<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 March 31, 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 of (I.R.S. Employer Identification
incorporation or organization)
No.)
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 March 31, 1997, Registrant had outstanding 9,098,202 shares of Common
Stock, $.01 par value.
================================================================================
1
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
TABLE OF CONTENTS
PAGE
----
PART 1 FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 - Financial Statements
Balance Sheets as of and March 31, 1998 and
December 31, 1997..................................... 3
Statements of Income for the Three Months ended
March 31, 1998 and 1997............................... 4
Condensed Statements of Cash Flows for the Three Months
Ended March 31, 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
2
<PAGE>
TSI INTERNATIONAL SOFTWARE LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------- --------------------
ASSETS 1998 1997
------ ---------------- --------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 14,205,900 $ 10,912,500
Marketable Securities 8,213,000 10,490,500
Accounts receivable, less allowances of
$584,200 and $471,300 8,996,200 7,864,100
Current portion of investment in licensing
contracts receivable, net of unearned finance
income of $81,200 and $84,200 701,200 678,100
Prepaid expenses and other current assets 805,200 745,000
----------- -----------
Total current assets 32,921,500 30,690,200
Furniture, fixtures and equipment, net 1,870,400 1,587,300
Investment in licensing contracts receivable, net of
unearned finance income of $60,500, and
$60,000, less current portion 220,800 421,800
Other assets 243,700 242,400
$35,256,400 $32,941,700
LIABILITIES AND STOCKHOLDERS'
-----------------------------
Current liabilities:
Accounts payable $ 756,900 $ 600,200
Accrued expenses (note 3) 1,661,400 2,207,900
Current portion of deferred
revenue 5,720,900 4,511,000
----------- ----------
Total current liabilities 8,139,200 7,319,100
Other long-term liabilities 23,300 17,800
Deferred revenue, less current portion 181,100 188,400
----------- ----------
Total liabilities 8,343,600 7,525,300
---------------- --------------------
Stockholders' equity (notes 4 and 5):
Common stock (3,888,166 shares authorized,
par value $.01) 91,000 90,600
Additional paid-in capital 33,662,200 33,134,200
Accumulated deficit (6,685,800) (7,557,000)
Cumulative foreign currency translation
adjustment (154,600) (199,300)
Treasury stock, at cost - (52,100)
---------------- --------------------
Total stockholders' equity 26,912,800 25,416,400
================ ====================
Total liabilities and stockholders' equity $35,256,400 $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
MARCH 31,
---------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Software licensing $ 5,203,300 $2,731,100
Service, maintenance and other 2,984,000 2,776,800
----------- ----------
Total revenues $ 8,187,300 $5,507,900
----------- ----------
Cost of revenues:
Software licensing $ 239,200 $ 173,500
Service, maintenance and other 755,100 548,200
----------- ----------
Total cost of revenues: $ 994,300 $ 721,700
----------- ----------
Gross profit $ 7,193,000 $4,786,200
Operating expenses:
Product development 1,223,800 1,073,400
Selling and marketing 4,088,100 2,583,700
General and administrative 1,228,100 777,200
----------- ----------
Total operating expenses 6,540,000 4,434,300
----------- ----------
Operating income 653,000 351,900
Interest income/and borrowing expenses, Net 323,200 (32,600)
Income before income taxes 976,200 319,300
Provision for income taxes 105,000 6,600
----------- ----------
Net income $ 871,200 $ 312,700
=========== ==========
Net income per share-Basic $0.10 $0.11
=========== ==========
Net income per share-Diluted $0.08 $0.05
=========== ==========
Weighted average number of common
and common equivalent shares
outstanding-Basic 9,044,404 2,886,822
-Diluted 10,827,636 6,368,545
=========== ==========
</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>
THREE MONTHS
ENDED MARCH 31,
1998 1997
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided (used) by operating activities $889,700 $(546,400)
Cash used by investing activities:
Purchase of furniture fixtures and equipment (453,500) (197,800)
Sale of Marketable Securities 2,277,500 -
----------- --------
Net cash provided (used) by investigating activities 1,824,000 (197,800)
Cash flows from financing activities:
Net borrowings (repayments) under revolving line
of credit - 800,000
Payments under capital leases (10,500) (13,000)
Proceeds from exercise of options 24,200 -
Proceeds from issuance under ESPP 540,000 -
----------- --------
Net cash (used) provided by financing activities 553,200 787,000
Effect of exchange rate changes on cash 26,000 (4,700)
Net change in cash 3,293,400 38,100
Cash at beginning of period 10,912,500 41,300
----------- ---------
Cash at end of period $14,205,900 $ 79,400
----------- ---------
Supplemental information:
Cash paid for:
Interest $ 4,900 $ 65,400
Income taxes 130,000 20,000
Non-cash investing activity --
Acquisition of equipment under capital leases - 30,000
=============== ================
</TABLE>
See accompanying notes to financial statements.
