development costs in the accompanying balance sheet are net of
accumulated amortization of approximately $350,000 at December 31, 1996.
Long-Lived Assets. The Company evaluates long-lived assets under 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 (SOP) 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 accrues for estimated rights of return, price protection,
and exchange privileges at the time of product shipment, 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 No. 109,
Accounting for Income Taxes.
Accounting for Stock-Based Compensation. The Company accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. (See Note 4)
Earnings per Share. In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, ("SFAS No. 128"). This
statement is effective for periods ending after December 15, 1997 and requires
restatement of all prior periods. The Statement redefines earnings per share
("EPS") under generally accepted accounting principles, making EPS comparable to
international standards. SFAS No. 128 requires dual presentation of "Basic" and
"Diluted" EPS, by entities with complex capital structures, replacing "Primary"
and "Fully diluted" EPS under APB Opinion No. 15.
24
<PAGE> 25
TouchStone Software Corporation
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from common stock equivalents, similar to fully diluted
EPS, but uses only the average stock price during the period as part of the
computation.
The Company has adopted the provisions of SFAS No. 128 in the
accompanying 1997 consolidated financial statements and has restated prior
periods to reflect the adoption of SFAS No. 128. Common stock equivalents
consisted of outstanding stock options and warrants for the years ended December
31, 1997 and 1996, but have not been included in the calculation of diluted EPS
as their effect would have been antidilutive on both periods.
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.
Reclassifications. Certain reclassifications have been made to the 1996
financial statements in order to conform them to the 1997 presentation.
Recently Issued Accounting Standards. In June 1997, the FASB issued SFAS
No. 130, Reporting Comprehensive Income, ("SFAS No. 130"). This statement
establishes standards for the reporting of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Comprehensive income, as defined, includes all
changes in equity (net assets) during a period from non-owner sources. Examples
of items to be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. The disclosures prescribed by SFAS
No. 130 are effective beginning with the first quarter of calendar 1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information, ("SFAS No. 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosure about products and services, geographic areas and major
customer. The Company has not yet determined the impact, if any, of adopting
this new standard. The disclosures prescribed by SFAS No. 131 are effective for
fiscal years beginning after December 15, 1997.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition", which
supercedes SOP 91-1. SOP 97-2 provides revised guidance on when revenue should
be recognized and in what amounts for licensing, selling, leasing or otherwise
marketing computer software. The provisions of SOP 97-2 which impact the Company
are effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company will adopt SOP 92-2 in fiscal 1998, and
management does not believe the adoption will have a material impact the
Company.
25
<PAGE> 26
TouchStone Software Corporation
Notes to Consolidated Financial Statements
2. BALANCE SHEET DETAIL
Current investments consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cost of Investments:
Certificates of deposit $2,307,000 $1,131,000
Commercial paper 3,119,075 5,552,965
Corporate bonds 498,672
Government notes 2,485,386
---------- ----------
$8,410,133 $6,683,965
========== ==========
Fair Market Value of Investments:
Certificates of deposit $2,307,000 $1,126,982
Commercial paper 3,125,761 5,560,258
Corporate bonds 501,385
Government notes 2,494,636
---------- ----------
$8,428,782 $6,687,240
========== ==========
</TABLE>
Non-current investments consist of the following which are classified as
held-to-maturity at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cost of Investments:
Certificates of deposit $ 974,000 $1,456,000
Commercial paper 260,360 2,761,242
Other 72,500 72,000
---------- ----------
$1,306,860 $4,289,242
========== ==========
Fair Market Value of Investments:
Certificates of deposit $ 968,876 $1,445,467
Commercial paper 259,687 2,809,098
Other 97,460 84,889
---------- ----------
$1,326,023 $4,339,454
========== ==========
</TABLE>
All of the Company's long-term investments at December 31, 1997 are scheduled to
mature in 1999.
26
<PAGE> 27
TouchStone Software Corporation
Notes to Consolidated Financial Statements
2. BALANCE SHEET DETAIL (Continued)
Accounts Receivable. At December 31, 1997, accounts receivable is
presented net of allowance for doubtful accounts, reseller rebate reserves, and
product return reserves of approximately $122,000, $614,000, and $279,000,
respectively. 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.
Property. Property consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Office equipment and furniture $ 804,392 $ 846,263
Automobiles 72,762
Leasehold improvements 43,224 41,393
--------- ---------
847,616 960,418
Less accumulated depreciation and amortization (427,583) (490,314)
--------- ---------
$ 420,033 $ 470,104
========= =========
</TABLE>
3. FINANCING ARRANGEMENTS
The Company has a bank line of credit which provides for borrowings up
to $500,000, bears interest at the bank's prime rate (8.5% at December 31, 1997)
and expires in September 1998. 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, 1997. This borrowing facility requires the Company to maintain
minimum shareholders' equity of $9,000,000 and minimum aggregate cash, cash
equivalents and investments of $10,000,000. 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 and 1997 vest over four years and expire ten
years from date of grant. On July 24, 1997, the Company reduced the exercise
price of 712,300 stock options to $1.50 per share which was the fair market
value on that date. These stock options had been exercisable at prices ranging
from $1.85 to $3.00 per share. At December 31, 1997, options for 370,165 shares
were available for future grants under the plans.
27
<PAGE> 28
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, 1997 and 1996, and changes during the years ending
on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options and warrants
outstanding, beginning of 1,193,734 $5.23 1,109,651 $5.05
year
Granted 1,087,050 $1.57 419,200 $2.66
Exercised (110,350) $0.58 (231,617) $0.45
Canceled (262,916) $1.91 (103,500) $3.63
--------- ---------
Options and warrants
outstanding,
end of year 1,907,518 $3.68 1,193,734 $5.23
========= =========
Options and warrants
exercisable at year end 790,758 $6.70 860,533 $6.22
========= =========
</TABLE>
The following table summarizes other information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price 12/31/97 Life Price 12/31/97 Price
- -------------- -------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$0.22-$1.00 482,533 6.0 $0.44 482,533 $0.44
$1.44-$3.56 1,194,985 9.0 $1.53 78,225 $1.50
$21.60 230,000 2.5 $21.60 230,000 $21.60
--------- --------
1,907,518 7.2 $3.68 790,758 $6.70
========= ========
</TABLE>
28
<PAGE> 29
TouchStone Software Corporation
Notes to Consolidated Financial Statements
4. SHAREHOLDERS' EQUITY (CONTINUED)
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. If the fair values
of the awards had been amortized to expense over the vesting period of the
awards, results would have been as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C>
Net loss: As reported $(2,056,882) $(4,529,469)
Pro forma $(2,301,894) $(4,712,820)
Net loss per share: As reported $(0.26) $(0.60)
Pro forma $(0.29) $(0.62)
</TABLE>
The fair value of options granted under the Company's stock option plans
during 1997 and 1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 48% in 1997 and 125% in 1996, risk-free
interest rate of 6.25%, in 1997 and 5.25% in 1996, and expected lives of four
years in both 1997 and 1996. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized as they occur. The
computed weighted average fair values for options awards in 1997 and 1996 were
$0.65 and $2.91 per share, respectively.
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 shareholders 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.
29
<PAGE> 30
TouchStone Software Corporation
Notes to Consolidated Financial Statements
5. INCOME TAXES
The provision for income taxes consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current:
Federal $ -- $ --
State 800 800
----------- -----------
800 800
Deferred:
Federal (462,800) (1,536,600)
State (158,200) (205,400)
----------- -----------
(621,000) (1,742,000)
Valuation allowance 621,000 1,742,000
----------- -----------
Total provision $ 800 $ 800
=========== ===========
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
U.S. statutory rate of 35% is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Income taxes at statutory rates (35.0%) (35.0%)
State taxes, net of federal benefit (5.1%) (3.0%)
Change in valuation allowance 30.2% 38.5%
Other 9.9% (.5%)
------ ------
Provision for income taxes 0.0% 0.0%
====== ======
</TABLE>
Deferred tax assets (liabilities) consist of the following at December
31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carry-forwards $ 3,889,300 $ 2,595,200
Sales returns reserves 120,800 156,200
Other reserves and accruals 64,300 319,500
----------- -----------
4,074,400 3,070,900
Valuation allowance (4,074,400) (3,000,400)
----------- -----------
70,500
----------- -----------
Deferred tax liabilities:
Capitalized research & development (70,500)
----------- -----------
Net deferred tax asset (liability) $ -- $ --
=========== ===========
</TABLE>
30
<PAGE> 31
TouchStone Software Corporation
Notes to Consolidated Financial Statements
5. INCOME TAXES (CONTINUED)
Based on the Company's assessment of future realization 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 the deferred tax
asset. Additionally, at December 31, 1997 and 1996, approximately $753,000 and
$300,000, respectively, 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, 1997, the Company had federal and state net operating
loss carry-forwards of approximately $9.7 million and $4.8 million, which will
begin expiring in the years 2111 and 2001, respectively. At December 31, 1997,
the Company had general business credit carryforwards for federal and state
purposes of $96,000 and $55,000, which will begin expiring in the years 1999 and
2008, respectively.
6. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, 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>
1998 $ 225,000
1999 214,000
2000 214,000
2001 214,000
2002 36,000
---------
$ 903,000
=========
</TABLE>
Rent expense totaled approximately $286,000 and $266,000 for the years
ended December 31, 1997 and 1996, 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 $1,076,000 and $1,314,000 for the years ended
December 31, 1997 and 1996, respectively.
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, Contra Costa 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. Eight other software companies have been named as defendants in
identical lawsuits in three different counties; all of the actions have been
coordinated in the San Francisco Superior Court (No. 4006). The Court sustained
the Company's demurrer to the complaint without leave to amend on January 23,
1998 and is in the process of filing an order to this effect. In the event of an
appeal, the Company will continue 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.
31
<PAGE> 32
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 2, 1997 are
as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Larry W. Dingus 53 Chairman of the Board of Directors
Larry S. Jordan 54 President, Chief Executive Officer and
Director
Ronald R. Maas 51 Executive Vice President, Chief Financial
Officer, Director, and Secretary
Kenneth C. Welch III 41 Director
E. Alain Levi 42 Director
</TABLE>
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 February 1996, he was elected to the Company's Board of
Directors. 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.
