<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- - ---
Exchange Act of 1934 for the quarterly period ended September 30, 1998.
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:
TSI INTERNATIONAL SOFTWARE LTD.
(Exact name of registrant as specified in its charter)
Delaware 06-1132156
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
45 Danbury Road, Wilton, CT 06897
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
203-761-8600
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
--- ---
As of September 30, 1998, Registrant had outstanding 10,988,926 shares of Common
Stock, $.01 par value.
================================================================================
1
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 - Financial Statements
Balance Sheets as of and September 30, 1998 and December 31, 1997.......................... 3
Statements of Income for the three and nine months ended September 30, 1998 and 1997....... 4
Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997... 5
Notes to Financial Statements.............................................................. 6-7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 8-15
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk........................ 15
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................. 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................... 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................... 16
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS........................................................................... 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 16
SIGNATURES......................................................................................... 16
</TABLE>
2
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents 26,209,000 10,912,500
Marketable securities 24,474,000 10,490,500
Accounts receiveable, less allowances of $1,183,300 and
$471,300 13,560,600 7,864,100
Current portion of investment in licensing contracts
receivable, net of unearned finance income of $41,400
and $60,000 479,300 678,100
Prepaid expenses and othe current assets 1,107,000 745,000
----------- -----------
Total Current Assets 65,829,900 30,690,200
Furniture, fixtures and equipment, net 2,290,600 1,587,300
Investment in licensing contracts receivable, net of
unearned finance income of $18,100 and $38,700, less
current portion 209,800 421,800
Other assets 251,400 242,400
----------- -----------
Total Assets $68,581,700 $32,941,700
=========== ===========
LIABILITIES AND STOCKHOLDERS'
-----------------------------
Current liabilities:
Accounts Payable $ 1,214,500 $ 600,200
Accrued expenses 3,498,000 2,207,900
Current portion of deferred revenue 7,015,000 4,511,000
----------- -----------
Total Current Liabilities 11,727,500 7,319,100
Other long-term liabilities 22,200 17,800
Deferred revenue, less current portion 335,000 188,400
----------- -----------
Total Liabilities 12,084,700 7,525,300
----------- -----------
Stockholders' equity:
Common stock (20,000,000 shares authorized, par value $.01) 110,200 90,600
Additional paid-in capital 60,325,500 33,134,200
Accumulated deficit (3,589,400) (7,557,000)
Cumulative foreign currency translation adjustment (349,300) (199,300)
Treasury stock, at cost - (52,100)
----------- -----------
Total Stockholders' Equity 56,497,000 25,416,400
=========== ===========
Total Liabilities and Stockholders' Equity $68,581,700 $32,941,700
=========== ===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Software licensing $ 7,967,700 $ 3,940,200 $19,869,600 $ 9,846,100
Service, maintenance and other 4,156,200 3,060,300 10,574,800 8,817,100
----------- ----------- ----------- -----------
Total Revenue 12,123,900 7,000,500 30,444,400 18,663,200
----------- ----------- ----------- -----------
Cost of revenues:
Software licensing 371,300 257,300 1,112,300 564,000
Service, maintenance and other 912,600 711,300 2,623,400 1,789,800
----------- ----------- ----------- -----------
Total Cost of Revenue 1,283,900 968,600 3,735,700 2,353,800
----------- ----------- ----------- -----------
Gross Profit 10,840,000 6,031,900 26,708,700 16,309,400
Operating expenses:
Product development 1,520,400 1,183,200 4,171,800 3,313,000
Selling and marketing 6,203,500 3,313,800 15,300,200 8,985,900
General and administrative 1,678,900 1,010,700 4,074,500 2,796,700
----------- ----------- ----------- -----------
Total Operating Expenses 9,402,800 5,507,700 23,546,500 15,095,600
----------- ----------- ----------- -----------
Operating Income 1,437,200 524,200 3,162,200 1,213,800
Other income (expense), net 683,900 264,900 1,370,100 171,400
----------- ----------- ----------- -----------
Income before income taxes 2,121,100 789,100 4,532,300 1,385,200
Provision for income taxes 250,000 - 564,700 16,600
----------- ----------- ----------- -----------
Net Income $ 1,871,100 $ 789,100 $ 3,967,600 $ 1,368,600
=========== =========== =========== ===========
Net income per share - Basic $ 0.17 $ 0.09 $ 0.38 $ 0.28
Net income per share - Diluted $ 0.15 $ 0.07 $ 0.33 $ 0.17
Weighted average number of common
and common equivalent shares
outstanding
- Basic 10,962,331 8,943,664 10,405,865 4,905,869
- Diluted 12,626,872 10,724,241 12,128,127 7,914,992
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
CONDENSED STATEMENTS OF CASH FLOWS
REPRESENTING INCREASES (DECREASES) IN CASH
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided (used) by operating activites $ 3,345,500 $ (982,400)
Cash flows from investing activities:
Purchase of furniture fixtures and equipment (1,312,600) (576,600)
Purchases of marketable securities (13,983,000) (2,746,300)
------------ -----------
Net cash (used) by investing activities (15,295,600) (3,322,900)
Cash flows from financing activities:
Net borrowing (repayments) under revolving line
of credit - (2,790,100)
Payments under capital leases (18,100) (29,500)
Proceeds from exercise of options 89,000
Proceeds from sale of preferred stock 993,400
Proceeds from issuance under ESPP 988,600 5,400
Net proceeds from public offering 26,149,600 24,321,100
------------ -----------
Net cash provided by financing activities 27,209,100 22,500,300
Effect of exchange rate changes on cash 37,500 (6,900)
Net change in cash 15,296,500 18,188,100
Cash at beginning of period 10,912,500 41,300
------------ -----------
Cash at end of period $ 26,209,000 $18,229,400
============ ===========
Supplemental information:
Cash paid for:
Interest 15,300 162,200
Income taxes 380,200 36,000
Non-cash investing activity --
Acquisition of equipment under capital leases $ - $ 30,000
============ ===========
</TABLE>
5
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial statements contained herein are unaudited, but, in
the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year.
