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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, 1999.
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 ____
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As of March 31, 1999, Registrant had outstanding 25,202,696 shares of Common
Stock, $.01 par value.
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TSI INTERNATIONAL SOFTWARE LTD.
TABLE OF CONTENTS
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PAGE
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PART 1 FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 3 - 4
Consolidated Statements of Operations for the Three Months Ended
March 31, 1999 and 1998 (unaudited) 5 - 6
Consolidated Condensed Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 (unaudited) 7
Notes to Consolidated Financial Statements 8 - 10
ITEM 2 - Managements' Discussion and Analysis of Financial Condition
and Results of Operations 10 - 22
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 22
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF
SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
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TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
1999 1998
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ASSETS (Unaudited)
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Current Assets:
Cash and cash equivalents 7,373,900 15,132,700
Marketable securities 12,620,400 32,812,100
Accounts receivable, less allowances of $1,760,700 and 20,849,400 17,965,500
$1,897,900
Current portion of investment in licensing contracts
receivable, net of unearned finance income of $62,200
and $68,100 416,700 522,000
Deferred Tax Assets 2,695,100 2,695,100
Prepaid expenses and other current assets 1,500,900 729,400
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Total Current Assets 45,456,400 69,856,800
Furniture, fixtures and equipment, net 5,146,000 2,699,400
Investment in licensing contracts receivable, net of
unearned finance income of $47,200 and $51,100, less
current portion 215,100 271,300
Intangible assets, net 113,451,700 5,155,400
Other assets 211,700 204,400
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Total Assets $164,480,900 $78,187,300
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 3,221,600 $ 1,546,700
Accrued expenses 9,450,300 6,479,900
Current portion of deferred revenue 12,521,600 8,088,000
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Total Current Liabilities 25,193,500 16,114,600
Other long-term liabilities 16,300 17,500
Deferred revenue, less current portion 116,900 156,400
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Total Liabilities 25,326,700 16,288,500
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Stockholders' equity:
Common stock (70,000,000 shares authorized, par value $.01;
25,202,696 and 22,283,138 shares issued and outstanding,
respectively) 252,000 222,800
Additional paid-in capital 141,198,400 63,845,000
Accumulated deficit (619,900) (400,200)
Cumulative foreign currency translation adjustment (384,000) (338,300)
Deferred compensation (1,292,300) (1,430,500)
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Total Stockholders' Equity 139,154,200 61,898,800
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Total Liabilities and Stockholders' Equity $164,480,900 $78,187,300
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</TABLE>
See accompanying notes to financial statements.
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TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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Three Months Ended
March 31,
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1999 1998
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Revenues:
Software licensing $ 9,799,400 $5,203,300
Service, maintenance and other 7,436,600 2,984,000
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Total Revenue 17,236,000 8,187,300
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Cost of revenues:
Software licensing 436,100 239,200
Service, maintenance and other 4,231,100 755,100
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Total Cost of Revenue 4,667,200 994,300
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Gross Profit 12,568,800 7,193,000
Operating expenses:
Product development 2,210,300 1,223,800
Selling and marketing 6,633,000 4,088,100
General and administrative 2,062,400 1,228,100
Amortization of intangibles 2,324,000 -
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Total Operating Expenses 13,229,700 6,540,000
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Operating Income (Loss) (660,900) 653,000
</TABLE>
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
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1999 1998
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Other income (expense), net 511,100 323,200
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Income (loss) before income taxes (149,800) 976,200
Provision for income taxes 69,700 105,000
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Net Income (Loss) $ (219,500) $ 871,200
=========== ===========
Net income per share - Basic $ (0.01) $ 0.05
Net income per share - Diluted $ (0.01) $ 0.04
Weighted average number of common
and common equivalent shares
outstanding
- Basic 22,838,864 18,088,808
- Diluted 26,518,574 21,655,272
</TABLE>
See accompanying notes to financial statements.