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. Levi was elected by the Directors to fill a vacancy on the Company's
Board of Directors in November 1997. Mr. Levi is CEO and a Director of Silvestri
Studios Inc. and a Board member of Johnny Rockets International, Inc., Lomita
Plaster, Inc., Cholame Ranch, Inc., Bloch Medical Clinic, Inc., and Chandler's
Palos Verdes Sand & Gravel Company. He is also an attorney and was admitted to
the California Bar in May 1981.
Ms. C. Shannon Dingus was a member of the Company's Board of Directors
until her resignation in February 1998. Ms. Dingus also resigned from the Chief
Technology Officer position in December 1997.
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,
32
<PAGE> 33
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, 1997, except Mr. L. W. Dingus, Mr. L. S. Jordan, Ms. C. S.
Dingus, and Mr. Maas, who failed to timely file a Form 4. They subsequently
filed a Form 5 report.
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 Restricted
Name & Annual Stock All Other
Principal Compen- Awards Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) ($) SAR (#) Payouts sation
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
L.W. Dingus 1997 0 0 0 0 20,000 0 0
Chairman of the 1996 51,429 0 0 0 0 0 0
Board of 1995 71,489 73,289 0 0 138,300 0 0
Directors
L.S. Jordan 1997 169,167 0 0 0 270,200 0 0
CEO, and 1996 162,824 0 0 0 200,000 0 0
Director (1) 1995 0 0 0 0 0 0 0
C.S. Dingus 1997 112,324 0 0 0 72,750 0 0
Chief 1996 126,659 0 0 0 0 0 0
Technology 1995 125,750 88,911 0 0 0 0 0
Officer
R.R. Maas 1997 93,570 0 0 0 45,400 0 0
Exec. V.P. and 1996 95,141 0 20,024 (2) 0 0 0 0
Director 1995 85,862 43,444 0 0 0 0 0
</TABLE>
(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.
Option Grants in Last Fiscal Year
The Company did not grant stock appreciation rights in 1997 to any of
the executive officers named above. Grants of stock options to executive
officers in 1997 are summarized in the following table.
<TABLE>
<CAPTION>
Number of Securities % of Total Options Avg.
Underlying Options Granted to Employees Exercise Expiration
Name Granted in 1997 Price Date
- ---- ------- ------- ----- ----
<S> <C> <C> <C> <C>
L.W. Dingus 20,000 1.8% $1.66 2007
L.S. Jordan 270,200 24.9% $1.50 2007
C.S. Dingus 72,750 6.7% $1.50 2007
R.R. Maas 45,400 4.2% $1.50 2007
</TABLE>
33
<PAGE> 34
Aggregated Option Exercises in 1997 and Option Values as of December 31,
1997
There were no options exercised in 1997 by the executive officers. The
value of unexercised options at December 31, 1997, for each of the officers
named above are:
<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Options/SARs at In-the-Money
12/31/97 (#) Options/SARs at
Shares 12/31/97 ($)
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) $195,310(1)
20,000(2) $4,500(2)
L.S. Jordan 0 0 100,000(1) $38,000(1)
370,200(2) $140,676(2)
C.S. Dingus 0 0 134,300(1) $194,366(1)
72,750(2) $27,645(2)
R.R. Maas 0 0 80,000(1) $116,000(1)
45,400(2) $17,252(2)
</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,
1997.
BOARD OF DIRECTOR MEETINGS AND COMMITTEES
During 1997, the Company's Board of Directors held six regular meetings
and otherwise took action by written consent. The Board has established an
Executive and an Options Committee, each 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. Levi, 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 consists of non-employee directors Mr.
Dingus, Mr. Welch and Mr. Levi, reviews and makes recommendations to the Board
concerning the Company's executive compensation policy, bonus plans, 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.
34
<PAGE> 35
COMPENSATION OF DIRECTORS
Each non-employee director is paid an annual retainer of $1,200 plus
$100 per each board or committee meeting attended. The Chairman of The Board
also receives a monthly auto allowance. The Company pays the expenses incurred
by its non-employee directors in attending Board meetings. In January 1997, the
Company issued 10-year options to purchase 10,000 shares of common stock, at an
exercise price that was subsequently repriced at $1.50 per share, with two-year
vesting schedules, to each of Mr. Welch and Mr. Dingus for serving on the
Company's Board of Directors. In November 1997, the Company issued 10-year
options to purchase 35,000 shares of common stock, at an exercise price of $2.25
per share, with a four-year vesting schedule, to Mr. Levi for serving on the
Company's Board of Directors. In December 1997, the Company issued 10-year
options to purchase 10,000 shares of common stock, at an exercise price of $1.81
per share, with two-year vesting schedules, to each of Mr. Welch and Mr. Dingus
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 employment agreements with its two
executive officers. 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. Mr. Maas has a one-year
agreement that automatically renews, on January 1 of each year unless either
party gives notice by December 1. Both agreements provide that the Board of
Directors may set the basic salary, which is currently at $173,250 and $90,700
for Mr. Jordan and Mr. Maas, respectively. Both agreements provide 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. Both officers are eligible for stock options
and bonuses. On January 1, 1998 a four-year employment/consulting agreement was
entered into with C. Shannon Dingus, who resigned from the Chief Technology
Officer position in December 1997 and from the Board of Directors in February
1998. Ms. Dingus currently receives a salary of $25,000 per year.
BONUS PLAN
The Company established a bonus plan for the years ending December 31,
1996 and 1997 (the "Bonus Plan"). Under the Bonus Plan, participants selected by
the Board of Directors were eligible to receive bonuses determined quarterly
based upon the Company's net income after taxes for the quarter, with 60% of the
earned bonus payable following the end of the quarter. The 40% balance of the
earned bonus will be deferred until the end of the year, and then will be
payable only if the 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 and
1997 under the Bonus Plan.
35
<PAGE> 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 2, 1998, certain information
concerning ownership of the Company's common stock by holders of 5% or more of
the Company's shares, each director, and all officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage
Beneficial Owner Beneficially Owned (*) of Class
- ---------------- ---------------------- --------
<S> <C> <C>
C. Shannon Dingus 677,768(1) 8.4%
2124 Main Street
Huntington Beach, CA 92648
Ronald R. Maas 361,510(2) 4.5%
2124 Main Street
Huntington Beach, CA 92648
Larry S. Jordan 319,000(3) 4.0%
2124 Main Street
Huntington Beach, CA 92648
Larry W. Dingus 272,253(4) 3.4%
2124 Main Street
Huntington Beach, CA 92648
Kenneth C. Welch III 243,574(5) 3.1%
2124 Main Street
Huntington Beach, CA 92648
E. Alain Levi - -
2124 Main Street
Huntington Beach, CA 92648
All Officers and Directors as a
Group (6 persons at
March 2, 1998) 1,874,095(6) 22.3%
</TABLE>
(*) Excludes options that do not vest within 60 days of the date of this report.
(1) Includes options for 140,550 shares. Does not include 272,253 shares
beneficially owned by Larry Dingus (husband).
(2) Includes options for 85,000 shares.
(3) Includes options for 111,000 shares.
(4) Includes options for 139,883 shares. Does not include 677,768 shares
beneficially owned by C. Shannon Dingus (wife).
(5) Includes options for 57,000 shares.
(6) Includes options for 533,433 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Dingus and Ms. Dingus are husband and wife.
36
<PAGE> 37
PART IV
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) Exhibits
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
No reports on form 8-K were filed during the quarter ended December 31,
1997.
37
<PAGE> 38
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 25, 1998
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.
<TABLE>
<S> <C>
/s/ Larry W. Dingus Chairman of the Board of Directors
- -------------------------------------------
Larry W. Dingus Date: 03/25/98
/s/ Larry Jordan Chief Executive Officer,
- ------------------------------------------- President and Director
Larry Jordan Date: 03/25/98
/s/ Kenneth C. Welch III Director
- -------------------------------------------
Kenneth C. Welch III Date: 03/25/98
/s/ E. Alain Levi Director
- -------------------------------------------
E. Alain Levi Date: 03/25/98
</TABLE>
38
<PAGE> 39
TouchStone Software Corporation
INDEX TO EXHIBITS
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of Registrant in Delaware.(9)
3.2 By-Laws of Registrant.(9)
10.1 Incentive Stock Option Plan.(1)
10.1A Amended Incentive Stock Option Plan.(2)
10.1B Non-Qualified Stock Option Plan.(2)
10.1C 1991 Stock Option Plan.(3)
10.1D Employee Stock Purchase Agreement.(5)
10.1E 1994 Non-Qualified Stock Option Plan.(6)
10.1F 1995 Non-Qualified Stock Option Plan.(9)
10.1G Preferred Share Purchase Rights(7)
10.1H 1997 Incentive Stock Plan.(8)
10.2 Line of Credit Change in Terms Agreement dated September 3, 1997.
10.3 Office Lease dated February 7,1995.(6)
10.4 Employment contract for Larry S. Jordan
10.5 Employment contract Ronald R. Maas
10.6 Employment contract for C. S. (Jenkins) Dingus
10.7 Employment contract amendment for C. S. Dingus
21. Subsidiaries of the Registrant.(6)
23. Consent of Independent Auditors.
27. Financial Data Schedule.
</TABLE>
(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 Company's 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 Company's 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.
(9) Incorporated by reference to the Exhibits to the Company's 10-KSB
for the year ended December 31, 1996 as filed with the Securities
and Exchange Commission.
39
<PAGE> 1
EXHIBIT 10.2
CHANGE IN TERMS AGREEMENT
Borrower: TouchStone Software Corporation
TIN: 95-3778226)
2124 Main St., Suite 250
Huntington Beach, CA 92648
Lender: SOUTHERN CALIFORNIA BANK
16420 VALLEY VIEW AVENUE P.O. BOX 588
LAGUNA HILLS OFFICE
LA MIRADA, CA 90637-0588
Principal Amount: $500,000.00 Date of Agreement: September 3, 1997
DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note dated September 12,
1996, in the principal amount of $500,000.00, reflecting a current principal
balance of $0.00.
DESCRIPTION OF COLLATERAL. Certificate of Deposit No. 427060092.
DESCRIPTION OF CHANGE IN TERMS.
(1) Maturity date shall be extended to September 15, 1998. Borrower will
continue to pay regular monthly payments of accrued unpaid interest with all
outstanding principal plus all accrued unpaid interest due at maturity. A
$250.00 documentation fee shall be collected upon execution of this document.