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 1998 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 comprehensive income be reported. Other
comprehensive income for the three months ended March 31, 1997 and March 31,
1998 respectively, was $(79,800) and $44,700 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
March 31,
---------
1997 1998
---- ----
<S> <C> <C>
Weighted average common shares
and outstanding (basic shares) 2,886,822 9,044,404
Common shares issued for conversion
of preferred stock. 2,609,415 --
Dilutive effect of stock options and
warrants 872,308 1,783,232
--------- ----------
Total diluted shares 6,368,545 10,827,636
========= ==========
</TABLE>
7
<PAGE>
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. 333-27293). 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 1.4, in August 1997 and
released its Mercator for R/3 product in June 1996.
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.
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.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Revenues:
Total Revenues. The Company's total revenues increased 49% from $5.5
million in the second quarter of 1997 to $8.2 million in the comparable period
of 1998.
8
<PAGE>
Software Licensing. Software licensing revenues increased 91% from $2.7
million in the first quarter of 1997 to $5.2 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 7% from $2.8 million in the first quarter of 1997 to $3.0 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 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.
Cost of Software Licensing. Cost of software licensing revenues increased
37% from $174,000 in the first quarter of 1997 to $239,000 in the comparable
period of 1998, primarily due to increased sales of software licenses. Software
licensing gross margin remained relatively constant at 94% and 95% in the first
quarter of 1997 and 1998, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 38% from $548,000 in the first quarter of 1997 to
$755,000 in the comparable period of 1998, primarily due to increased
professional services rendered, particularly Mercator-related services. Service,
maintenance and other gross margin were80% and 75% for the first 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 14% from $1.1 million in the first quarter of 1997 to $1.2 million in
the first quarter 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 20% in the first quarter of 1997 to
15% in the first 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 58% from $2.6 million in the first quarter of 1997 to
$4.1 million in the first 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 rose from 47% in the first quarter of 1997 to 50% in the first
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 58% from
$777,000 in the first quarter of 1997 to $1.2 million in the first 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
increased from 14% in the first quarter of 1997 to 15% in the first quarter of
1998. 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>
Other Income (Expense), Net
Other income represents income earned on the Company's cash balances as
well as on its term-use contracts. Other income (expense) increased from
$(32,000) in the first three months of 1997 to $323,000 in the comparable period
of 1998, due to higher cash balances resulting from the Company's initial public
offering. The Company had minimal borrowing expenses in the three months ended
March 31, 1998 as compared to $63,000 for the three months ended March 31, 1997.
Due to the utilization of net operating loss carryforwards, the provisions for
income taxes for the quarters ended June 30, 1996 and 1997 were not significant.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company sold 3,000,000 shares of its Common Stock in its
initial public offering. The total net proceeds to the Company from the initial
public offering were $24.3 million, $3.4 million of which were used to repay
indebtedness under the Company's bank line of credit. Prior to its initial
public offering, the Company funded its operations through private sales of
equity securities, its bank line of credit and cash from operations. At March
31, 1998, the Company had net working capital of $24.8 million, which included
cash and marketable securities of $22.4 million.