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TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
REPRESENTING INCREASES (DECREASES) IN CASH
(unaudited)
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Three Months
Ended March 31,
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1999 1998
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Cash flows from operating activities:
Net cash provided by operating activities $ 772,900 $ 889,700
Cash flows from investing activities:
Purchase of furniture fixtures and equipment (1,448,200) (453,500)
Purchase of Braid Group Limited, net of cash
acquired (27,736,100)
Sales of marketable securities 20,191,700 2,277,500
Other (294,300) -
------------ ------------
Net cash (used in) provided by investing
activities (9,286,900) 1,824,000
Cash flows from financing activities:
Payments under capital leases (2,600) (10,500)
Proceeds from exercise of options 203,700 24,200
Proceeds from issuance under ESPP 598,300 540,000
------------ ------------
Net cash provided by financing activities 799,400 553,700
Effect of exchange rate changes on cash (44,200) 26,000
Net change in cash (7,758,800) 3,293,400
Cash at beginning of period 15,132,700 10,912,500
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Cash at end of period $ 7,373,900 $ 14,205,900
============ ============
Supplemental information:
Cash paid for:
Interest $ 15,300 $ 4,900
Income taxes 403,000 130,000
Non cash investing and finance activities:
Issuance of stock in connection with the
acquisition of Braid $ 63,723,500 $ -
Warrants exercised on a net exercise basis 2,300 -
</TABLE>
See accompanying notes to financial statements.
7
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TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated 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,
1998.
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) BUSINESS COMBINATIONS
In March 1999, the Company acquired all of the outstanding share capital of
Braid Group Limited, ("Braid") a privately held Bermuda corporation, pursuant to
a Stock Purchase Agreement by and among the Company and each of the stockholders
of Braid.
TSI Software purchased all of the outstanding share capital of Braid for
approximately $110.2 million excluding approximately $20 million of contingent
consideration to be paid upon the achievement of certain performance criteria.
The purchase price included (1) $30 million in cash, (2) 2,207,258 shares of TSI
Software common stock valued at approximately $63.7 million, (3) the issuance of
217,311 TSI Software stock options, with a fair value of approximately $12.0
million, in exchange for all outstanding Braid stock options, and (4)
approximately $4.5 million in fees and acquisition related expenses. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities, and operating results of Braid have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition. The Company is in the process of finalizing
the purchase accounting. The excess of the purchase price, excluding the
contingent consideration, over the fair value of the assets is currently
estimated to be approximately $110.4 million. This excess purchase price will be
allocated to certain intangible assets, with the remainder recorded as goodwill.
The lives of the intangible assets and goodwill are estimated to be five years.
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(3) NEWLY ADOPTED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to
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effect the Company as the Company currently does not have any significant
derivative instruments or hedging activities.
On December 15, 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions". SOP 98-9,
which is effective for transactions entered into in fiscal years beginning after
March 15, 1999, requires the application of the "residual method" for certain
components of a multiple element arrangement. Under this method, the arrangement
fee is recognized as follows: (1) the total fair value of the undelivered
elements, as indicated by vendor-specific objective evidence, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2 and
(2) the difference between the total arrangement fee and the amount deferred for
the undelivered elements is to be recognized as revenue. All other provisions of
SOP 97-2 remain in effect. The Company will adopt SOP 98-9 for software
transactions in the fiscal year which begins on January 1, 2000. The Company
believes that its current accounting policies substantially comply with SOP 98-9
and therefore does not expect the adoption of 98-9 to have a material effect on
our 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) STOCK ACTIVITIES
On January 25, 1999, the Board of Directors approved a 2 for 1 common stock
split in the form of a stock dividend, effective April 5, 1999. The
accompanying financial statements have been retroactively adjusted to reflect
this common stock split.
On March 26, 1999, the stockholders approved an amendment to the Company's
1997 Equity Incentive Plan. The shares reserved for issuance under the plan
increased from 2,500,000 to an aggregate of 4,750,000.