Reference should be made to the Company's 1997 Annual Report on Form 10K,
which includes audited financial statements for the year ended December 31,
1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.
(2) NEWLY ADOPTED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130
"Reporting Comprehensive Income," was issued. SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of other comprehensive income (loss) be
reported. Other comprehensive income (loss) for the three months ended
September 30, 1998 and September 30, 1997 respectively, was ($136,800) and
($72,000) and for the nine months ended September 30, 1998 and September 30,
1997, was ($149,700) and ($130,400) respectively, and is comprised of the change
in the foreign currency translation.
In October 1997 and AICPA issued SOP 97-2, "Software Revenue Recognition",
which supersedes SOP 91-1. The Company adopted SOP 97-2 for software
transactions entered into beginning January 1, 1998. SOP 97-2 generally
requires revenue earned on software arrangements involving multiple elements,
such as additional software products, upgrades or enhancements, rights to
exchange or return software, postcontract customer support, or services,
including elements deliverable only on a when-and-if-available basis, to be
allocated to the various elements of such sale based on "vendor-specific
objective evidence of fair values" allocable to each such element.
The Company has reviewed and accounted for its license agreements under the
requirements of SOP 97-2 and noted adoption did not have a material effect on
its results of operations.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are not
significant to the financial statements of the Company.
(3) EARNINGS PER SHARE
In December 1997, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 replaced the
calculation of primary and fully diluted net income per share with basic and
diluted net income per share. Basic earnings per share is computed based upon
the weighted average number of common shares outstanding. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding increased for any dilutive effects of options, warrants, and
convertible securities. All net income per share data for prior years has been
restated to conform with the provisions of SFAS No. 128.
6
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 8,943,664 10,962,331 4,905,869 10,405,865
Common shares issued for conversion of
preferred stock - - 1,739,510 -
Dilutive effect of stock options and
Warrants 1,780,577 1,664,541 1,269,613 1,722,262
------------ -------------- -------------- -------------
Weighted average common and common
equivalent shares outstanding -
Diluted 10,724,241 12,626,872 7,914,992 12,128,127
============ ============== ============== =============
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to, (i)
the effects of rapid technological change and the need to make frequent product
transitions, (ii) the potential for software defects, (iii) the impact of
competitive products and pricing, (iv) less than anticipated growth in the
market for the SAP R/3 system and related services, (v) uncertainties in
attracting and retaining needed management, marketing, sales, professional
services and product development personnel, (vi) the Company's ability to manage
growth, (vii) the success of the Company's Mercator product line, (viii) the
Company's ability to develop additional distribution channels, and (ix) those
discussed in "Factors That May Affect Future Results" contained herein and in
the Company's other filings with the Securities and Exchange Commission,
including but not limited to those discussed under the heading "Risk Factors" in
the Company's Registration Statement on Form S-1 (File No. 333-52007). Should
one or more of these risks or uncertainties materialize, or should the
underlying estimates or assumptions prove incorrect, actual results or outcomes
may vary significantly from those anticipated, believed, estimated, expected,
intended or planned.
OVERVIEW
The Company was incorporated in Connecticut in 1985 and reincorporated in
Delaware in September 1993. In June 1991, the Company began developing its
Mercator product and in December 1993 released Version 1.0 of Mercator. The
Company released the latest version of Mercator, Release 1.41, in June 1998.
Historically, the Company has derived a majority of its revenues from
products other than Mercator, primarily its Trading Partner family of products
and its KEY/MASTER product. However, revenue related to Mercator has grown
significantly in each of the last three years and has increased as a percentage
of total revenues. The Company believes that future growth in revenues, if any,
will be mainly attributable to its Mercator product line. In view of the
relatively recent introduction of Mercator, the Company believes it cannot
accurately predict the amount of revenues that will be attributable to such
products or the life of such products. To the extent the Company's Mercator
products do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially and adversely affected.
7
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The Company's revenues are derived principally from two sources: (i)
license fees for the use of the Company's software products and (ii) service
fees for maintenance, consulting services and training related to the Company's
software products. The Company generally recognizes revenue from software
license fees upon shipment, unless the Company has significant post-delivery
obligations, in which case revenues are recognized when such obligations are
satisfied. The Company's KEY/MASTER product is licensed under term-use
contracts rather than for a one-time license fee, and the Company recognizes
revenue from such arrangements on a present-value basis at the inception of the
contract. Revenues from consulting and training are recognized as services are
performed, and maintenance revenues are recognized ratably over the maintenance
period, typically one year. The Company does not actively market new contracts
for KEY/MASTER but continues to receive KEY/MASTER related revenues, which are
principally maintenance revenues. As a result, KEY/MASTER accounts for a larger
proportion of maintenance revenues than license revenues and increases the
percentage of the Company's total revenues represented by services, maintenance
and other revenue. The Company intends to increase the scope of its service
offerings insofar as it supports sales of its products. The Company believes
that software licensing will continue to account for a larger portion of its
revenues in the future.
In addition, the Company markets its products and services outside North
America through sales offices located in the United Kingdom and France and
through indirect channels. Revenues from international customers were
approximately 10% and 11% for the quarter ended September 30, 1997 and 1998,
respectively, and approximately 8% and 12% for the nine months ended September
30, 1997 and 1998, respectively.