(2) Additional Terms, Conditions and Covenants to Business Loan Agreement dated
September l2, 1996, are hereby amended as follows:
(i) Item (1) is amended in its entirety to read as follows: Borrower to maintain
minimum Shareholder Equity of $9,000,000.00, to be measured quarterly.
(ii) Item (2) is amended in its entirety to read as follows: Borrower to
maintain minimum liquidity of $10,000,000.00, to be measured quarterly.
Liquidity is defined as the sum of cash plus marketable securities.
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 securing this Agreement 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 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 Agreement,
including any claim to rewind, reform, or otherwise modify any agreement
relating to the collateral securing this Agreement, 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
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
<PAGE> 2
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.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms
of the original obligation or obligations including all agreements evidenced
or securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreemeni does not waive Lander's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a
satisfaction of the obligation(s). It is the intention of Lender to retain as
liable parties all makers and endorsers of the original obligation(s),
including accommodation parties, unless a party is expressly released by
Lender in writing. Any maker or endorser, including accommodation makers, will
not be released by virtue of this Agreement. If any person who signed the
original obligation does not sign this Agreement below, then all persons
signing below acknowledge that this Agreement is given conditionally, based on
the representation to Lender that the non-signing party consents to the
changes and provisions of this Agreement or otherwise will not be released by
it. This waiver applies not only to any initial extension, modification or
release, but also to all such subsequent actions.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.
BORROWER:
TouchStone Software Corporation
BY: By:
Larry S. Jordan
President/CEO Ronald R.Maas, Executive Vice President/CFO
LENDER:
SOUTHERN CALIFORN BANK
Authorized Officer
<PAGE> 1
EXHIBIT 10.4
This Employment Agreement ("Agreement"), dated this ___4th__ day of December,
1995, is by and between TOUCHSTONE SOFTWARE CORPORATION (the "Corporation") and
LARRY JORDAN("EMPLOYEE").
RECITALS
A. The Corporation desires to employ the Employee on a full-time
basis in the following capacity: Chief Executive Officer.
B. Employee desires to be so employed by the Corporation.
Therefore, in consideration of the mutual covenants contained herein, the
parties agree as follows:
ARTICLE 1
EMPLOYMENT DUTIES AND BENEFITS
Section 1.1 - Employment
The Corporation hereby employs the Employee as Chief Executive Officer. The
Employee accepts such employment and agrees to abide by the Articles of
Incorporation, By-Laws and the decisions of the Board of Directors of the
Corporation.
Section 1.2 - Duties and Responsibilities
The Employee is employed pursuant to the terms of this Agreement and agrees to
devote his/her attention and energies to the business of the Corporation. The
Employee shall perform such duties as may be reasonably determined and assigned
to him/her by the Officers and Senior Management of the Corporation.
Section 1.3 - Working Facilities
The Employee shall be furnished with facilities and services suitable to the
position and adequate for the performance of the duties of the Employee under
this Agreement. Unless Employee otherwise consents, his/her principal place of
employment shall be at the Corporation's headquarter offices where he/she will
be furnished with a private office, and such other facilities and services
suitable to his/her position and adequate to perform his/her duties during the
entire time of this Agreement.
Section 1.4 - Time Devoted to Corporation
The Employee shall devote such time as is necessary to satisfactorily perform
his/her duties to the Corporation. Unless otherwise specified in Schedule A
attached hereto, Employee shall be free to pursue any other employment or
ventures during the term hereof so long as such other employment or ventures do
not unreasonably interfere with the provision of services by Employee to the
Corporation hereunder, and are not competitive with the Corporation's business.
Section 1.5 - Vacations and Benefits
The Employee shall be entitled each year to one or more reasonable vacations in
accordance with the established practices of the Corporation now or hereafter in
effect for executive personnel, during which time Employee's compensation shall
be paid in full. In no event shall the amount of annual vacation time to which
the Employee is entitled be less than three weeks per year. Nothing in this
Agreement shall be construed to impair or limit the Employee's rights to
participate in all employee benefit plans of the Corporation of every nature and
he/she shall, in fact, be entitled to participate in and be a member of all such
benefit plans in proportion to his/her seniority and compensation. These shall
include, but not be limited to, company-paid life insurance payable to the
beneficiary the Employee shall designate from time to time, private
hospitalization and major medical insurance coverage for the Employee and
participation in stock option plans and pension and profit sharing plans. In the
event Employee continues his/her employment with any successor-in-interest to
the Corporation resulting from any sale by the Corporation of substantially all
of its assets or any merger or consolidation of the Corporation, Employee shall
remain entitled to benefits at least as favorable as those provided herein and
shall be accorded seniority and benefits with such successor-in-interest based
upon the aggregate period of time Employee was employed by the Corporation and
by any such successor-in-interest.
Section 1.6 - Expenses
The Employee is authorized to incur reasonable business expenses for promoting
the business of the travel. The Corporation will reimburse Employee from time to
time for all such business expenses provided that the Employee presents to the
Corporation:
1. An expense report in which the Employee recorded at or near the
time each expenditure was made: (a) the amount of the
expenditure: (b) the time, place and designation of the type of
the entertainment and travel or other expense, or the date and
description of the gift (gifts made to one
1
<PAGE> 2
individual are not to exceed a total of Twenty-Five Dollars
($25.00 in any taxable year); (c) the business reason for the
expenditure and the nature of the business benefit derived or
expected to be derived as a result of the expenditure; and (d)
on request, the names, occupations, addresses and other
information concerning each person who was entertained or given
a gift sufficient to establish the business relationship to the
Corporation; and
2. Documentary evidence (such as a receipt or paid bill), which
states sufficient information to establish the amount, date
place and essential character of the expenditure, for each
expenditure: (a) of Twenty-Five Dollars ($25.00) or more (except
for transportation charges if not readily available); and (b)
lodging while traveling away from home.
Section 1.7 - Loyal and Conscientious Performance of Duties
The Employee agrees that to the best of his/her ability and experience he/she
will at all times loyally and conscientiously perform all of the duties and
obligations either expressly or implicitly required of him/her by the terms of
this Agreement.
ARTICLE 2
COMPENSATION
Section 2.1 - Basic Salary
The Corporation shall pay to the Employee a basic salary during the term of this
Agreement in accordance with the amount set forth on Schedule B of this
Agreement. This amount will be paid consistent with standard operating procedure
for employee payroll and may be increased from time to time by action of the
Board of Directors.
ARTICLE 3
TERM OF EMPLOYMENT AND TERMINATION
Section 3.1 - Term
This Agreement shall be for an initial term of three (3) years and continuing
through January 16, 1999, commencing on its effective date, subject, however, to
termination during such period as provided in this Article 3. The term of this
Agreement shall be renewed automatically for succeeding periods of one (1) year
on the same terms and conditions as contained in this Agreement unless either
the Corporation, or the Employee shall, at least thirty days prior to the
expiration of any one year period, give written notice of the intention not to
renew this Agreement. Such renewals shall be effective in subsequent years on
the same day of the same month as the original effective date of this Agreement.
Section 3.2 - Termination by Corporation Without Cause
The Board of Directors, without cause, may terminate the Employee at any time,
but in such event Employee's salary shall continue to be paid to the Employee
for the longer of (a) the remainder of the then current term of this Agreement
as set forth in Section 3.1 notwithstanding such termination or (b) for nine (9)
months following such termination without cause.
Section 3.3 - Termination With Cause
For purposes of this Article 3, Employee shall be deemed to be terminated "for
cause" in the event such termination results from: (i) the willful misconduct or
bad faith of Employee with respect to the performance of his/her duties under
this agreement; (ii) the repeated material failure of Employee to perform duties
reasonably required of him/her by the Corporation; (iii) Employee's repeated
breach of the provisions of Article 5 of this Agreement pertaining to
confidentiality; (iv) the conviction of Employee for the commission of a felony
or criminal offense including moral turpitude; or (v) a repeated material breach
of Employee's fiduciary obligations to the Corporation. For purposes of the
foregoing, breaches or failures shall be deemed "repeated" if two (2) separate
breaches occur within any six (6) month period, provide written notice of the
first such breach has been given to Employee, or if any continuous or ongoing
breach is not cured within one (1) month of notice to Employee during the term
hereof. The Board of Directors of the Corporation may terminate the Employee
"for cause" as defined above upon thirty (30) days written notice to the
Employee, and in such event Employee shall have no right to any compensation
hereunder following the date of such termination.
Section 3.4 - Disability or Death
Employee shall be deemed to be "permanently disabled" for purposes of this
Section 3.4 if, during any period of three (3) consecutive months, he/she shall
be unable, due to illness or injury, to perform his/her duties hereunder for at
least fifty percent (50%) of the number of full regular business days during
such three (3) month period. Employee shall be deemed to be permanently disabled
on the last day of such three (3) month period. The Corporation may elect upon
written notice to terminate this Agreement upon the permanent disability of
Employee, and this Agreement shall automatically terminate, without notice, upon
the death of Employee. In the event of a termination resulting from Employee's
death or permanent disability, Employee or Employee's heirs shall be entitled to
payment of salary for three (3) months following such termination.
Section 3.5 - Termination Upon Sale of Business
2
<PAGE> 3
The Board of Directors or the Employee may terminate this Agreement upon ten
(10) days notice to the other party upon the occurrence of any of the following
events:
(a) The sale by the Corporation of substantially all of the assets to a
single purchaser or to a group of associated purchasers;
(b) The sale, exchange or other disposition in one transaction of one-half or
more of the outstanding common shares of the Corporation;
(c) A bona fide decision by the shareholders of the Corporation to terminate
its business and liquidate its assets; or
(d) The merger or consolidation of the Corporation in a transaction in which
the shareholders of the Corporation receive less than fifty percent (50%)
of the outstanding voting shares of the new or continuing corporation.
Section 3.6 - Effect of Termination on Compensation
In the event the Corporation elects to terminate this Agreement pursuant to
Section 3.5 hereof, the Employee shall be entitled to the compensation as
provided for in this Agreement for the longer of (a) the remainder of the then
current term of this Agreement or (b) nine (9) months. In the event Employee
elects to terminate this Agreement pursuant to Section 3.5 hereof, the Employee
shall be entitled to compensation, as provided for in this Agreement, for the
longer of (a) one-half (1/2) of the remainder of the then current term of this
Agreement or (b) six (6) months.