Operating activities provided net cash of $842,000 and $890,000 during the
three months ended March 31, 1997 and 1998, respectively. The cash used in the
three months ended March 31, 1997 and March 31, 1998 was due to increased
accounts receivable.
Investing activities (used) net cash of $(197,800) during the three months
ended March 31, 1997. Investing activities provided cash of $1.8 million during
the three months ended March 31, 1998 due primarily to the sale of marketable
securities during the quarter.
Financing activities provided net cash of $787,000 and $554,000, for the
three months ended March 31, 1997 and 1998, respectively, from repayment of debt
and sale of stock to employees.
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 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 March 31, 1998
and does not anticipate any borrowings in the foreseeable future.
Net accounts receivable were $9.0 million at March 31, 1998 compared to
$5.3 million at March 31, 1997. The number of days of average revenues in
accounts receivables was 99 at March 31, 1998 compared to 87 at March 31, 1997.
This increase in quarterly days sales outstanding is the result of an increase
in the amount of sales occurring at the end of the quarter ended March 31, 1998
as compared with the quarter ended March 31, 1997 and an extension of payment
terms for certain customers. 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 March
31, 1998, the Company had no material commitments for capital expenditures. The
Company's bank line of credit generally limits capital expenditures to $400,000
per quarter.
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 generated by operations is
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. The Company has no present understandings, commitments
or agreements with respect to any material acquisitions of other businesses,
products or technologies.
YEAR 2000 COMPLIANCE
Many currently installed computer systems 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 from
20th century dates. The Company has completed an assessment of the "Year 2000"
issue with respect to its computer systems. The Company has replaced or upgraded
its internal systems within the past 16 months and the Company believes they are
Year 2000 compliant. The Company is also in the process of communicating with
its suppliers and customers to determine the extent to which it may be affected
by any third party's Year 2000 issues. The Company also believes that all of its
products are Year 2000 compliant. Therefore, the Company believes that the Year
2000 will not have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- Year 2000
Issues."
RECENT ACCOUNTING PRONOUNCEMENTS
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 requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders which is
currently not required. 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 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 March 31, 1998 was $44,700 and is comprised of the change
in the foreign currency translation.
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,
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 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.
10
<PAGE>
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. In particular, the ability of the Company to
achieve growth in the future will depend on its success in adding a substantial
number of sales, professional services and research and development personnel.
Competition for such personnel is intense and there can be no assurance the
Company will be able to attract and retain these personnel.
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
11
<PAGE>
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. The Company introduced its Mercator
products in 1993. In recent years, 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 represent an increasing portion of the
Company's total revenue for the foreseeable future. The development and
marketing of its Mercator product line has required the Company to, among other
things, focus its attention and resources away from some of its traditional
products, market its products to a different customer base and shift a large
portion of its development efforts to the Mercator product line. 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 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 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
12
<PAGE>
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. Development of enhancements to existing
products and new products depends, in part, on the timing of releases of new
versions of applications systems by vendors, the introduction of new
applications, systems or computing platforms, the timing of changes in
platforms, the release of new standards or changes to existing standards, and
changing customer requirements, among other factors. There can be no assurance
that the Company will be successful in developing and marketing product
enhancements or new products that respond to technological change, evolving
industry standards and changing customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products or product enhancements, or that
its product enhancements or new products will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance. The
Company has in the past experienced delays in the introduction of product
enhancements and new products and may experience such delays in the future.
Furthermore, as the number of applications, systems and platforms supported by
the Company's products increases, the Company could experience difficulties in
developing on a timely basis product enhancements which address the increased
number of new versions of applications, systems or platforms served by its
existing products. Failure of the Company, for technological or other reasons,
to develope and introduce product enhancements or new products in a timely and
cost-effective manner or to anticipate and respond adequately to changing market
conditions, as well as any significant delay in product development or
introduction, could cause customers to delay or decide against purchases of the
Company's products, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company may, in the future, seek to develope 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 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. The Company has
recently expanded and intends to continue to expand its direct sales force. The
Company's future success will depend in part upon the ability of the Company to
attract, integrate, train, motivate and retain new sales personnel. There can be
no assurance that the Company's efforts to expand its direct sales force to date
or in the future will be successful or that the cost of such efforts will not
exceed the revenue generated. In addition, the Company expects to experience a
significant time lag between the date sales personnel are hired and the date
such personnel become fully productive. The Company's inability to manage its
sales force expansion effectively could have a material adverse effect on the
Company's business, operating results and financial condition. 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.