The size of the Company's orders can range from a few thousand dollars to over
$100,000 per order. The loss or delay of large individual orders, therefore,
can have a significant impact on the revenues and other quarterly results of the
Company. In addition, the Company has generally recognized a substantial
portion of its quarterly software licensing revenues in the last month of each
quarter, and as a result, revenue for any particular quarter may be difficult to
predict. Because the Company's operating expenses are relatively fixed, a delay
in the recognition of revenue from a limited number of license transactions
could cause significant variations in operating results from quarter to quarter
and could result in significant losses. To the extent such expenses precede, or
are not subsequently followed by, increased revenue, the Company's operating
results would be materially and adversely affected. As a result of these and
other factors, operating results for any quarter are subject to variation, and
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES:
Total Revenues. The Company's total revenues increased 73% from $7.0
million in the third quarter of 1997 to $12.1 million in the comparable period
of 1998.
Software Licensing. Software licensing revenues increased 102% from $3.9
million in the third quarter of 1997 to $8.0 million in the comparable period of
1998, primarily as a result of an increase in Mercator license revenues.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 36% from $3.0 million in the third quarter of 1997 to $4.2 million in
the comparable period of 1998, primarily as a result of higher professional
services associated with sales of Mercator and, to a lesser extent, an increase
in Mercator maintenance revenue, partially offset by a decrease in KEY/MASTER
maintenance revenues.
Cost of Revenues. Cost of software licensing revenues consists primarily
of media, manuals, distribution costs and the cost of third party software that
the Company resells. Cost of service, maintenance and other revenues consists
primarily of personnel-related costs in providing maintenance, technical
support, consulting and training to
8
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
customers. Gross margin on software licensing revenues is higher than gross
margin on service, maintenance and other revenues, reflecting the low materials,
packaging and other costs of software products compared with the relatively high
personnel costs associated with providing maintenance, technical support,
consulting and training services. Cost of service, maintenance and other
revenues also varies based upon the mix of maintenance, technical support,
consulting and training services.
Total Cost of Revenues. Total cost of revenues increased 33% from 968,000
in the third quarter of 1997 to 1.3 million in the comparable period of 1998.
Cost of Software Licensing. Cost of software licensing revenues increased
44% from $257,000 in the third quarter of 1997 to $371,000 in the comparable
period of 1998, primarily due to increased sales of software licenses and costs
for the write-off of approximately $200,000 of obsolete manuals and other
documentation. Software licensing gross margin was 93% and 95% in the third
quarter of 1997 and 1998, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 28% from $711,000 in the third quarter of 1997 to
$913,000 in the comparable period of 1998, primarily due to increased
professional services rendered, particularly Mercator-related services.
Service, maintenance and other gross margin was 77% and 78% for the third
quarter of 1997 and 1998, respectively.
OPERATING EXPENSES
Product Development. Product development expenses include expenses
associated with the development of new products and enhancements to existing
products and consist primarily of salaries, recruiting and other personnel-
related expenses, depreciation of development equipment, supplies, travel and
allocated facilities and communications costs. Product development costs
increased 28% from $1.2 million in the third quarter of 1997 to $1.5 million in
the third quarter of 1998 primarily, due to increased product development
activities related to the Mercator product line. Product development expenses
as a percentage of total revenue decreased from 17% in the third quarter of 1997
to 13% in the third quarter of 1998. The Company believes that a significant
level of research and development expenditures is required to remain
competitive. Accordingly, the Company anticipates that it will continue to
devote substantial resources to research and development. The Company expects
that the dollar amount of research and development expenses will increase
through at least the remainder of 1998. To date, all research and development
expenditures have been expensed as incurred.
Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature and allocated facilities and communications costs. Selling and
marketing costs increased 87% from $3.3 million in the third quarter of 1997 to
$6.2 million in the third quarter of 1998, primarily due to the increased number
of sales and marketing personnel and increased expenditures for Mercator related
marketing programs. Selling and marketing expenses as a percentage of total
revenues increased from 47% in the third quarter of 1997 to 51% in the third
quarter of 1998. The Company expects to continue hiring additional sales and
marketing personnel and to increase promotional expenses through at least the
remainder of 1998 to focus on the Mercator product line and anticipates that
sales and marketing expenses will increase in absolute dollar amount.
General and Administrative. General and administrative expenses consist
primarily of salaries, recruiting and other personnel-related expenses for the
Company's administrative, executive and finance personnel as well as outside
legal and audit costs. General and administrative expenses increased 66% from
$1.0 million in the third quarter of 1997 to $1.7 million in the third quarter
of 1998, primarily due to increased administrative costs to support the
Company's growth. General and administrative expenses as a percentage of total
revenues revenue constant at 14% for the third quarter of 1997 and the third
quarter of 1998, respectively. The Company believes that the dollar amount of
its general and administrative expenses will increase as the Company expands its
administrative staff to support the Company's growth.
9
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
OTHER INCOME/EXPENSE, NET
Net other income (expense) represents income earned on the Company's cash
balances, interest on term contracts and interest expense on the Company's line
of credit. Net interest income (expense) increased from $264,900 in the third
quarter of 1997 to $683,900 in the comparable period of 1998, due to higher cash
balances resulting from the Company's initial public offering and secondary
public offering. The Company had minimal borrowing expenses in the third
quarter of 1998 as compared to $22,000 for the third quarter of 1997.
INCOME TAXES
Income tax expense increased from $0 for the second quarter of 1997 to
$250,000 for the third quarter of 1998. Although the utilization of operating
loss carryforwards continues to reduce the required provision for income taxes,
the company is now incurring increased income tax expense. The expense for 1998
reflects the increased provision required for 1998 income.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES
Total Revenues. The Company's total revenues increased 63% from $18.7
million in the first three quarters of 1997 to $30.4 million in the comparable
period of 1998.