Section 3.7 - Effect of Termination on Stock Options and Warrants
In the event the Corporation or Employee elects to terminate this Agreement
pursuant to Section 3.5 hereof, the Employee shall be entitled to exercise all
vested and non-vested options or warrants with a promissory note at a rate of
interest not to exceed the prime interest rate plus 2 points and for a term of 2
years. If the Company stock is exchanged for stock in another corporation and a
stock lock-up period is required, the term shall be the longer of (a) 2 years or
(b) 180 days after the stock lock-up period ends.
3
<PAGE> 4
ARTICLE 4
CORPORATION RIGHTS OF CONTRACT CONTINUATION
Section 4.1 - Right of Continuation
If the Corporation shall at any time be merged or consolidated into or with any
other corporation or entity, or if substantially all of the assets of the
Corporation are transferred to another corporation or entity, the provisions of
this Agreement shall survive any such transaction and shall be binding upon and
inure to the benefit of the corporation resulting from such merger or
consolidation of the corporation to which such assets will be transferred.
ARTICLE 5
DISCLOSURE OF INFORMATION
Section 5.1 - Trade Secrets and Confidential Information
The Employee during the term of employment under this Agreement may have access
to and become acquainted with various trade secrets and confidential
information, consisting of formulas, patterns, devices, secret inventions,
processes and compilations of information, records, computer programs and
specifications, trademarks, and copyrights, which are owned by the Corporation
and which are regularly used in the operation of the business of the
Corporation. The Employee shall not disclose any of the aforesaid trade secrets
or confidential information, directly or indirectly, or use them in any way
outside the acknowledged business of the Corporation, either during the term of
this Agreement or at any time thereafter. All files, records, documents,
drawings, specifications, marks, copyrights, equipment and similar items
relating to the business of the Corporation, whether prepared by the Employee or
otherwise coming into his/her possession, shall remain the exclusive property of
the Corporation and shall not be removed from the premises of the Corporation
under any circumstances whatsoever without the prior written consent of the
Corporation.
Section 5.2 - Employee Shall Not Disclose Information
The Employee recognizes and acknowledges that much of the information concerning
the Corporation's business is a valuable, special and unique asset of the
corporation. The Employee will not, during or for a period of five (5) years
after the term of his/her employment, disclose confidential information
concerning the Corporation's business, or any part thereof, to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
except as required by Employee's employment by the Corporation, nor shall make
use of such information in any manner for any other purpose.
Section 5.3 - Exclusions
The restrictions and limitations set forth in this Article 5 shall not apply to
information publicly known that is generally employed by the trade at or after
the time the Employee first learns of such information, or generic information
or knowledge which the Employee would have learned in the course of similar
employment or work elsewhere in the trade, or information already known to
Employee at the time of first disclosure by the Corporation to Employee.
ARTICLE 6
INVENTIONS, PATENTS AND COPYRIGHTS
Section 6.1 - Inventions, Copyrights and Patents
The Employee agrees that as to any inventions or works of authorship made by
him/her during the term of his/her employment, solely or jointly with others,
which are made with the Corporation's equipment, supplies, facilities, trade
secrets or time, or which relate to the business of the Corporation or the
Corporation's actual or demonstrably anticipated research or development, or
which result from any work performed by the Employee for the Corporation, such
inventions and works of authorship and all proprietary rights therein, including
patents, copyrights and trade secrets, shall belong to the Corporation and
he/she promises to assign such
4
<PAGE> 5
inventions and rights to the Corporation. The Employee also agrees that the
Corporation shall have the right to keep such inventions as trade secrets, if
the Corporation chooses. This Agreement does not apply to any inventions which
are the subject of Section 2870 of the California Labor Code. Further, this
Article 6 does not apply to any inventions or works of authorship, if any,
identified in Schedule C attached hereto.
Section 6.2 - Disclosure of Inventions
In order to permit the Corporation to claim rights to which he/she may be
entitled, the Employee agrees to disclose to the Corporation in confidence all
inventions which the Employee makes during the course of his/her employment and
all patent or copyright applications filed by the Employee within a year after
termination of his/her employment.
Section 6.3 - Employee's Assistance
The Employee shall assist the Corporation in obtaining patents and/or copyrights
on all inventions, works of authorship, designs, improvements and discoveries
deemed patentable or copyrightable by the Corporation in the United States and
in all foreign countries, and shall execute all documents and do all things
necessary to obtain letters patent, or copyrights, to vest the Corporation with
full and extensive title thereto, and to protect the same against infringement
by others.
Section 6.4 - During Employment Defined
For purposes of this Agreement, an invention or work of authorship is deemed to
have been made during the period of the Employee's employment if, during such
period, the invention was first actually reduced to practice or the work of
authorship was first embodied in a tangible medium of expression.
ARTICLE 7
SOLICITING CUSTOMERS OR EMPLOYEES BEFORE OR AFTER TERMINATION OF EMPLOYMENT
The employee shall not during employment or for a period of one (1) year
immediately following the termination of his/her employment with the
Corporation, either directly or indirectly, unless Employee has received
permission from the Board of Directors:
1. Make known to any person, firm or corporation the names or addresses of
any of the customers or employees of the Corporation or any other
information pertaining to them; or
2. entice away or attempt to entice away, any of the customers or employees
of the Corporation on whom the Employee called or with whom he/she became
acquainted during his/her employment with the Corporation, either on the
Employee's own behalf or for any other person, firm or corporation, with
substantially similar products or services which would complete with
products and services sold by the Corporation.
ARTICLE 8
BREACH OF ARTICLES 5, 6, AND 7
In the event of a breach or threatened breach by the Employee of the provisions
of Articles 5, 6 or 7 hereof, the Corporation shall be entitled to an injunction
restraining the Employee from breaching such provisions. Nothing herein shall be
construed as prohibiting the Corporation from protecting, to the full extent of
the law, its rights and property.
ARTICLE 9
RETURN OF CORPORATION'S PROPERTY
On the termination of his/her employment or whenever requested by the
Corporation, the Employee shall immediately deliver to the Corporation all
property in his/her possession or under his/her control belonging to the
Corporation in good condition, ordinary wear and tear and damage by any cause
beyond the reasonable control of the Employee excepted.
ARTICLE 10
ARBITRATION
Section 10.1
Except as otherwise provided in this Article, the parties hereby submit all
controversies, claims and matters of difference arising under or related to this
Agreement to arbitration in Orange County, California, according to the
California Arbitration Act, Sections 1280 through 1294.2 of the California Code
of Civil Procedure as it now exists or is hereinafter enacted. This submission
and Agreement to arbitrate shall be specifically enforceable. Notwithstanding
anything to the contrary set forth herein, the parties shall not be obligated to
submit to arbitration, and either party shall be free to pursue litigation in a
court of competent jurisdiction with respect to, any controversies, disputes or
differences relating to any breach or alleged breach of, or question of
interpretation regarding, Article 5 or Article 6 hereof.
Section 10.2 - Controversies
For purposes of this Agreement, controversies shall include, but not be limited
to, the following:
(a) All questions relating to the breach of any obligation, warranty
or condition hereunder;
5
<PAGE> 6
(b) Failure of any party to deny or reject a claim or demand of any
other party; and
(c) All questions as to whether the right to arbitrate exists.
Section 10.3 - Appointment of Arbitrators
Within thirty (30) days after the date on which a controversy is submitted to
arbitration, the Corporation and the Employee shall appoint a single arbitrator
who is acceptable to each. If the Corporation and the Employee cannot agree upon
a single arbitrator during such 30-day period, the Corporation shall choose an
arbitrator and the Employee shall choose an arbitrator.
The two arbitrators so selected shall choose an additional arbitrator. The
decision of the majority shall be final and binding.
Section 10.4 - Awards
Arbitration may proceed in the absence of any party if notice of the proceedings
has been given to such party. The parties agree to abide by all awards rendered
in such proceedings. Such awards shall be final and binding on all parties to
the extent and in the manner provided by the laws of California. All awards may
be filed with the clerk of one or more courts having jurisdiction over the party
against whom such an award is rendered or his property, as a basis of judgment
and of the issuance of execution for its collection.
ARTICLE 11
GENERAL MATTERS
Section 11.1 - California Law
This Agreement shall be governed by the laws of the State of California and
shall be construed in accordance therewith.
Section 11.2 - No Waiver and Notification
No provision of this Agreement may be waived except by an agreement in writing
signed by the waiving party. A waiver of any term or provision shall not be
construed as a waiver of any other term or provision.
Section 11.3 - Amendment
This Agreement may be amended, altered or revoked at any time, in whole or in
part, by filing with this Agreement a written instruction setting forth such
changes, signed by all of the parties.
Section 11.4 - Benefit
This Agreement shall be binding upon the Employee and the Corporation, and shall
not be assignable by the Corporation except as provided in Section 4.1.
Section 11.5 - Construction
Throughout this Agreement the singular shall include the plural, and the plural
shall include the singular, and the neuter shall include the masculine/feminine,
wherever the context so requires.
Section 11.6 - Text to Control
The headings of articles and sections are included solely for convenience of
reference. If any conflict between any heading and the text of this Agreement
exists, the text shall control.
Section 11.7 - Severability
If any provision of this Agreement is declared by any court of competent
jurisdiction to be invalid for any reason, such invalidity shall not affect the
remaining provision. On the contrary, such remaining provision shall be fully
severable, and this Agreement shall be construed and enforced as if such invalid
provisions never had been inserted in this Agreement.
The effective date of this Agreement shall be 1/15/96.
TOUCHSTONE SOFTWARE EMPLOYEE:
CORPORATION:
Signature:_________________________ Signature:____________________________
Print Name:________________________ Print Name:___________________________
Title:_____________________________ Title:________________________________
Date:______________________________ Date:_________________________________
6
<PAGE> 7
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
SCHEDULE A
EXCLUDED EMPLOYMENT OR VENTURES
None
7
<PAGE> 8
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
SCHEDULE B
The current compensation plan is set forth in the most recent Employee
status form.