(4) COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" during 1998. SFAS 130 requires the Company to report in its financial
statements, in addition to its net income, comprehensive income, which includes
all changes in equity during a period from non-owner sources. The Company's
comprehensive income consists of net income and foreign currency translation
adjustments. Comprehensive income was ($265,200) and $826,500 for the three
months ended March 31, 1999 and 1998, respectively.
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
enterprise resource planning software market 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 and integrate the operations of its recent
acquisitions, (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
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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, in December 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 and the acquisition of
new products. In view of the relatively recent introduction of Mercator and the
recent acquisition of Braid, 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 recognizes revenue from software license fees based on
the following four criteria: persuasive evidence of an agreement exists,
delivery has occurred, the fee is fixed and determinable, and the fee is
collectible. 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 has increased the scope of its service offerings
insofar as they support the sale of its products. The Company believes that
software licensing will continue to account for a larger portion of its revenues
in the future.
Mercator can be used by IT professionals as well as Value Added Resellers
(VARs), Independent Software Vendors (ISVs), Systems Integrators (SI's) or other
third parties who resell, embed or otherwise bundle Mercator with their
products,. To date, license fee revenues have been derived principally from
direct sales of software products through the Company's direct sales force.
Although the Company believes that such direct sales will continue to account
for a significant portion of software licensing revenues, the Company intends to
increase its use of distributors and resellers. Furthermore, the Company's
planned expansion of its sales organization is expected to cause sales and
marketing expenses to increase.
The Company markets its products in North America primarily through its direct
sales and telesales organizations.
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In addition, the Company markets its products and services outside North
America through sales offices located in the United Kingdom, France and, with
the acquisition of Braid, through offices located in Singapore, Australia and
Hong Kong, as well as through indirect channels. International sales are
recorded in their local currency and converted in consolidation. Revenues from
international customers were approximately 6.8% and 14.5% for the quarters ended
March 31, 1998 and 1999, respectively. With the acquisition of Braid, the
Company anticipates that revenues from international customers could represent a
larger percentage of total revenue in the future.
The size of the Company's orders can range from a few thousand dollars to over
$150,000 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 preceed, or
are not subsequently followed by, increased revenue, the Company's operating
results could 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 MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
REVENUES:
Total Revenues. The Company's total revenues increased 111% to $17.2 million
in the first quarter of 1999 from $8.2 million in the comparable period of 1998.
This increase resulted from increased license sales, as well as increased
billings for professional services. Braid contributed $1.9 million in total
revenues for the period ending March 31, 1999.
Software Licensing. Software licensing revenues increased 88% to $9.8 million
in the first quarter of 1999 from $5.2 million in the comparable period of 1998,
primarily due to an increase in Mercator license revenues and license revenues
of $615,200 from Braid.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 149% to $7.4 million in the first quarter of 1999 from $3.0 million in
the comparable period of 1998, primarily due to increased professional services
billings. This increase was primarily due to increased personnel from both SCP
and Braid, increased demand for Mercator services 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,
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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.
Total Cost of Revenues. Total cost of revenues increased 370% to $4.7 million
in the first quarter of 1999 from $1.0 million in the comparable period of 1998.
Cost of Software Licensing. Cost of software licensing revenues increased 82%
to $436,100 in the first quarter of 1999 from $239,200 in the comparable period
of 1998, primarily due to increased sales of software licenses. Software
licensing gross margin remained constant at 95% for both the first quarters of
1999 and 1998, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 460% to $4.2 million in the first quarter of 1999 from
$755,100 in the comparable period of 1998, primarily due to the acquisition of
Software Consulting Partners in November 1998 and the related costs, and an
increase in professional services rendered, and therefore higher professional
services personnel costs, particularly Mercator-related services. In addition
Braid costs totaled $629,500 for the period ending March 31, 1999. Service,
maintenance and other gross margin was 43% and 75% for the first quarter of 1999
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 81% to $2.2 million in the first quarter
of 1999 from $1.2 million in the first quarter of 1999, primarily due to
increased product development activities related to the Mercator product line
and costs from Braid of $484,800. Product development expenses as a percentage
of total revenue decreased to 13% in the first quarter of 1999 from 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 1999.