13
<PAGE>
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to end-
users and indirectly through VARs, ISVs, SIs and distributors may result in
distribution channel conflicts. The Company's direct sales efforts may compete
with those of its indirect channels and, to the extent different resellers
target the same customers, resellers may also come into conflict with each
other. Although the Company has attempted to manage its distribution channels to
avoid potential conflicts, there can be no assurance that channel conflicts will
not materially and adversely affect its relationships with existing VARs, ISVs,
SIs or distributors or adversely affect its ability to attract new VARs, ISVs,
SIs and distributors.
The Company markets its products and services outside of North America through
a sales office located in the United Kingdom and through indirect channels.
Revenues from international customers were approximately 7% and 9% of the
Company's total revenues for the quarter ended March 31, 1998 and year ended
December 31, 1997, respectively.
Dependence on Key Personnel; Need to Attract and Retain Sales, Professional
Services and Technical Personnel. The Company's future success depends in large
part on the continued service of its key sales, professional services and
research and development personnel, as well as senior management. The loss of
the services of any of one or more of the Company's key employees could have a
material adverse effect on the Company's business, operating results and
financial condition. All employees are employed at-will and the Company has no
fixed-term employment agreements with its employees. The Company's future
success also depends on its ability to attract, train and retain highly
qualified sales, research and development, professional services and managerial
personnel, particularly sales, professional services and research and
development personnel with expertise in the SAP R/3 system. An increase in the
Company's sales staff is required to expand both the Company's direct and
indirect sales activities and to achieve revenue growth. Competition for such
personnel is intense, particularly for personnel with expertise in the SAP R/3
system, and there can be no assurance that the Company can attract, assimilate
or retain such personnel. The Company has at times experienced and continues to
experience difficulty in recruiting qualified research and development and sales
personnel, and anticipates such difficulties in the future. The Company has in
the past experienced and in the future expects to continue to experience a
significant time lag between the date research and development professional
services and sales personnel are hired and the date such personnel become fully
productive. If the Company is unable to hire and train on a timely basis and
subsequently retain such personnel in the future, the Company's business,
operating results and financial condition could be materially and adversely
affected.
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 $5.5 million for the first quarter of 1997 to $8.2 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 March 31, 1997 to March 31, 1998 from
approximately 87 days to approximately 99 days, and an increase in total
accounts receivable from $5.3 million to $9.0 million. This increase in
quarterly day sales outstanding is the result of an increase in the amount of
sales occurring at the end of the quarter ended March 31, 1998, as compared to
the quarter ended March 31, 1997 and an extension of payment terms for certain
customers.
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 and to
hire additional administrative personnel. There can be no assurance that the
Company will be able to complete the implementation of these systems, procedures
and controls or hire such personnel in a timely manner. The failure of the
Company or its 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. To promote
growth in the Company's sales and operations, the Company will also have to
expand its sales and marketing organizations, expand and develope its
distribution channels, fund increasing levels of product development and
increase the size of its training, professional services and customer support
organization to accommodate expanded operations, and there can be no assurance
that the Company will be successful in these endeavors.
14
<PAGE>
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 each of these
factors depends upon the specific customer environment. Although the Company
believes that its products and services currently compete favorably with respect
to such factors, there can be no assurance that the Company can maintain its
competitive position against current and potential competitors.
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.