8
<PAGE> 9
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
SCHEDULE C
EXCLUDED INVENTIONS OR WORKS OF AUTHORSHIP
1. __________________________________________________________________
2. __________________________________________________________________
3. __________________________________________________________________
4. __________________________________________________________________
5. __________________________________________________________________
6. __________________________________________________________________
7. __________________________________________________________________
8. __________________________________________________________________
9. __________________________________________________________________
10. __________________________________________________________________
9
<PAGE> 1
EXHIBIT 10.5
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT FOR EXECUTIVES
This Employment Agreement ("Agreement"), dated this ____1st__ day of January,
1996, is by and between TOUCHSTONE SOFTWARE CORPORATION (the "Corporation") and
RONALD R. MAAS ("Employee").
RECITALS
A. The Corporation desires to employ the Employee on a full-time
basis in the following capacity: Executive Vice President, CFO,
and Secretary.
B. Employee desires to be so employed by the Corporation.
Therefore, in consideration of the mutual covenants contained herein, the
parties agree as follows:
ARTICLE 1
EMPLOYMENT DUTIES AND BENEFITS
Section 1.1 - Employment
The Corporation hereby employs the Employee as Executive Vice President, CFO,
and Secretary. The Employee accepts such employment and agrees to abide by the
Articles of Incorporation, By-Laws and the decisions of the Board of Directors
of the Corporation.
Section 1.2 - Duties and Responsibilities
The Employee is employed pursuant to the terms of this Agreement and agrees to
devote his/her attention and energies to the business of the Corporation. The
Employee shall perform such duties as may be reasonably determined and assigned
to him/her by the Officers and Senior Management of the Corporation.
Section 1.3 - Working Facilities
The Employee shall be furnished with facilities and services suitable to the
position and adequate for the performance of the duties of the Employee under
this Agreement. Unless Employee otherwise consents, his/her principal place of
employment shall be at the Corporation's headquarter offices where he/she will
be furnished with a private office, and such other facilities and services
suitable to his/her position and adequate to perform his/her duties during the
entire time of this Agreement.
Section 1.4 - Time Devoted to Corporation
The Employee shall devote such time as is necessary to satisfactorily perform
his/her duties to the Corporation. Unless otherwise specified in Schedule A
attached hereto, Employee shall be free to pursue any other employment or
ventures during the term hereof so long as such other employment or ventures do
not unreasonably interfere with the provision of services by Employee to the
Corporation hereunder, and are not competitive with the Corporation's business.
Section 1.5 - Vacations and Benefits
The Employee shall be entitled each year to one or more reasonable vacations in
accordance with the established practices of the Corporation now or hereafter in
effect for executive personnel, during which time Employee's compensation shall
be paid in full. In no event shall the amount of annual vacation time to which
the Employee is entitled be less than four weeks per year. Nothing in this
Agreement shall be construed to impair or limit the Employee's rights to
participate in all employee benefit plans of the Corporation of every nature and
he/she shall, in fact, be entitled to participate in and be a member of all such
benefit plans in proportion to his/her seniority and compensation. These shall
include, but not be limited to, company-paid life insurance payable to the
beneficiary the Employee shall designate from time to time, private
hospitalization and major medical insurance coverage for the Employee and
participation in stock option plans and pension and profit sharing plans. In the
event Employee continues his/her employment with any successor-in-interest to
the Corporation resulting from any sale by the Corporation of substantially all
of its assets or any merger or consolidation of the Corporation, Employee shall
remain entitled to benefits at least as favorable as those provided herein and
shall be accorded seniority and
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benefits with such successor-in-interest based upon the aggregate period of time
Employee was employed by the Corporation and by any such successor-in-interest.
Section 1.6 - Expenses
The Employee is authorized to incur reasonable business expenses for promoting
the business of the travel. The Corporation will reimburse Employee from time to
time for all such business expenses provided that the Employee presents to the
Corporation:
1. An expense report in which the Employee recorded at or near the
time each expenditure was made: (a) the amount of the
expenditure: (b) the time, place and designation of the type of
the entertainment and travel or other expense, or the date and
description of the gift (gifts made to one individual are not to
exceed a total of Twenty-Five Dollars ($25.00 in any taxable
year); (c) the business reason for the expenditure and the
nature of the business benefit derived or expected to be derived
as a result of the expenditure; and (d) on request, the names,
occupations, addresses and other information concerning each
person who was entertained or given a gift sufficient to
establish the business relationship to the Corporation; and
2. Documentary evidence (such as a receipt or paid bill), which
states sufficient information to establish the amount, date
place and essential character of the expenditure, for each
expenditure: (a) of Twenty-Five Dollars ($25.00) or more (except
for transportation charges if not readily available); and (b)
lodging while traveling away from home.
Section 1.7 - Loyal and Conscientious Performance of Duties
The Employee agrees that to the best of his/her ability and experience he/she
will at all times loyally and conscientiously perform all of the duties and
obligations either expressly or implicitly required of him/her by the terms of
this Agreement.
ARTICLE 2
COMPENSATION
Section 2.1 - Basic Salary
The Corporation shall pay to the Employee a basic salary during the term of this
Agreement in accordance with the amount set forth on Schedule B of this
Agreement. This amount will be paid consistent with standard operating procedure
for employee payroll and may be increased from time to time by action of the
Board of Directors.
ARTICLE 3
TERM OF EMPLOYMENT AND TERMINATION
Section 3.1 - Term
This Agreement shall be for an initial term of one (1) year and continuing
through December 31, 1996, commencing on its effective date, subject, however,
to termination during such period as provided in this Article 3. The term of
this Agreement shall be renewed automatically for succeeding periods of one (1)
year on the same terms and conditions as contained in this Agreement unless
either the Corporation, or the Employee shall, at least thirty days prior to the
expiration of any one year period, give written notice of the intention not to
renew this Agreement. Such renewals shall be effective in subsequent years on
the same day of the same month as the original effective date of this Agreement.
Section 3.2 - Termination by Corporation Without Cause
The Board of Directors, without cause, may terminate the Employee at any time,
but in such event Employee's salary shall continue to be paid to the Employee
for the longer of (a) the remainder of the then current term of this Agreement
as set forth in Section 3.1 notwithstanding such termination or (b) for nine (9)
months following such termination without cause.
Section 3.3 - Termination With Cause
For purposes of this Article 3, Employee shall be deemed to be terminated "for
cause" in the event such termination results from: (i) the willful misconduct or
bad faith of Employee with respect to the performance of his/her duties under
this agreement; (ii) the repeated material failure of Employee to perform duties
reasonably required of him/her by the Corporation; (iii) Employee's repeated
breach of the
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provisions of Article 5 of this Agreement pertaining to confidentiality; (iv)
the conviction of Employee for the commission of a felony or criminal offense
including moral turpitude; or (v) a repeated material breach of Employee's
fiduciary obligations to the Corporation. For purposes of the foregoing,
breaches or failures shall be deemed "repeated" if two (2) separate breaches
occur within any six (6) month period, provide written notice of the first such
breach has been given to Employee, or if any continuous or ongoing breach is not
cured within one (1) month of notice to Employee during the term hereof. The
Board of Directors of the Corporation may terminate the Employee "for cause" as
defined above upon thirty (30) days written notice to the Employee, and in such
event Employee shall have no right to any compensation hereunder following the
date of such termination.
Section 3.4 - Disability or Death
Employee shall be deemed to be "permanently disabled" for purposes of this
Section 3.4 if, during any period of three (3) consecutive months, he/she shall
be unable, due to illness or injury, to perform his/her duties hereunder for at
least fifty percent (50%) of the number of full regular business days during
such three (3) month period. Employee shall be deemed to be permanently disabled
on the last day of such three (3) month period. The Corporation may elect upon
written notice to terminate this Agreement upon the permanent disability of
Employee, and this Agreement shall automatically terminate, without notice, upon
the death of Employee. In the event of a termination resulting from Employee's
death or permanent disability, Employee or Employee's heirs shall be entitled to
payment of salary for three (3) months following such termination.
Section 3.5 - Termination Upon Sale of Business
The Board of Directors or the Employee may terminate this Agreement upon ten
(10) days notice to the other party upon the occurrence of any of the following
events:
(a) The sale by the Corporation of substantially all of the assets to a
single purchaser or to a group of associated purchasers;
(b) The sale, exchange or other disposition in one transaction of one-half or
more of the outstanding common shares of the Corporation;
(c) A bona fide decision by the shareholders of the Corporation to terminate
its business and liquidate its assets; or
(d) The merger or consolidation of the Corporation in a transaction in which
the shareholders of the Corporation receive less than fifty percent (50%)
of the outstanding voting shares of the new or continuing corporation.
Section 3.6 - Effect of Termination on Compensation
In the event the Corporation elects to terminate this Agreement pursuant to
Section 3.5 hereof, the Employee shall be entitled to the compensation as
provided for in this Agreement for the longer of (a) the remainder of the then
current term of this Agreement or (b) nine (9) months. In the event Employee
elects to terminate this Agreement pursuant to Section 3.5 hereof, the Employee
shall be entitled to compensation, as provided for in this Agreement, for the
longer of (a) one-half (1/2) of the remainder of the then current term of this
Agreement or (b) six (6) months.
Section 3.7 - Effect of Termination on Stock Options and Warrants
In the event the Corporation or Employee elects to terminate this Agreement
pursuant to Section 3.5 hereof, the Employee shall be entitled to exercise all
vested and non-vested options or warrants with a promissory note at a rate of
interest not to exceed the prime interest rate plus 2 points and for a term of 2
years. If the Company stock is exchanged for stock in another corporation and a
stock lock-up period is required, the term shall be the longer of (a) 2 years or
(b) 180 days after the stock lock-up period ends.
ARTICLE 4
CORPORATION RIGHTS OF CONTRACT CONTINUATION
Section 4.1 - Right of Continuation
If the Corporation shall at any time be merged or consolidated into or with any
other corporation or entity, or if substantially all of the assets of the
Corporation are transferred to another corporation or entity, the provisions of
this Agreement shall survive any such transaction and shall be binding upon and
inure to the
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benefit of the corporation resulting from such merger or consolidation of the
corporation to which such assets will be transferred.