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.
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Selling and marketing costs increased 62% to $6.6 million in the first quarter
of 1999 from $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 and advertising programs. In addition, Braid costs
totaled $503,600 for the period ending March 31, 1999. Selling and marketing
expenses as a percentage of total revenues decreased to 38% in the first quarter
of 1999 from 50% in the first quarter of 1998. The Company expects to continue
hiring additional sales and marketing personnel and to increase promotional
expenses through the remainder of 1999 to focus on the Mercator product line and
the newly acquired Braid products. The Company anticipates that sales and
marketing expenses will continue to 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 68% to $2.1 million in the first
quarter of 1999 from $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 decreased to 12% for
the first quarter of 1999 from 15% for the first quarter of 1998. The Company
believes that the dollar amount of its general and administrative expenses will
continue to increase as the Company expands its administrative staff to support
the Company's worldwide expansion.
Amortization of Intangibles. The amortization of goodwill and other
intangibles resulting from the acquisition of SCP in November 1998 and Braid in
March 1999 was $2.3 million for the three months ended March 31, 1999.
OTHER INCOME/EXPENSE, NET
Net other income (expense) represents income earned on the Company's cash
balances and interest on term contracts. Net interest income increased to
$511,100 in the first quarter of 1999 from $323,200 in the comparable period of
1998, due to higher cash balances resulting from the Company's public offerings.
The Company anticipates that interest income will decline due to the utilization
of $30 million in cash for the acquisition of Braid in March of 1999.
INCOME TAXES
Income tax expense decreased to $69,700 for the first quarter of 1999 from
$105,000 for the first quarter of 1998. The utilization of operating loss
carryforwards and certain credits has reduced the required provision for income
taxes. The expense for the first quarter of 1999 reflects the anticipated
effective tax rate on projected income for the year ended December 31, 1999,
which is effected by the amortization of goodwill which is non-deductible for
income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1999, the Company had net working capital of $20.3 million, which
included cash and marketable securities of $20.0 million.
Operating activities provided net cash of $772,900 and $889,700 during the
three months ended March 31, 1999 and 1998, respectively. The cash provided in
the three months ended March 31, 1999 was due to changes in accounts receivable
and the timing of payments to certain vendors.
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Investing activities used net cash of $9,286,900 during the three months
ended March 31, 1999. The reduction in cash was due to the acquisition of Braid
Ltd., offset by the sale of marketable securities. Investing activities
provided cash of $1,824,000 during the three months ended March 31, 1998, due
primarily to the purchase of marketable securities during the year.
Financing activities provided net cash of $799,400 and $553,700 for the three
months ended March 31, 1999 and 1998, respectively. The cash provided was due
to proceeds from sale of stock through employee stock option exercises and
employee stock purchase plan purchases.
Net accounts receivable was $20.8 million at March 31, 1999 compared to $18.0
million at March 31, 1998. The number of days sales in accounts receivables was
109 at March 31, 1999 compared to 99 at March 31, 1998. This increase in days
sales outstanding is the result of the extension of payment terms for certain
customers, the timing of collections, and the acquisition of Braid's outstanding
receivables.
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, 1999, 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. As was the case with the Braid acquisition, 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 READINESS
Awareness: The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium ("Year 2000")
approaches. Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates because such systems may have been developed using two digits rather than
four to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures, generation of
erroneous data or miscalculations causing disruption of operations, including
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply with
such Year 2000 requirements. The Year 2000 problem is pervasive and
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complex. Significant uncertainty exists in the software industry concerning the
potential impact of Year 2000 problems. The Company is assessing the potential
overall impact of the impending century change on the Company's business,
financial condition and results of operations.