Software Licensing. Software licensing revenues increased 101% from $9.8
million in the first three quarters of 1997 to $19.8 million in the comparable
period of 1998, primarily as a result of an increase in Mercator license
revenues.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 21% from $8.8 million in the first three quarters of 1997 to $10.7
million in the comparable period of 1998, primarily as a result of increased
professional services rendered in conjunction with sales of Mercator and, to a
lesser extent, an increase in Mercator maintenance revenue, partially offset by
a decrease in KEY/MASTER maintenance revenues.
COST OF REVENUES
Cost of Software Licensing. Cost of software licensing revenues increased
97% from $0.6 million in the first three quarters of 1997 to $1.1 million in the
comparable period of 1998, primarily due to increased sales of software
licenses. Software licensing gross margin remained constant at 94% and 94% in
the first three quarters of 1997 and 1998, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 47% from $1.8 million in the first nine months of 1997
to $2.6 million in the comparable period of 1998, primarily due to increased
professional services rendered, particularly Mercator-related services.
Service, maintenance and other gross margin was 80% and 75% for the first nine
months of 1997 and 1998, respectively. The decrease in margin is primarily due
to the increase in initial hiring costs for new professional services personnel.
OPERATING EXPENSES
Product Development. Product development costs increased 26% from $3.3
million in the first nine months of 1997 to $4.2 million in the first nine
months of 1998 due to increased product development activities related to the
Mercator product line. Product development expenses as a percentage of total
revenue decreased from 18% in the first nine months of 1997 to 14% in the first
nine months of 1998.
10
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Selling and Marketing. Selling and marketing costs increased 70% from $9.0
million in the first nine months of 1997 to $15.3 million in the first nine
months of 1998, primarily due to the increased number of sales and marketing
personnel and increased expenditures for Mercator-related marketing programs.
Selling and marketing expenses as a percentage of total revenues rose from 48%
in the first nine months of 1997 to 50% in the first nine months of 1998.
General and Administrative. General and administrative expenses increased
46% from $2.8 million in the first nine months of 1997 to $4.1 million in the
first nine months of 1998, primarily due to increased administrative costs to
support the Company's growth. General and administrative expenses as a
percentage of total revenues decreased from 15% in the first nine months of 1997
to 13% in the first nine months of 1998.
OTHER INCOME/(EXPENSE), NET
Net other income (expense) represents income earned on the Company's cash
balances and term contract sales offset by interest expense on the Company's
line of credit. Net other income (expense) increased from $171,400 in the first
nine months of 1997 to $1,370,100 in the comparable period of 1998, due to the
reduction of debt in the third quarter of 1997 and higher cash balances
resulting from the Company's initial public offering and additional monies
received from its public offering in June, 1998. The Company had minimal
borrowing expenses in the nine months ended September 30, 1998 as compared to
$(175,300) for the nine months ended September 30, 1997.
INCOME TAXES
Income tax expense increased from $17,000 for the nine months ending
September 30, 1997 to $565,000 for the nine months ending September 30, 1998.
Although the utilization of operating loss carryforwards continues to reduce the
required provision for income taxes, the company is now incurring increased
income tax expense. The expense for 1998 reflects the increased provision
required for 1998 income.
LIQUIDITY AND CAPITAL RESOURCES
The Company funded its operations through its initial public offering,
private sales of equity securities, its bank line of credit and cash from
operations. In June 1998, the Company completed a secondary public offering of
3,511,000 shares of common stock of which 1,200,000 shares were issued by the
company with the remaining 2,311,000 shares sold by existing shareholders. This
offering raised approximated $26.1 million in net proceeds for the company. At
September 30, 1998, the Company had net working capital of $54.1 million, which
included cash and marketable securities of $50.7 million.
Operating activities provided (used) net cash of ($982,400) and $3,345,500
during the nine months ended September 30, 1997 and 1998, respectively. The
cash provided (used) in the nine months ended September 30, 1997 and September
30, 1998 was due to changes in accounts receivable.
Investing activities (used) net cash of ($3,332,900) during the nine months
ended September 30, 1997. Investing activities used cash of ($15.3) million
during the nine months ended September 30, 1998 due primarily to the purchase of
marketable securities during the year.
Financing activities provided net cash of $22.5 and $27.2 million for the
nine months ended September 30, 1997 and 1998, respectively, due to borrowings
under the Company's credit line and the Company's June secondary offering.
The Company has a line of credit facility with the Bank of New York which
provides for borrowings equal to the lesser of $4.0 million or 80% of the sum of
eligible accounts receivable and certain other receivables contracts.
Borrowings may take the form of prime rate loans (which bear interest at the
bank's prime rate plus
11
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1.0%) or LIBOR rate loans (which bear interest at the applicable LIBOR rate plus
3.0%). The Company's obligations under this credit line are secured by
substantially all of the Company's assets. The bank line of credit contains
certain financial covenants and also prohibits cash dividends, mergers and
acquisitions. The Company had no borrowings outstanding as of September 30, 1998
and does not anticipate any borrowings in the foreseeable future.
Net accounts receivable were $13.6 million at September 30, 1998 compared
to $5.8 million at September 30, 1997. The number of days of average revenues
in accounts receivables was 101 at September 30, 1998 compared to 75 at
September 30, 1997. This increase in days sales outstanding is the result of
increases in the amount of sales occurring at the end of the quarter ended
September 30, 1998 as compared with the quarter ended September 30, 1997, an
increase in sales of maintenance services which were recognized over the life of
the contract the extension of payment terms for certain customers, and the
timing of collections. There have been no significant changes in the percentage
of receivables outstanding over 90 days.
Capital expenditures have been, and future capital expenditures are
anticipated to be, primarily for facilities, equipment and computer software to
support expansion of the Company's operations. As of September 30, 1998, the
Company had no material commitments for capital expenditures.