ARTICLE 5
DISCLOSURE OF INFORMATION
Section 5.1 - Trade Secrets and Confidential Information
The Employee during the term of employment under this Agreement may have access
to and become acquainted with various trade secrets and confidential
information, consisting of formulas, patterns, devices, secret inventions,
processes and compilations of information, records, computer programs and
specifications, trademarks, and copyrights, which are owned by the Corporation
and which are regularly used in the operation of the business of the
Corporation. The Employee shall not disclose any of the aforesaid trade secrets
or confidential information, directly or indirectly, or use them in any way
outside the acknowledged business of the Corporation, either during the term of
this Agreement or at any time thereafter. All files, records, documents,
drawings, specifications, marks, copyrights, equipment and similar items
relating to the business of the Corporation, whether prepared by the Employee or
otherwise coming into his/her possession, shall remain the exclusive property of
the Corporation and shall not be removed from the premises of the Corporation
under any circumstances whatsoever without the prior written consent of the
Corporation.
Section 5.2 - Employee Shall Not Disclose Information
The Employee recognizes and acknowledges that much of the information concerning
the Corporation's business is a valuable, special and unique asset of the
corporation. The Employee will not, during or for a period of five (5) years
after the term of his/her employment, disclose confidential information
concerning the Corporation's business, or any part thereof, to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
except as required by Employee's employment by the Corporation, nor shall make
use of such information in any manner for any other purpose.
Section 5.3 - Exclusions
The restrictions and limitations set forth in this Article 5 shall not apply to
information publicly known that is generally employed by the trade at or after
the time the Employee first learns of such information, or generic information
or knowledge which the Employee would have learned in the course of similar
employment or work elsewhere in the trade, or information already known to
Employee at the time of first disclosure by the Corporation to Employee.
ARTICLE 6
INVENTIONS, PATENTS AND COPYRIGHTS
Section 6.1 - Inventions, Copyrights and Patents
The Employee agrees that as to any inventions or works of authorship made by
him/her during the term of his/her employment, solely or jointly with others,
which are made with the Corporation's equipment, supplies, facilities, trade
secrets or time, or which relate to the business of the Corporation or the
Corporation's actual or demonstrably anticipated research or development, or
which result from any work performed by the Employee for the Corporation, such
inventions and works of authorship and all proprietary rights therein, including
patents, copyrights and trade secrets, shall belong to the Corporation and
he/she promises to assign such inventions and rights to the Corporation. The
Employee also agrees that the Corporation shall have the right to keep such
inventions as trade secrets, if the Corporation chooses. This Agreement does not
apply to any inventions which are the subject of Section 2870 of the California
Labor Code. Further, this Article 6 does not apply to any inventions or works of
authorship, if any, identified in Schedule C attached hereto.
Section 6.2 - Disclosure of Inventions
In order to permit the Corporation to claim rights to which he/she may be
entitled, the Employee agrees to disclose to the Corporation in confidence all
inventions which the Employee makes during the course of his/her employment and
all patent or copyright applications filed by the Employee within a year after
termination of his/her employment.
Section 6.3 - Employee's Assistance
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The Employee shall assist the Corporation in obtaining patents and/or copyrights
on all inventions, works of authorship, designs, improvements and discoveries
deemed patentable or copyrightable by the Corporation in the United States and
in all foreign countries, and shall execute all documents and do all things
necessary to obtain letters patent, or copyrights, to vest the Corporation with
full and extensive title thereto, and to protect the same against infringement
by others.
Section 6.4 - During Employment Defined
For purposes of this Agreement, an invention or work of authorship is deemed to
have been made during the period of the Employee's employment if, during such
period, the invention was first actually reduced to practice or the work of
authorship was first embodied in a tangible medium of expression.
ARTICLE 7
SOLICITING CUSTOMERS OR EMPLOYEES BEFORE OR AFTER TERMINATION OF EMPLOYMENT
The employee shall not during employment or for a period of one (1) year
immediately following the termination of his/her employment with the
Corporation, either directly or indirectly, unless Employee has received
permission from the Board of Directors:
1. Make known to any person, firm or corporation the names or addresses of
any of the customers or employees of the Corporation or any other
information pertaining to them; or
2. Entice away or attempt to entice away, any of the customers or employees
of the Corporation on whom the Employee called or with whom he/she became
acquainted during his/her employment with the Corporation, either on the
Employee's own behalf or for any other person, firm or corporation, with
substantially similar products or services which would complete with
products and services sold by the Corporation.
ARTICLE 8
BREACH OF ARTICLES 5, 6, AND 7
In the event of a breach or threatened breach by the Employee of the provisions
of Articles 5, 6 or 7 hereof, the Corporation shall be entitled to an injunction
restraining the Employee from breaching such provisions. Nothing herein shall be
construed as prohibiting the Corporation from protecting, to the full extent of
the law, its rights and property.
ARTICLE 9
RETURN OF CORPORATION'S PROPERTY
On the termination of his/her employment or whenever requested by the
Corporation, the Employee shall immediately deliver to the Corporation all
property in his/her possession or under his/her control belonging to the
Corporation in good condition, ordinary wear and tear and damage by any cause
beyond the reasonable control of the Employee excepted.
ARTICLE 10
ARBITRATION
Section 10.1
Except as otherwise provided in this Article, the parties hereby submit all
controversies, claims and matters of difference arising under or related to this
Agreement to arbitration in Orange County, California, according to the
California Arbitration Act, Sections 1280 through 1294.2 of the California Code
of Civil Procedure as it now exists or is hereinafter enacted. This submission
and Agreement to arbitrate shall be specifically enforceable. Notwithstanding
anything to the contrary set forth herein, the parties shall not be obligated to
submit to arbitration, and either party shall be free to pursue litigation in a
court of competent jurisdiction with respect to, any controversies, disputes or
differences relating to any breach or alleged breach of, or question of
interpretation regarding, Article 5 or Article 6 hereof.
Section 10.2 - Controversies
For purposes of this Agreement, controversies shall include, but not be limited
to, the following:
(a) All questions relating to the breach of any obligation, warranty
or condition hereunder;
(b) Failure of any party to deny or reject a claim or demand of any
other party; and
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(c) All questions as to whether the right to arbitrate exists.
Section 10.3 - Appointment of Arbitrators
Within thirty (30) days after the date on which a controversy is submitted to
arbitration, the Corporation and the Employee shall appoint a single arbitrator
who is acceptable to each.
If the Corporation and the Employee cannot agree upon a single arbitrator during
such 30-day period, the Corporation shall choose an arbitrator and the Employee
shall choose an arbitrator.
The two arbitrators so selected shall choose an additional arbitrator. The
decision of the majority shall be final and binding.
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Section 10.4 - Awards
Arbitration may proceed in the absence of any party if notice of the proceedings
has been given to such party. The parties agree to abide by all awards rendered
in such proceedings. Such awards shall be final and binding on all parties to
the extent and in the manner provided by the laws of California. All awards may
be filed with the clerk of one or more courts having jurisdiction over the party
against whom such an award is rendered or his property, as a basis of judgment
and of the issuance of execution for its collection.
ARTICLE 11
GENERAL MATTERS
Section 11.1 - California Law
This Agreement shall be governed by the laws of the State of California and
shall be construed in accordance therewith.
Section 11.2 - No Waiver and Notification
No provision of this Agreement may be waived except by an agreement in writing
signed by the waiving party. A waiver of any term or provision shall not be
construed as a waiver of any other term or provision.
Section 11.3 - Amendment
This Agreement may be amended, altered or revoked at any time, in whole or in
part, by filing with this Agreement a written instruction setting forth such
changes, signed by all of the parties.
Section 11.4 - Benefit
This Agreement shall be binding upon the Employee and the Corporation, and shall
not be assignable by the Corporation except as provided in Section 4.1.
Section 11.5 - Construction
Throughout this Agreement the singular shall include the plural, and the plural
shall include the singular, and the neuter shall include the masculine/feminine,
wherever the context so requires.
Section 11.6 - Text to Control
The headings of articles and sections are included solely for convenience of
reference. If any conflict between any heading and the text of this Agreement
exists, the text shall control.
Section 11.7 - Severability
If any provision of this Agreement is declared by any court of competent
jurisdiction to be invalid for any reason, such invalidity shall not affect the
remaining provision. On the contrary, such remaining provision shall be fully
severable, and this Agreement shall be construed and enforced as if such invalid
provisions never had been inserted in this Agreement.
The effective date of this Agreement shall be _______________.
TOUCHSTONE SOFTWARE CORPORATION: EMPLOYEE:
Signature:_______________________ Signature:_________________________
Print Name:______________________ Print Name:________________________
Title:___________________________ Title:_____________________________
Date:____________________________ Date:______________________________
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SCHEDULE A
EXCLUDED EMPLOYMENT OR VENTURES
None
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SCHEDULE B
The current compensation plan is set forth in the most recent Employee
status form.
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SCHEDULE C
EXCLUDED INVENTIONS OR WORKS OF AUTHORSHIP
1. None
2. ________________________________________________________________
3. ________________________________________________________________
4. ________________________________________________________________
5. ________________________________________________________________
6. ________________________________________________________________
7. ________________________________________________________________
8. ________________________________________________________________
9. ________________________________________________________________
10.________________________________________________________________
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EXHIBIT 10.6
This Employment Agreement ("Agreement"), dated this ___1st__ day of April, 1996,
is by and between TOUCHSTONE SOFTWARE CORPORATION (the "Corporation") and C.
SHANNON JENKINS ("Employee").
RECITALS
A. The Corporation desires to employ the Employee on a full-time
basis in the following capacity: Chief Executive Officer.
B. Employee desires to be so employed by the Corporation.
Therefore, in consideration of the mutual covenants contained herein, the
parties agree as follows:
ARTICLE 1
EMPLOYMENT DUTIES AND BENEFITS
Section 1.1 - Employment
The Corporation hereby employs the Employee as Chief Executive Officer. The
Employee accepts such employment and agrees to abide by the Articles of
Incorporation, By-Laws and the decisions of the Board of Directors of the
Corporation.
Section 1.2 - Duties and Responsibilities
The Employee is employed pursuant to the terms of this Agreement and agrees to
devote his/her attention and energies to the business of the Corporation. The
Employee shall perform such duties as may be reasonably determined and assigned
to him/her by the Officers and Senior Management of the Corporation.
Section 1.3 - Working Facilities
The Employee shall be furnished with facilities and services suitable to the
position and adequate for the performance of the duties of the Employee under
this Agreement. Unless Employee otherwise consents, his/her principal place of
employment shall be at the Corporation's headquarter offices where he/she will
be furnished with a private office, and such other facilities and services
suitable to his/her position and adequate to perform his/her duties during the
entire time of this Agreement.