State of Readiness: Based on the Company's assessment to date, the Company
believes the current versions of its software products and services are "Year
2000 ready" - that is, they are capable of adequately distinguishing twenty-
first century dates from twentieth century dates. New products are being
designed to be Year 2000 ready. Although the Company's products have undergone,
or will undergo, the Company's normal quality testing procedures, there can,
however, be no assurance that the Company's products will contain all necessary
date code changes. Furthermore, use of the Company's products in connection
with other products which are not Year 2000 compliant, including non-compliant
hardware, software and firmware may result in the inaccurate exchange of dates
and result in performance problems or system failure. In addition, OEM
derivative versions of older products may not be year 2000 ready. Any failure
of the Company's products to perform, including system malfunctions associated
with the onset of Year 2000, could result in claims against the Company.
However, the success of the Company's Year 2000 readiness efforts may depend on
the success of its customers in dealing with the Year 2000 issue. We have
issued disclosure statements to all our existing customers and have posted these
statements on our website.
Although the Company has not been a party to any litigation or arbitration
proceeding to date that involves Year 2000 compliance issues with its products
or services, it could be required to defend its products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.
The costs of defending and resolving Year 2000-related disputes, regardless of
the merits of such disputes, and any liability of the Company for Year 2000-
related damages, excluding consequential damages, could have a material adverse
effect on the Company's business.
In addition, the Company believes that the purchasing patterns of customers
and potential customers of the Company may be affected by Year 2000 compliance
issues as organizations expend significant resources to correct their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funding available to such entities for other information technology
purchases, such as those products and services offered by the Company.
Furthermore, customers and potential customers may defer information technology
purchases until early in the next millennium to avoid Year 2000 compliance
problems. Any such deferral of purchases by the Company's customers or
potential customers could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's business depends on numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:
hardware and software systems used by the Company to deliver products and
services to its customers (including software supplied by third parties);
communications networks such as the wide area network and local area networks
upon which the Company depends to communicate product orders to its
manufacturing and distribution operations and to develop products; the internal
systems of the Company's customers and suppliers; software products sold to
customers; the hardware and software systems used internally by the Company in
the management of its business; and non-
16
<PAGE>
information technology systems and services used by the Company in the
management of its business, such as power, telephone systems and building
systems.
The Company is currently in the process of evaluating its information
technology infrastructure in order to identify and modify any products, services
or systems that are not Year 2000 compliant. Based on its initial analysis of
the systems potentially impacted by conducting business in the twenty-first
century, the Company is applying a phased approach to making such systems, and
accordingly, the Company's operations, ready for Year 2000. Beyond awareness of
the issues and scope of systems involved, the phases of activities in process
include: an assessment of specific underlying computer systems, programs and
hardware; renovation or replacement of Year 2000 non-compliant technology;
validation and testing of critical systems certified by third-party suppliers to
be Year 2000 compliant; and implementation of Year 2000 compliant systems. The
table below describes the status and timing of such phased activities:
IMPACTED SYSTEMS TARGETED
ASSESSMENT STATUS COMPLETION
---------- ------ -----------
Software products sold to customers
- -----------------------------------
Existing Products Software products Q3 1998
tested and available (completed)
for distribution
New Products Ongoing testing Q4 1999
complete before release
Hardware and software
- ---------------------
Systems used to deliver Assessment in process Q1 1999
products and services (completed)
Communication networks used Assessment in process Q1 1999
to carry products and provide services (completed)
Hardware and software Assessment in process Q1 1999
Systems used to manage the (completed)
Company's business
Hardware and software Validation Q2 1999
Systems used to deliver and testing
Products and services
Communication networks used Validation Q2 1999
To carry products and and testing
provide services
Hardware and software Validation Q2 1999
Systems used to manage and testing
The Company's business
Hardware and software systems Remediation Q3 1999
17
<PAGE>
Used to deliver Products
and services
Communication networks Remediation Q3 1999
used to carry products
and provide services
Hardware and software systems Remediation Q3 1999
used to manage the Company's
business
Non-information technology Systems upgraded Q3 1999
systems and services or replaced as appropriate,
Testing and implementation
Extensive Year 2000 Testing will be conducted on all systems considered
critical to the Company. To date, the Company has not encountered any material
problems in this regard with its computer systems or any other equipment that
might be subject to such problems. In the event that any of the Company's
significant suppliers or customers do not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be adversely
affected. This could result in system failures or generation of erroneous
information and could cause significant disruption to business activities. The
Company is reviewing what further actions are required to make all software
systems used internally Year 2000 compliant as well as actions needed to
mitigate vulnerability to problems with suppliers and other third parties'
systems. Such actions include a review of vendor contracts and formal
communication with suppliers to request certification that products are Year
2000 compliant.