The Company believes that its current cash and cash equivalent balances and
any net cash generated by operations will be sufficient to meet its anticipated
cash needs for working capital, capital expenditures and business expansion for
at least the next 12 months. Thereafter, if cash balances generated by
operations are insufficient to satisfy the Company's operating requirements, the
Company may seek additional debt or equity financing. There can be no assurance
that such financing will be available on terms acceptable to the Company. The
sale of additional equity or debt securities could result in dilution to the
Company's stockholders. A portion of the Company's cash could also be used to
acquire or invest in complementary businesses or products or otherwise to obtain
the right to use complementary technologies. From time to time, in the ordinary
course of business, the Company evaluates potential acquisitions of such
businesses, products or technologies.
YEAR 2000 COMPLIANCE
Many currently installed computer system and software products are unable
to distinguish 21st century dates from 20th century dates. Beginning in the Year
2000, these date code fields will need to distinguish 21st century dates. The
Company has completed an assessment of the "Year 2000" issue with respect to its
computer systems and products. The Company has replaced or upgraded its internal
systems within the past 2 years and believes they are Year 2000 compliant.
Although the Company believes that its internal systems and software
products are Year 2000 compliant, the success of the Company's Year 2000
compliance efforts may depend on the success of its customers in dealing with
their Year 2000 issues. The Company sells its products to companies in a
variety of industries, each of which is experiencing different Year 2000
compliance issues. Customer difficulties with Year 2000 issues might require
the Company to devote additional resources to resolve underlying problems.
Moreover, despite testing by the company if the Company's products are
discovered to suffer from or create Year 2000 problems at some or all of its
customers, the Company's business financial condition and results of operations
could be materially adversely affected.
The Company has tested each of its software products and has a plan to
communicate with its customers, the status of each release of its software which
has been tested for date sensitively, during early 1999. Furthermore, the
purchasing patterns of customers and potential customers may be affected by Year
2000 concerns. As companies expend significant financial and management
resources to become Year 2000 compliant, they may choose to refrain from changes
in their technology environment until after the year 2000. In addition, the
costs of becoming Year 2000 compliant may consume technology budgets and result
in decisions not to purchase and implement the Company's solutions.
12
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
To date, the Company has not incurred significant costs directly related to
Year 2000 issues, even in cases where non-compliant internal systems were
upgraded or replaced. The replacement cost of such non-compliant systems would
have been incurred regardless of the Year 2000 issue, to accommodate the
Company's internal growth.
The Company has developed a plan to perform detailed testing of all its
internal systems beginning in early 1999, and believes it has the resources
required to do such testing and any systems revisions if required, at that time.
Based on information currently available it does not believe the cost will be
material. The Company has obtained or relied upon published assurances from
vendors of the Company's internal systems of year 2000 compliance with respect
to its internal systems.
The Company believes that any future expenditures to upgrade internal
systems, applications and products will not have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, while the potential costs of redeploying personnel and of any delays
in implementing other projects is not known, the costs are anticipated to be
immaterial.
The Company has no current plans to perform an assessment of embedded
technology outside of its information technology systems, but the Company
beleives based on inquires made of the owners of its facilities that any failure
of embedded technology will not have a material effect on the Company's
business.
The Company does not presently have a contingency plan for handling Year
2000 problems that are not detected and corrected prior to their occurrence. The
Company is begining to develop a contingency plan. Any failure of the Company to
address any unforeseen Year 2000 issue could adversely affect the Company's
business, financial condition and results of operations. However, because the
Company has completed internal reviews of its computer systems and software
products and believes them to be Year 2000 compliant, the Company believes that
the year 2000 will not have a material adverse effect on the Company's business,
financial condition and results of operations.
CONVERSION TO A SINGLE EUROPEAN CURRENCY
The Company has sales in a number of foreign countries but at the present
time they are not significant and conversion to a single European currency would
not have a material impact on the Company's financial results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 130
"Reporting Comprehensive Income," was issued. SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported. Other
comprehensive income for the three months ended September 30, 1998 and the nine
months ended September 30, 1998 was ($136,800) and ($149,700) respectively and
is comprised of the change in the foreign currency translation.
In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information", was
issued. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and now requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company is required to
adopt this standard as of December 31, 1998.
In October 1997 the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which supersedes SOP 91-1. SOP 97-2 generally requires revenue earned on
software arrangements involving multiple elements, such as additional software
products, upgrades or enhancements, rights to exchange or return software, post
contract customer support, or services, including elements deliverable only on a
when-and-if-available basis, to be allocated to the various elements of such
sale based on "vendor-specific objective evidence of fair values" allocable to
each such element. The Company adopted SOP 97-2 for software transactions
entered into beginning January 1, 1998. Such adoption did not have a material
effect on the timing of the Company's revenue recognition and the Company
believes that it will not have a material impact on its results of operations
for the year ended December 31, 1998.
13
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risk of Fluctuations in Operating Results. The Company's quarterly and
annual operating results have varied significantly in the past and are expected
to do so in the future. Accordingly, the Company believes that period to period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. The Company's
revenues and results of operations are difficult to forecast and could be
adversely affected by many factors, including, among others: the size, timing
and terms of individual license transactions; the sales cycle for the Company's
products; demand for and market acceptance of the Company's products and related
services (particularly its Mercator products); the number of businesses
implementing the SAP R/3 system and other ERP applications as well as the number
of such businesses requiring third party enterprise application integration
software and related services; the Company's ability to expand, and market
acceptance of, its professional services business; the timing of expenditures by
the Company in anticipation of product releases or increased revenue; the timing
of product enhancements and product introductions by the Company and its
competitors; market acceptance of enhanced versions of the Company's existing
products and of new products; changes in pricing policies of the Company and its
competitors; variations in the mix of products and services sold by the Company;
the mix of channels through which products and services are sold; the success of
the Company in penetrating international markets; the buying patterns and
budgeting cycles of customers; personnel changes, the Company's ability to
attract and retain qualified sales, professional services and research and
development personnel and the rate at which such personnel become productive;
and general economic conditions.
