Thanks Brad! Have been busy since returning... Here it is: PART 1
TOUCHSTONE SOFTWARE CORP /CA/ (TSSW)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This quarterly report on Form 10-QSB contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to those discussed under the caption "Business Risks" contained herein.
GENERAL
The Company's revenues consist of product sales and royalty income. Royalty income is derived 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 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.
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.
In addition, 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. All product development efforts 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.
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, enhancement, and translation to foreign languages after technological feasibility of a product has been established
are capitalized in accordance with Statement of Financial Accounting Standards (SFAS) No. 86. During the six months ended
June 30, 1998, technological feasibility was not reached for any products under development. Accordingly, the Company did
not capitalize any software development costs during the six months ended June 30, 1998.
The Company's quarterly operating results may fluctuate significantly due to a variety of factors, including changes in he
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 decrease in revenue in the three months ended June 30, 1998 was primarily due to a decline in the sales of the company's
PC-cillin anti-virus product and the erosion in the pricing structure of those products caused by increasing competition and
rebates. In addition, there has been a general slowdown in the software utility market pending the release of Windows 98 which
has affected revenues for the company's diagnostic products. The sales of the company's new CheckIt NetOptimizer, which
reached retail stores in early June, did not attain a volume during quarter sufficient to offset the reduced sales of other products.
Management recognizes the difficulty of competing solely in the retail market, and believes that the Company must embark on a
more balanced strategy of developing diagnostic tools for both home consumers and for professional PC technicians and
assemblers. Currently, the Company is focused on development efforts for the core CheckIt line with product releases planned
for the third quarter of 1998. Designed for computer technicians and advanced computer enthusiasts, the next CheckIt
products will build upon the Company's strengths in hardware diagnostics and trouble shooting and will take advantage of new
tools in Windows 98. Additionally, the next CheckIt product will address the Year 2000 PC hardware compatibility problem
and will provide a "patch" to correct this problem. The Company plans to continue developing products that address the
advanced needs of computer technicians. Because many commercial markets require tools to test and verify computer
components, the Company will create products to address these needs as well.
In regards to the strategy 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. 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 acceptance of the Company's
products in the commercial market as well as in the retail market.
Without abandoning the retail market, which is important to maintain for brand identity, the Company will concentrate on
creating more commercial sales. As a part of executing on that strategy, the Company has restructured its operations. The loss
in the second quarter includes $778,000 of restructuring charges, which includes reduction of personnel related expenses;
severance packages related to changes in management; expensing of inventory and capital assets; and expenses associated with
a reduction in facilities.
A fundamental part of the restructuring effort will be to improve the Company's operations in all areas. Overall employee
headcount will be reduced approximately 30% during the third quarter of 1998. While expenses will be reduced in some areas
and overall expenses will be reduced, the Company will concentrate on setting up its organization to support the development
and sale of its diagnostic products into the retail channel as well as directly to businesses.
To further support the strategy of developing products that address the advanced needs of computer technicians, the Company
signed a three-year technology license agreement with Award Software International Inc. (Award). As part of this agreement,
the Company will gain access to technology, will engage consultants, and will receive training from Award, a leading provider of
system enabling and management software for personal computers and embedded systems.
As part of the Company's plan to increase focus on the development of CheckIt products, Trend Micro, Inc. will assume
responsibility for the PC-cillin anti-virus product. Trend Micro will provide service and support for current and future PC-cillin
customers. Additionally, the Company will transfer all PC-cillin inventory in the sales channel and in the Company's warehouse
locations to Trend Micro who will become solely responsible for the stock. The transfer will take effect on September 30,
1998. The Company and Trend Micro have co-developed the PC-cillin line of products since 1995.
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.
PRODUCTS
The following table sets forth the products currently marketed by the Company:
INITIAL RELEASE
PRODUCT TITLE DESCRIPTION DATE
------------- ----------- ---------------
CheckIt A utility with new technology that optimizes and troubleshoots May 1998
NetOptimizer users' Internet connections and modems for maximum
(tm) performance. The product's Internet Tune-Up program optimizes
modem, port and Windows settings for maximum efficiency and
speed, increasing throughput and download speeds on all analog
modems. The CheckIt Internet Monitor automatically tracks
download and connection speeds, total on-line time by day or
month, and notifies surfers when connecting at below-average
rates. CheckIt Redial is available to continually redial an ISP
until a connection at average or above-average speed is obtained.
NetOptimizer also includes Active Update allowing users to
receive free program updates and enhancements.
CheckIt CheckIt version 5 for Windows 95 collects detailed system October 1997
(R) 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 for Windows 95 and the award-winning PC-cillin 3.0
(R) 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 PC-cillin provides automatic protection from computer viruses. PC November 1995
(R) PC-cillin monitors virus sources, adjusts protection automatically, (last update
and removes viruses. PC-cillin's exclusive patent-pending July 1997)
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! A file synchronization and transfer program with ZIPSync that March 1995
(R) keeps the files and directories on desktop PCs, laptops, (last update
networks and Zip drives, synchronized and up-to-date with the October 1996)
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. |