Costs to Address Year 2000 Issues: The total cost of these Year 2000
compliance activities has not been, and is not anticipated to be, material to
the Company's business, results of operations and financial condition. These
costs and the timing in which the Company plans to complete its Year 2000
modification and testing processes are based on management's estimates.
However, there can be no assurance that the Company will timely identify and
remedy all significant Year 2000 problems, that remediation efforts will not
involve significant time and expense, or that such problems will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Contingency Plans: The Company does not presently have a contingency plan for
handling Year 2000 problems that are not detected and corrected prior to their
occurrence. 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.
CONVERSION TO A SINGLE EUROPEAN CURRENCY
18
<PAGE>
The Company has sales in a number of foreign countries, but at the present
time they are not significant and the conversion to a single European currency
has not had a material impact on the Company's financial results. With the
acquisition of Braid and increased selling efforts in international markets,
conversion impact will increase during 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
TSI SOFTWARE DEPENDS ON ITS MERCATOR PRODUCT LINE. The Company introduced its
Mercator products in 1993. In recent years, a significant and increasing
portion of the Company's revenue has been attributable to licenses of its
Mercator products and related services, and the Company expects that revenues
attributable to Mercator will 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 to this line.
MARKET ACCEPTANCE OF THE COMPANY'S PRODUCT LINE MAY NOT INCREASE OR REMAIN AT
CURRENT LEVELS. The Company may not be able to successfully market the Mercator
product line and develop extensions and enhancements to these product lines 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 Company's products, demand for the
Company's products and services would likely decline. A decline in demand for,
or market acceptance of, the Company's products as a result of competition,
technological change or other factors would have a material adverse effect on
the Company's business.
TSI SOFTWARE DEPENDS ON ENTERPRISE RESOURCE PLANNING ("ERP") 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 use
with ERP Systems and related services. The Company believes that its future
revenue growth, if any, will also depend in significant part upon continued sale
of Mercator for use in ERP System implementations. The Company has devoted and
must continue to devote substantial resources to identifying potential customers
in the ERP market, building strategic relationships and attracting and retaining
skilled technical, sales and professional services personnel with expertise in
ERP systems. Personnel with expertise in the ERP 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 R/3 systems
could have a material adverse effect on the Company's business, operating
results and financial condition. Implementation of
19
<PAGE>
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 business 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 certification, 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 or 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.
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. The Company may not be able to
successfully identify such applications, systems or platforms. Also these
applications, systems or platforms will have to achieve commercial acceptance or
the Company may not realize a sufficient return on its investment.
In addition, the introduction or announcement by the Company, or by one or
more of its current or future competitors, of products embodying new
technologies or features could render the Company's existing products obsolete
or unmarketable.
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 (or VARs), Independent Software
Vendors (or ISVs), Systems Integrators (or SIs) and distributors. Although
VAR's, 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. TSI Software may not be successful in expanding the
number of indirect distribution channels for its products. Furthermore, any new
VARs, ISV, SIs or distributors may offer competing products, or have no minimum
purchase requirements of the Company's products. These third parties also may
not provide adequate levels of services and technical support. The inability of
the Company to enter into additional indirect distribution arrangements, the
failure of these third parties to perform under agreements with the Company and
to penetrate their markets, or the inablility 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
material adverse effect on the Company's business. The Company's planned efforts
to
20
<PAGE>
expand its use of VARs, ISVs, SIs and distributors may not 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. Therefore revenue to the Company for
each such sale will be less than if the Company had licensed the same product to
the customer directly.