Many of the Company's current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than the
Company. The Company's present or future competitors may be able to develop
products comparable or superior to those offered by the Company, adapt more
quickly than the Company to new technologies, evolving industry trends or
customer requirements, or devote greater resources to the development, promotion
and sale of their products than the Company. Accordingly, there can be no
assurance that the Company will be able to compete effectively in its markets,
that competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results and
financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Through March 31, 1997 the net offering proceeds to the Company have been
utilized as follows:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the Company or
their associates; to persons
owning ten percent or more of
any class of equity securities Direct or
of the Company; and to indirect payments
USE affiliates of the Company to others
- ------------------------------- ------------------------------------ -------------------------
<S> <C> <C>
Construction of plant, -- 0
building and facilities
Purchase and installation -- $ 961,845
of machinery and equipment
Purchase of real estate -- 0
Acquisition of other -- 0
business(es)
Repayment of indebtedness -- 2,790,100
- --Debt/ 33,600
Capital Leases
Working capital -- 0
Temporary investment-- -- 20,486,755
Purchase Marketable
Securities and Cash Equivalents
Other purposes (specify) -- --
TOTAL NET PROCEEDS $24,272,300
===========
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
On May 7, 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 will be offered by the
Company and 2,311,000 will be offered by Selling Stockholders. Selling
Stockholder shares include 382,281 shares subject to warrant which will be sold
to the Underwriters who will then exercise the warrant and resell the shares of
Common Stock. The Company, Warburg, Pincus Capital Company, L.P. and Vanguard
Atlantic Ltd. have granted the Underwriters an option to purchase an additional
526,650 shares of Common Stock to cover over-allotments, if any.
The offering will be 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 net proceeds of this offering primarily for
working capital and general corporate purposes. The Company will not receive any
proceeds from the sale of the shares by the Selling Stockholders, but will
receive an additional $764,562 upon exercise of the warrant by the Underwriters.
A copy of a Preliminary Prospectus may be obtained from BancAmerica Robertson
Stephens, 555 California Street, Suite 2000, San Francisco, CA 94104,
(415)676-2526, Bear, Stearns & Co. Inc., 245 Park Avenue, New York, NY 10167,
(212)272-4850, Dain Rauscher Wessels, a division of Dain Rauscher Incorporated,
Dain Rauscher Plaza, 60 South 6th Street, Minneapolis, MN 55402, (612)313-1200,
or SoundView Financial Group Inc., 22 Gatehouse Road, Stamford, CT 06092,
(203)462-7200.
A Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the Registration Statement becomes effective. This press release shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sales of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
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
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three-
month period ended March 31, 1998.
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: May XX, 1998 __________________________________________
Constance F. Galley
President and Chief Executive Officer
(Principal Executive Officer)
Date: May XX, 1998 __________________________________________
Ira A. Gerard
Vice President, Finance and Administration
Chief Financial Officer and Secretary
(Principal Financial Officer)
16
<PAGE>
EXHIBIT 11.1
TSI INTERNATIONAL SOFTWARE LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Weighted average common shares
Outstanding-Basic 2,886,822 9,044,404
Common shares issued for conversion
Of preferred stock 2,609,415 0
Dilutive effect of stock options and
Warrants 872,308 1,783,232
------- ---------
Weighted average common and common
equivalent shares outstanding-Diluted 6,368,545 10,827,636
Net Income $870,800 $313,000
Per Share Amount-Basic $ 0.10 $ 0.11
-Diluted $ 0.08 $ 0.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,205,900
<SECURITIES> 8,213,000
<RECEIVABLES> 8,996,200
<ALLOWANCES> 584,200
<INVENTORY> 0
<CURRENT-ASSETS> 39,921,500
<PP&E> 5,081,100
<DEPRECIATION> 3,210,700
<TOTAL-ASSETS> 35,256,400
<CURRENT-LIABILITIES> 8,139,200
<BONDS> 0
0
0
<COMMON> 91,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35,256,400
<SALES> 8,187,300
<TOTAL-REVENUES> 8,187,300
<CGS> 994,300
<TOTAL-COSTS> 7,534,300
<OTHER-EXPENSES> 323,200
<LOSS-PROVISION> 33,100
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 976,200
<INCOME-TAX> 105,000
<INCOME-CONTINUING> 871,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 871,200
<EPS-PRIMARY> .10
<EPS-DILUTED> .08
</TABLE>