Licensing of the Company's software products historically has accounted for
a substantial portion of the Company's revenues, and the Company anticipates
that this trend will continue for the foreseeable future. Software license
revenues are difficult to forecast for a number of reasons. The Company
typically does not have a material backlog of unfilled orders, and revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The length of the sales cycles for the Company's products can vary
significantly from customer to customer and from product to product and, in
certain instances, can be as long as nine months or more. Furthermore, the
terms and conditions of individual license transactions, including prices and
discounts, may be negotiated based on volumes and commitments, and may vary
considerably from customer to customer. In addition, the Company has generally
recognized a substantial portion of its quarterly software licensing revenues in
the last month of each quarter. Accordingly, the cancellation or deferral of
even a small number of purchases of the Company's products has in the past and
could in the future have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's future revenues will also be difficult to predict and the
Company has, in the past, failed to achieve its revenue expectations for certain
periods. The Company's expense levels are based, in part, on its expectation of
future revenues, and expense levels are, to a large extent, fixed in the short
term. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, operating results are likely to be materially and
adversely affected. Net income may be disproportionately affected by a reduction
in revenue because a large portion of the Company's expenses is related to
headcount that cannot be easily reduced without adversely affecting the
Company's business. In addition, the Company currently intends to increase its
operating expenses by expanding its research and product development staff,
particularly research and development personnel to be devoted to the Company's
Mercator product line, increasing its sales and marketing and professional
services operations, expanding distribution channels and hiring personnel in
other operating areas. The Company expects to experience a significant time lag
between the date professional services, sales and technical personnel are hired
and the date such personnel become fully productive. The timing of such
expansion and the rate at which new technical, professional services and sales
personnel become productive as well as the timing of the introduction and
success of new distribution channels could cause material fluctuations in
quarterly results of operations. Furthermore, to the extent such increased
operating expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
could be materially and adversely affected.
14
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Due to the foregoing factors, it is likely that in some future quarter the
Company's revenue or operating results will not meet the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.
Dependence on Mercator Product Line. A significant portion of the
Company's revenue has been attributable to licenses of its Mercator products and
related services, and the Company expects that these products and services will
represent a substantial portion of the Company's total revenue for the
foreseeable future. Accordingly, the Company's future operating results are
highly dependent on the market acceptance and growth of its Mercator product
line and enhancements thereto. There can be no assurance that market acceptance
of the Mercator product line will increase or remain at current levels or that
the Company will be able to successfully market the Mercator product line and
develop extensions and enhancements to this product line on a long-term basis.
In the event that the Company's current or future competitors release new
products that provide, or are perceived as providing, more advanced features,
greater functionality, better performance, better compatibility with other
systems or lower prices than the Mercator product line, demand for the Company's
products and services would likely decline. A decline in demand for, or market
acceptance of, the Mercator product line as a result of competition,
technological change or other factors would have a material adverse effect on
the Company's business, operating results and financial condition.
Dependence on SAP R/3 System Implementations. A substantial portion of the
Company's sales of its Mercator products and related services has been
attributable to sales of Mercator for R/3 and related services. The Company
believes that its future revenue growth, if any, will also depend in part upon
continued sales of Mercator for R/3 and related services. The Company has
devoted, and must continue to devote, substantial resources to identifying
potential customers in the R/3 market, building strategic relationships and
attracting and retaining skilled technical, sales and professional services
personnel with expertise in R/3 systems. Personnel with expertise in the R/3
system are in high demand and as such are typically difficult to hire and
retain. Regardless of the investments the Company makes in pursuing this new
market, there can be no assurance that the Company will be successful in
implementing a sales and marketing strategy appropriate for this market or in
attracting and retaining the necessary skilled personnel.
Demand for and market acceptance of Mercator for R/3 and related services
will be dependent on the continued market acceptance of the SAP R/3 system. As
a result, any factor adversely affecting demand for or use of SAP's R/3 system
could have a material adverse effect on the Company's business, operating
results and financial condition. Implementation of the SAP R/3 system is a
costly and time-consuming process and there can be no assurance that businesses
will choose to purchase such systems. Furthermore, there can be no assurance
that businesses which may implement such systems will wish to commit the
additional resources required to implement Mercator for R/3. In addition, SAP
could in the future introduce enterprise application integration solutions
competitive with Mercator for R/3 and related services. Moreover, any changes
in or new versions of SAP's R/3 system could materially and adversely affect the
Company's business, operating results and financial condition if the Company
were not able to successfully develop or implement any related changes to
Mercator for R/3 in a timely fashion. The Company will also be required to
maintain ALE, EDI and DMI certifications for Mercator for R/3. In order to
maintain such certifications, the Company's product must adhere to SAP's
technical specifications which are updated by SAP from time to time, and the
Company has no control over whether and when such specifications will be
changed. Any material change by SAP in such specifications could require the
Company to devote significant development resources to updating this product to
comply with such specifications. In such event, there can be no assurance that
the Company would be able to successfully modify Mercator for R/3 on a timely
basis, if at all, and any failure to do so could materially and adversely affect
the Company's business, operating results and financial condition.
Risks Associated with Technological Change, Product Enhancements and New
Product Development. The market for the Company's products and services is
characterized by extremely rapid technological change, frequent new product
introductions and enhancements, evolving industry standards, and rapidly
changing customer requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Accordingly, the life cycles of the
Company's
15
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
products are difficult to estimate. The Company's future success will depend in
part upon its ability to anticipate changes and enhance its current products and
develop and introduce new products that keep pace with technological
advancements and address the increasingly sophisticated needs of its customers.
The Company's products may be rendered obsolete if the Company fails to
anticipate or react to change.
The Company may, in the future, seek to develop and market enhancements to
existing products or new products which are targeted for applications, systems
or platforms which the Company believes will achieve commercial acceptance.