Section 1.4 - Time Devoted to Corporation
The Employee shall devote such time as is necessary to satisfactorily perform
his/her duties to the Corporation. Unless otherwise specified in Schedule A
attached hereto, Employee shall be free to pursue any other employment or
ventures during the term hereof so long as such other employment or ventures do
not unreasonably interfere with the provision of services by Employee to the
Corporation hereunder, and are not competitive with the Corporation's business.
Section 1.5 - Vacations and Benefits
The Employee shall be entitled each year to one or more reasonable vacations in
accordance with the established practices of the Corporation now or hereafter in
effect for executive personnel, during which time Employee's compensation shall
be paid in full. In no event shall the amount of annual vacation time to which
the Employee is entitled be less than four weeks per year. Nothing in this
Agreement shall be construed to impair or limit the Employee's rights to
participate in all employee benefit plans of the Corporation of every nature and
he/she shall, in fact, be entitled to participate in and be a member of all such
benefit plans in proportion to his/her seniority and compensation. These shall
include, but not be limited to, company-paid life insurance payable to the
beneficiary the Employee shall designate from time to time, private
hospitalization and major medical insurance coverage for the Employee and
participation in stock option plans and pension and profit sharing plans. In the
event Employee continues his/her employment with any successor-in-interest to
the Corporation resulting from any sale by the Corporation of substantially all
of its assets or any merger or consolidation of the Corporation, Employee shall
remain entitled to benefits at least as favorable as those provided herein and
shall be accorded seniority and benefits with such successor-in-interest based
upon the aggregate period of time Employee was employed by the Corporation and
by any such successor-in-interest.
Section 1.6 - Expenses
The Employee is authorized to incur reasonable business expenses for promoting
the business of the travel. The Corporation will reimburse Employee from time to
time for all such business expenses provided that the Employee presents to the
Corporation:
1. An expense report in which the Employee recorded at or near the
time each expenditure was made: (a) the amount of the
expenditure: (b) the time, place and designation of the type of
the entertainment and travel or other expense, or the date and
description of the gift (gifts made to one
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individual are not to exceed a total of Twenty-Five Dollars
($25.00 in any taxable year); (c) the business reason for the
expenditure and the nature of the business benefit derived or
expected to be derived as a result of the expenditure; and (d)
on request, the names, occupations, addresses and other
information concerning each person who was entertained or given
a gift sufficient to establish the business relationship to the
Corporation; and
2. Documentary evidence (such as a receipt or paid bill), which
states sufficient information to establish the amount, date
place and essential character of the expenditure, for each
expenditure: (a) of Twenty-Five Dollars ($25.00) or more (except
for transportation charges if not readily available); and (b)
lodging while traveling away from home.
Section 1.7 - Loyal and Conscientious Performance of Duties
The Employee agrees that to the best of his/her ability and experience he/she
will at all times loyally and conscientiously perform all of the duties and
obligations either expressly or implicitly required of him/her by the terms of
this Agreement.
ARTICLE 2
COMPENSATION
Section 2.1 - Basic Salary
The Corporation shall pay to the Employee a basic salary during the term of this
Agreement in accordance with the amount set forth on Schedule B of this
Agreement. This amount will be paid consistent with standard operating procedure
for employee payroll and may be increased from time to time by action of the
Board of Directors.
ARTICLE 3
TERM OF EMPLOYMENT AND TERMINATION
Section 3.1 - Term
This Agreement shall be for an initial term of one (1) year and continuing
through December 31, 1996, commencing on its effective date, subject, however,
to termination during such period as provided in this Article 3. The term of
this Agreement shall be renewed automatically for succeeding periods of one (1)
year on the same terms and conditions as contained in this Agreement unless
either the Corporation, or the Employee shall, at least thirty days prior to the
expiration of any one year period, give written notice of the intention not to
renew this Agreement. Such renewals shall be effective in subsequent years on
the same day of the same month as the original effective date of this Agreement.
Section 3.2 - Termination by Corporation Without Cause
The Board of Directors, without cause, may terminate the Employee at any time,
but in such event Employee's salary shall continue to be paid to the Employee
for the longer of (a) the remainder of the then current term of this Agreement
as set forth in Section 3.1 notwithstanding such termination or (b) for nine (9)
months following such termination without cause.
Section 3.3 - Termination With Cause
For purposes of this Article 3, Employee shall be deemed to be terminated "for
cause" in the event such termination results from: (i) the willful misconduct or
bad faith of Employee with respect to the performance of his/her duties under
this agreement; (ii) the repeated material failure of Employee to perform duties
reasonably required of him/her by the Corporation; (iii) Employee's repeated
breach of the provisions of Article 5 of this Agreement pertaining to
confidentiality; (iv) the conviction of Employee for the commission of a felony
or criminal offense including moral turpitude; or (v) a repeated material breach
of Employee's fiduciary obligations to the Corporation. For purposes of the
foregoing, breaches or failures shall be deemed "repeated" if two (2) separate
breaches occur within any six (6) month period, provide written notice of the
first such breach has been given to Employee, or if any continuous or ongoing
breach is not cured within one (1) month of notice to Employee during the term
hereof. The Board of Directors of the Corporation may terminate the Employee
"for cause" as defined above upon thirty (30) days written notice to the
Employee, and in such event Employee shall have no right to any compensation
hereunder following the date of such termination.
Section 3.4 - Disability or Death
Employee shall be deemed to be "permanently disabled" for purposes of this
Section 3.4 if, during any period of three (3) consecutive months, he/she shall
be unable, due to illness or injury, to perform his/her duties hereunder for at
least fifty percent (50%) of the number of full regular business days during
such three (3) month period. Employee shall be deemed to be permanently disabled
on the last day of such three (3) month period. The Corporation may elect upon
written notice to terminate this Agreement upon the permanent disability of
Employee, and this Agreement shall automatically terminate, without notice, upon
the death of Employee. In the event of a termination resulting from Employee's
death or permanent disability, Employee or Employee's heirs shall be entitled to
payment of salary for three (3) months following such termination.
Section 3.5 - Termination Upon Sale of Business
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The Board of Directors or the Employee may terminate this Agreement upon ten
(10) days notice to the other party upon the occurrence of any of the following
events:
(a) The sale by the Corporation of substantially all of the assets to a
single purchaser or to a group of associated purchasers;
(b) The sale, exchange or other disposition in one transaction of one-half or
more of the outstanding common shares of the Corporation;
(c) A bona fide decision by the shareholders of the Corporation to terminate
its business and liquidate its assets; or
(d) The merger or consolidation of the Corporation in a transaction in which
the shareholders of the Corporation receive less than fifty percent (50%)
of the outstanding voting shares of the new or continuing corporation.
Section 3.6 - Effect of Termination on Compensation
In the event the Corporation elects to terminate this Agreement pursuant to
Section 3.5 hereof, the Employee shall be entitled to the compensation as
provided for in this Agreement for the longer of (a) the remainder of the then
current term of this Agreement or (b) nine (9) months. In the event Employee
elects to terminate this Agreement pursuant to Section 3.5 hereof, the Employee
shall be entitled to compensation, as provided for in this Agreement, for the
longer of (a) one-half (1/2) of the remainder of the then current term of this
Agreement or (b) six (6) months.
Section 3.7 - Effect of Termination on Stock Options and Warrants
In the event the Corporation or Employee elects to terminate this Agreement
pursuant to Section 3.5 hereof, the Employee shall be entitled to exercise all
vested and non-vested options or warrants with a promissory note at a rate of
interest not to exceed the prime interest rate plus 2 points and for a term of 2
years. If the Company stock is exchanged for stock in another corporation and a
stock lock-up period is required, the term shall be the longer of (a) 2 years or
(b) 180 days after the stock lock-up period ends.
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ARTICLE 4
CORPORATION RIGHTS OF CONTRACT CONTINUATION
Section 4.1 - Right of Continuation
If the Corporation shall at any time be merged or consolidated into or with any
other corporation or entity, or if substantially all of the assets of the
Corporation are transferred to another corporation or entity, the provisions of
this Agreement shall survive any such transaction and shall be binding upon and
inure to the benefit of the corporation resulting from such merger or
consolidation of the corporation to which such assets will be transferred.
ARTICLE 5
DISCLOSURE OF INFORMATION
Section 5.1 - Trade Secrets and Confidential Information
The Employee during the term of employment under this Agreement may have access
to and become acquainted with various trade secrets and confidential
information, consisting of formulas, patterns, devices, secret inventions,
processes and compilations of information, records, computer programs and
specifications, trademarks, and copyrights, which are owned by the Corporation
and which are regularly used in the operation of the business of the
Corporation. The Employee shall not disclose any of the aforesaid trade secrets
or confidential information, directly or indirectly, or use them in any way
outside the acknowledged business of the Corporation, either during the term of
this Agreement or at any time thereafter. All files, records, documents,
drawings, specifications, marks, copyrights, equipment and similar items
relating to the business of the Corporation, whether prepared by the Employee or
otherwise coming into his/her possession, shall remain the exclusive property of
the Corporation and shall not be removed from the premises of the Corporation
under any circumstances whatsoever without the prior written consent of the
Corporation.
Section 5.2 - Employee Shall Not Disclose Information
The Employee recognizes and acknowledges that much of the information concerning
the Corporation's business is a valuable, special and unique asset of the
corporation. The Employee will not, during or for a period of five (5) years
after the term of his/her employment, disclose confidential information
concerning the Corporation's business, or any part thereof, to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
except as required by Employee's employment by the Corporation, nor shall make
use of such information in any manner for any other purpose.
Section 5.3 - Exclusions
The restrictions and limitations set forth in this Article 5 shall not apply to
information publicly known that is generally employed by the trade at or after
the time the Employee first learns of such information, or generic information
or knowledge which the Employee would have learned in the course of similar
employment or work elsewhere in the trade, or information already known to
Employee at the time of first disclosure by the Corporation to Employee.