These efforts could require the Company to devote significant development and
sales and marketing personnel as well as other resources to such efforts which
would otherwise be available for other purposes. There can be no assurance that
the Company will be able to successfully identify such applications, systems or
platforms, or that such applications, systems or platforms will achieve
commercial acceptance or that the Company will realize a sufficient return on
its investment. Failure of these targeted applications, systems or platforms to
achieve commercial acceptance or the failure of the Company to achieve a
sufficient return on its investment could have a material adverse effect on the
Company's business, operating results and financial condition.
In addition, the introduction or announcement by the Company, or by one or
more of its current or future competitors of new technologies or features could
render the Company's existing products obsolete or unmarketable. There can be
no assurance that the introduction or announcement of enhanced or new product
offerings by the Company or its current or future competitors will not cause
customers to defer or cancel purchases of existing Company products. Such
deferment or cancellation of purchases could have a material adverse effect on
the Company's business, operating results and financial condition.
Dependence Upon Development of Distribution Channels. An integral part of
the Company's strategy is to expand both its direct sales force and its indirect
sales channels such as Value-Added Resellers ("VARs"), Independent Software
Vendors ("ISVs"), Systems Integrators ("SIs") and distributors. Although VARs,
ISVs, SIs and distributors have not accounted for a substantial percentage of
the Company's total revenues historically, the Company is increasing resources
dedicated to developing and expanding its indirect distribution channels. There
can be no assurance that the Company will be successful in expanding the number
of indirect distribution channels for its products. Furthermore, any new VARs,
ISVs, SIs or distributors may offer competing products, or have no minimum
purchase requirements of the Company's products. There can also be no assurance
that such third parties will provide adequate levels of services and technical
support. The inability of the Company to enter into additional indirect
distribution arrangements, the failure of such third parties to perform under
agreements with the Company and to penetrate their markets, or the inability of
the Company to retain and manage VARs, ISVs, SIs and distributors with the
technical and industry expertise required to market the Company's products
successfully could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company's planned efforts to expand its use of VARs, ISVs, SIs and distributors
will be successful. To the extent that the Company is successful in increasing
its sales through indirect sales channels, it expects that those sales will be
at lower per unit prices than sales through direct channels, and revenue to the
Company for each such sale will be less than if the Company had licensed the
same product to the customer directly.
Management of Growth. The Company's business has grown in recent periods,
with total revenues increasing from $19.0 million in 1996 to $26.7 million in
1997 and increasing from $18.7 million for the first nine months of 1997 to
$30.4 million for the comparable period of 1998. The growth of the Company's
business has placed, and is expected to continue to place, a strain on the
Company's administrative, financial, sales and operational resources and
increased demands on its systems and controls. In particular, the Company noted
an increase in quarterly days sales outstanding from September 30, 1997 to
September 30, 1998 from approximately 75 days to approximately 100 days, and an
increase in total accounts receivable from $5.8 million to $13.6 million. This
increase in day sales outstanding is the result of an increase in the amount of
sales occurring at the end of the quarter ended September 30, 1998 as compared
to the quarter ended September 30, 1997, an extension of payment terms for
certain customers, and the timing of collections. To deal with these concerns,
the Company has implemented, or is in the process of implementing, and will be
required to implement in the future a variety of new and upgraded operational
and financial systems, procedures and controls. The failure of the Company or
its
16
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
management to respond to, and manage, its growth and changing business
conditions, or to adapt its operational, management and financial control
systems to accommodate its growth could have a material adverse effect on the
Company's business, operating results and financial condition.
Competition. The market for the Company's products and services is extremely
competitive and subject to rapid change. Because there are relatively low
barriers to entry in the software market, the Company expects additional
competition from other established and emerging companies. The Company believes
that the competitive factors affecting the market for the Company's products and
services include product functionality and features; quality of professional
services offerings; product quality, performance and price; ease of product
implementation; quality of customer support services; customer training and
documentation; and vendor and product reputation. The relative effect each of
these factors depends upon the specific customer environment.
In the business application integration market, the Company's Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific business application
integration needs. As a result, the Company must educate prospective customers
as to the advantages of the Company's products and services as opposed to
internally developed solutions and there can be no assurance that the Company
will be able to adequately educate potential customers to the benefits provided
by the Company's products and services. In the EDI market, the Company's
Trading Partner products compete with products offered by companies offering
proprietary Value-Added Network ("VAN") services as part of their EDI solution
and the Company's PC-based Trading Partner products also compete with PC-based
products offered by a number of other EDI software vendors. There can be no
assurance that the Company can maintain its competitive position against current
and potential competitors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Through September, 1998 the net offering proceeds to the Company from
its initial public offering in July 1997 have been utilized as follows:
<TABLE>
Direct or indirect payments to
directors, officers, general
partners of the Company or
their associates; to persons
owning ten percent or more of Direct or
any class or equity securities indirect
of the Company; and to payments to
affiliaties of the Company others
---------------------------------- ---------------------------------
<S> <C> <C>
Construction of plant, building and facilities -- 0
Purchase and installation of machinery and
equipment -- $ 1,689,551
Purchase of real estate -- 0
Acquisition of other business(es) -- 0
Repayment of indebtedness
Debt -- 2,790,100
Capital Leases 56,100
Working capital -- 0
Temporary investment-- -- 18,425,004
Purchase of marketable securities and cash
equivalents
Other purposes (specify) -
TOTAL NET PROCEEDS $22,960,755
===========
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Public Offering. On June 5, 1998, the Company filed a Registration
Statement with the Securities and Exchange Commission for a public offering of
3,511,000 shares of its Common Stock. Of the 3,511,000 shares being offered,
1,200,000 were offered by the Company and 2,311,000 were offered by selling
stockholders. Selling Stockholder shares included 382,281 shares subject to
warrant which were sold to the underwriters who then exercised the warrant and
resold the shares of Common Stock.