ARTICLE 6
INVENTIONS, PATENTS AND COPYRIGHTS
Section 6.1 - Inventions, Copyrights and Patents
The Employee agrees that as to any inventions or works of authorship made by
him/her during the term of his/her employment, solely or jointly with others,
which are made with the Corporation's equipment, supplies, facilities, trade
secrets or time, or which relate to the business of the Corporation or the
Corporation's actual or demonstrably anticipated research or development, or
which result from any work performed by the Employee for the Corporation, such
inventions and works of authorship and all proprietary rights therein, including
patents, copyrights and trade secrets, shall belong to the Corporation and
he/she promises to assign such
4
<PAGE> 5
inventions and rights to the Corporation. The Employee also agrees that the
Corporation shall have the right to keep such inventions as trade secrets, if
the Corporation chooses. This Agreement does not apply to any inventions which
are the subject of Section 2870 of the California Labor Code. Further, this
Article 6 does not apply to any inventions or works of authorship, if any,
identified in Schedule C attached hereto.
Section 6.2 - Disclosure of Inventions
In order to permit the Corporation to claim rights to which he/she may be
entitled, the Employee agrees to disclose to the Corporation in confidence all
inventions which the Employee makes during the course of his/her employment and
all patent or copyright applications filed by the Employee within a year after
termination of his/her employment.
Section 6.3 - Employee's Assistance
The Employee shall assist the Corporation in obtaining patents and/or copyrights
on all inventions, works of authorship, designs, improvements and discoveries
deemed patentable or copyrightable by the Corporation in the United States and
in all foreign countries, and shall execute all documents and do all things
necessary to obtain letters patent, or copyrights, to vest the Corporation with
full and extensive title thereto, and to protect the same against infringement
by others.
Section 6.4 - During Employment Defined
For purposes of this Agreement, an invention or work of authorship is deemed to
have been made during the period of the Employee's employment if, during such
period, the invention was first actually reduced to practice or the work of
authorship was first embodied in a tangible medium of expression.
ARTICLE 7
SOLICITING CUSTOMERS OR EMPLOYEES BEFORE OR AFTER TERMINATION OF EMPLOYMENT
The employee shall not during employment or for a period of one (1) year
immediately following the termination of his/her employment with the
Corporation, either directly or indirectly, unless Employee has received
permission from the Board of Directors:
1. Make known to any person, firm or corporation the names or addresses of
any of the customers or employees of the Corporation or any other
information pertaining to them; or
2. entice away or attempt to entice away, any of the customers or employees
of the Corporation on whom the Employee called or with whom he/she became
acquainted during his/her employment with the Corporation, either on the
Employee's own behalf or for any other person, firm or corporation, with
substantially similar products or services which would complete with
products and services sold by the Corporation.
ARTICLE 8
BREACH OF ARTICLES 5, 6, AND 7
In the event of a breach or threatened breach by the Employee of the provisions
of Articles 5, 6 or 7 hereof, the Corporation shall be entitled to an injunction
restraining the Employee from breaching such provisions. Nothing herein shall be
construed as prohibiting the Corporation from protecting, to the full extent of
the law, its rights and property.
ARTICLE 9
RETURN OF CORPORATION'S PROPERTY
On the termination of his/her employment or whenever requested by the
Corporation, the Employee shall immediately deliver to the Corporation all
property in his/her possession or under his/her control belonging to the
Corporation in good condition, ordinary wear and tear and damage by any cause
beyond the reasonable control of the Employee excepted.
ARTICLE 10
ARBITRATION
Section 10.1
Except as otherwise provided in this Article, the parties hereby submit all
controversies, claims and matters of difference arising under or related to this
Agreement to arbitration in Orange County, California, according to the
California Arbitration Act, Sections 1280 through 1294.2 of the California Code
of Civil Procedure as it now exists or is hereinafter enacted. This submission
and Agreement to arbitrate shall be specifically enforceable. Notwithstanding
anything to the contrary set forth herein, the parties shall not be obligated to
submit to arbitration, and either party shall be free to pursue litigation in a
court of competent jurisdiction with respect to, any controversies, disputes or
differences relating to any breach or alleged breach of, or question of
interpretation regarding, Article 5 or Article 6 hereof.
Section 10.2 - Controversies
For purposes of this Agreement, controversies shall include, but not be limited
to, the following:
(a) All questions relating to the breach of any obligation, warranty
or condition hereunder;
5
<PAGE> 6
(b) Failure of any party to deny or reject a claim or demand of any
other party; and
(c) All questions as to whether the right to arbitrate exists.
Section 10.3 - Appointment of Arbitrators
Within thirty (30) days after the date on which a controversy is submitted to
arbitration, the Corporation and the Employee shall appoint a single arbitrator
who is acceptable to each. If the Corporation and the Employee cannot agree upon
a single arbitrator during such 30-day period, the Corporation shall choose an
arbitrator and the Employee shall choose an arbitrator.
The two arbitrators so selected shall choose an additional arbitrator. The
decision of the majority shall be final and binding.
Section 10.4 - Awards
Arbitration may proceed in the absence of any party if notice of the proceedings
has been given to such party. The parties agree to abide by all awards rendered
in such proceedings. Such awards shall be final and binding on all parties to
the extent and in the manner provided by the laws of California. All awards may
be filed with the clerk of one or more courts having jurisdiction over the party
against whom such an award is rendered or his property, as a basis of judgment
and of the issuance of execution for its collection.
ARTICLE 11
GENERAL MATTERS
Section 11.1 - California Law
This Agreement shall be governed by the laws of the State of California and
shall be construed in accordance therewith.
Section 11.2 - No Waiver and Notification
No provision of this Agreement may be waived except by an agreement in writing
signed by the waiving party. A waiver of any term or provision shall not be
construed as a waiver of any other term or provision.
Section 11.3 - Amendment
This Agreement may be amended, altered or revoked at any time, in whole or in
part, by filing with this Agreement a written instruction setting forth such
changes, signed by all of the parties.
Section 11.4 - Benefit
This Agreement shall be binding upon the Employee and the Corporation, and shall
not be assignable by the Corporation except as provided in Section 4.1.
Section 11.5 - Construction
Throughout this Agreement the singular shall include the plural, and the plural
shall include the singular, and the neuter shall include the masculine/feminine,
wherever the context so requires.
Section 11.6 - Text to Control
The headings of articles and sections are included solely for convenience of
reference. If any conflict between any heading and the text of this Agreement
exists, the text shall control.
Section 11.7 - Severability
If any provision of this Agreement is declared by any court of competent
jurisdiction to be invalid for any reason, such invalidity shall not affect the
remaining provision. On the contrary, such remaining provision shall be fully
severable, and this Agreement shall be construed and enforced as if such invalid
provisions never had been inserted in this Agreement.
The effective date of this Agreement shall be April 1, 1996
TOUCHSTONE SOFTWARE CORPORATION: EMPLOYEE:
Signature:_________________________ Signature:__________________________
Print Name:________________________ Print Name:_________________________
Title:_____________________________ Title:______________________________
Date:______________________________ Date:_______________________________
6
<PAGE> 7
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
SCHEDULE A
EXCLUDED EMPLOYMENT OR VENTURES
None
7
<PAGE> 8
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
SCHEDULE B
The current compensation plan is set forth in the most recent Employee
status form.
8
<PAGE> 9
TOUCHSTONE SOFTWARE CORPORATION
EMPLOYMENT AGREEMENT
SCHEDULE C
EXCLUDED INVENTIONS OR WORKS OF AUTHORSHIP
1. ______________________________________________________________
2. ______________________________________________________________
3. ______________________________________________________________
4. ______________________________________________________________
5. ______________________________________________________________
6. ______________________________________________________________
7. ______________________________________________________________
8. ______________________________________________________________
9. ______________________________________________________________
10. ______________________________________________________________
9
<PAGE> 1
EXHIBIT 10.7
TOUCHSTONE SOFTWARE CORPORATION
AMENDMENT TO EMPLOYMENT AGREEMENT
The employment agreement dated April 1, 1996 by and between TouchStone Software
Corporation ("Corporation") and C. Shannon Jenkins Dingus ("Employee") shall be
amended as follows:
Section 1.1 Employement shall be amended to read:
The Corporation hereby employs the Employee as a technical consultant to the
President. The Employee accepts such employment and agrees to abide by the
Articles of Incorporation, By-Laws and the decisions of the Board of Directors
of the Corporation.
Section 1.2 - Duties and Responsibilities shall be amended to read:
The Employee is employed pursuant to the terms of this Agreement and agrees to
devote limited attention and energies to the business of the Corporation.
Section 1.3 - Working Facilities shall be amended to read:
Employee's principal place of employment shall be provided by Employee.
Section 1.5 - Vacations and Benefits shall be amended to read:
The Employee shall not be entitled to any accrual of vacation time. Nothing in
this Agreement shall be construed to impair or limit the Employee's rights to
participate in all other employee benefit plans of the Corporation of every
nature and he/she shall, in fact, be entitled to participate in and be a member
of all such benefit plans in proportion to his/her seniority and compensation.
These shall include, but not be limited to, a $100,000 whole life insurance
policy and a company-paid group life insurance payable to the beneficiary the
Employee shall designate from time to time, and major medical and
hospitalization insurance coverage for the Employee and participation in stock
option plans and pension and profit sharing plans. In the event Employee
continues his/her employment with any successor-in-interest to the Corporation
resulting from any sale by the Corporation of substantially all of its assets or
any merger or consolidation of the Corporation, Employee shall remain entitled
to benefits at least as favorable as those provided herein and shall be accorded
seniority and benefits with such successor-in-interest based upon the aggregate
period of time Employee was employed by the Corporation and by any such
successor-in-interest.
Section 2.1 - Basic Salary shall be amended to read:
The Corporation shall pay to the Employee a basic salary of $25,000 per year
during the term of this Agreement. This amount will be paid consistent with
standard operating procedure for employee payroll.
Section 3.1 - Term shall be amended to read:
1
<PAGE> 2
This Agreement shall be for an initial term of four (4) years and commencing on
its effective date, subject, however, to termination during such period as
provided in this Article 3.
The effective date of this Agreement shall be January 1, 1998
TOUCHSTONE SOFTWARE CORPORATION: EMPLOYEE:
Signature:_________________________ Signature:___________________________
Print Name:________________________ Print Name:__________________________
Title:_____________________________ Title:_______________________________
Date:______________________________ Date:________________________________
2
<PAGE> 1
TOUCHSTONE SOFTWARE CORPORATION
EXHIBIT 23.1--INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-25989 and 333-21395 on Form S-8 of TouchStone Software Corporation of our
report dated February 6, 1998, appearing in this Annual Report on Form 10-KSB of
TouchStone Software Corporation for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Costa Mesa, California
March 25, 1998
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