18
<PAGE>
On July 5, 1998 the underwriters exercised their 30-day option to purchase an
additional 526,650 shares of the Company's stock of which were purchased from
the Company and 300,000 of which were purchased from certain selling
stockholders.
The offering was managed by BancAmerica Robertson Stephens, Bear, Stearns & Co.
Inc., Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, and Sound
View Financial Group, Inc.
The Company intends to use the approximately $26.5 million of net proceeds of
this offering primarily for working capital and general corporate purposes. The
Company did not receive any proceeds from the sale of the shares by the selling
stockholders, but did receive an additional $764,562 upon the exercise of the
warrant by the Underwriters.
Stockholder Rights Plan. On September 2, 1998, the Company adopted a
stockholder rights plan designed to protect the long-term value of the company
for its stockholders during any future unsolicited acquisition attempt. In
connection with the plan, the Board declared a dividend of one preferred share
purchase right for each share of the Company's common stock outstanding on
September 7, 1998. Each right will entitle the folder to purchase 1/100th of a
share of a newly designated Series A Junior Participating Preferred Stock at an
exercise price of $140.00. The preferred stock has been structured so that the
value of 1/100th of a share of such preferred stock will approximate the value
of one share of common stock.
Initially, the rights are neither exercisable nor traded separately
from the common stock. If a person or a group (an "Acquiring Person") acquires
15 percent or more of the Company's common stock, or announces an intention to
make a tender offer the Company's common stock the consummation of which would
result in a person or group becoming an Acquiring Person, the rights will become
exercisable and thereafter trade separately from the common stock. Any person
who was a holder of 5% or more of the Company's common stock as of August 27,
1998 will not be deemed to be an Acquiring person unless such person or group
acquires 20 percent or more of the Company's common stock.
Upon a person becoming an Acquiring Person, the holder of rights (other than the
Acquiring Person) will have the right to acquire shares of the Company at a
substantially discounted price. Additionally, if a person becomes an Acquiring
Person and the Company is acquired in a merger or other business combination, or
50 percent or more of its assets are sold in a transaction with an Acquiring
Person, the holders of rights (other than the Acquiring Person) will have the
right to receive shares of common stock of the acquiring corporation at a
substantially discounted price.
After a person has become an Acquiring Person, the Company's Board of
Directors may exchange the outstanding rights (other than those held by the
Acquiring Person) for common stock of the Company at an exchange ratio of one
share of common stock per right.
The Board may redeem outstanding rights at any time prior to a person
becoming an Acquiring Person at a price of $0.001 per right. Prior to such
time, the terms of the rights may be amended by the Board. The rights will
expire on September 2, 2008.
Appointment to Board of Directors. On August 27, 1998 the Company
elected James P. Schadt, Chairman, Dailey & Partners and retired chairman and
CEO, Readers Digest Association, Inc. to its Board of Directors. The board
expansion is an integral part of TSI's strategy to bring key outside talent into
the company to support its plans for growth.
Acquisition of SCP
On November 16, 1998, the company announced its agreement to acquire
Software Consulting Partners (SCP), a certified Accelerated SAP (ASAP)
Implementation Partner focused on implementation and integration services for
SAP R/3 solutions. TSI will acquire substantially all assets and liabilities of
SCP by issuing TSI common stock for all issued and outstanding stock of SCP. The
transaction will be accounted for as a purchase.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this Quarterly Report on Form 10-
Q-11.1
. Computation of Earnings Per share
. Financial Data Schedule
(b) Reports on Form 8-K.
A report on form 8K was filed on September 4, 1998 relating to the adoption
of the shareholders rights plan.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TSI INTERNATIONAL SOFTWARE LTD.
Date: September XX, 1998
----------------------------------------------------
Constance F. Galley
President and Chief Executive Officer
(Principal Executive Officer)
Date: September XX, 1998
----------------------------------------------------
Ira A. Gerard
Vice President, Finance and Administration
Chief Financial Officer and Secretary
(Principal Financial Officer)
20
<PAGE>
EXHIBIT 11.1
TSI INTERNATIONAL SOFTWARE LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 8,943,664 10,962,331 4,905,869 10,405,865
Common shares issued for conversion of
preferred stock 0 0 1,739,510 0
Dilutive effect of stock options and Warrants 1,780,577 1,664,541 1,269,613 1,722,262
----------- ----------- ---------- -----------
Weighted average common and common
equivalent shares outstanding - Diluted 10,724,241 12,626,872 7,914,992 12,128,127
=========== =========== ========== ===========
Net Income $ 789,100 $ 1,871,000 $1,368,600 $ 3,967,600
Per Share Amount - Basic $ 0.09 $ 0.17 $ 0.28 $ 0.38
- Diluted $ 0.07 $ 0.15 $ 0.17 $ 0.33
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 26,209,000
<SECURITIES> 24,474,000
<RECEIVABLES> 13,560,600
<ALLOWANCES> 1,183,300
<INVENTORY> 65,829,900
<CURRENT-ASSETS> 5,941,400
<PP&E> 5,474,503
<DEPRECIATION> 3,650,800
<TOTAL-ASSETS> 68,581,700
<CURRENT-LIABILITIES> 11,727,500
<BONDS> 0
0
0
<COMMON> 110,200
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 68,581,700
<SALES> 30,444,400
<TOTAL-REVENUES> 30,444,400
<CGS> 3,735,700
<TOTAL-COSTS> 27,282,200
<OTHER-EXPENSES> 1,370,100
<LOSS-PROVISION> 712,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,532,300
<INCOME-TAX> 564,700
<INCOME-CONTINUING> 3,967,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,967,600
<EPS-PRIMARY> .38
<EPS-DILUTED> .33
</TABLE>