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 also 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 customer, resellers may also come into conflict with each other.
Although the Company has attempted to manage its distribution channels to avoid
potential conflicts, channel conflicts could 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.
MANAGEMENT GROWTH. 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.
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. TSI Software may not 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. To promote
growth in the Company's sales and operations, the Company will also continue to
expand its sales and marketing organizations, expand and develop 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. The Company may not be
successful in these endeavors.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION. With its recent acquisition of
Braid, the Company has expanded its sales and marketing resources outside of the
United States, which will require significant management attention and financial
resources. The Company also expects to commit additional time and development
resources to customizing its products for selected international markets and
developing international sales and support channels. International operations
involve a number of additional risks, including the impact of possible
recessionary environments in economies outside the United States, longer
receivables collections periods and greater difficulty in accounts receivable
collection, unexpected changes in regulatory requirements, dependence on
independent resellers, reduced protection for intellectual property rights in
some countries, tariffs and other trade barriers, foreign currency exchange rate
21
<PAGE>
fluctuations, difficulties in staffing and managing foreign operations, the
burdens of complying with a variety of foreign laws, potentially adverse tax
consequences and political and economic instability.
To the extent the Company's international operations continue to expand, the
Company expects that an increasing portion of its international license and
service and other revenues will be denominated in foreign currencies, subjecting
the Company to fluctuations in foreign currency exchange rates. The Company
does not currently engage in foreign currency hedging transactions. However, as
the Company continues to expand its international operations, exposures to gains
and losses on foreign currency transactions may increase. The Company may
choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. There can be no assurance that any
currency exchange strategy would be successful in avoiding exchange-related
losses. There can be no assurance that the foregoing factors will not have a
material adverse effect on the Company's future international revenues, and the
Company believes that its growth will require expansion of its sales in the
foreign market. There can be no assurance that the Company will be able to
sustain or increase revenue derived from international sources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TSI is exposed to market risk primarily through its investments in marketable
securities. TSI's investment policy calls for investment in short term, low
risk instruments. As of March 31, 1999, investments in marketable securities
were $12.6 million. Due to the nature of these investments, any decrease in
rates would not have material impact on the Company's financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1997, the Company filed a complaint in the U.S. District Court for
the district of Connecticut (case no. 397CV0268) against Transition Systems,
Inc. for trademark infringement and unfair competition and trade practices,
including using the trademark "TSI". This claim was settled in April of 1999
resulting in payment of $65,000 in damages to the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1999, the Company purchased from the stockholders of Braid (the
Braid Stockholders) all of the issued and outstanding share capital of Braid
in exchange for (i) $30,000,000 in cash, (ii) 2,207,258 shares of TSI Common
Stock (iii) 217,311 options to purchase TSI common stock and (iv) up to an
additional $20,000,000 based on certain performance goals. The 2,207,258 shares
of TSI Common Stock to be issued to the Braid Stockholders will not be
registered under the Securities Act of 1933, as amended, in reliance upon the
exemption from registration provided by Section
22
<PAGE>
4(2) thereof. The Company and the Braid Stockholders have entered into a
Registration Rights Agreement, pursuant to which the Company granted the Braid
Stockholders certain registration rights on Form S-3 and certain "piggyback"
registration rights in connection with the resale of shares of TSI Common Stock
issued to them (the "Registrable Shares"). Under the terms of the Registration
Rights Agreement, TSI is to maintain in effect a shelf registration on Form S-3
pursuant to Rule 415 under the 1933 Act covering the resale by the Braid
stockholders of Registrable Shares held by them.
Through March 1999, the net offering proceeds to the Company from its initial
public offering in July 1997 have been fully utilized as follows:
Direct or indirect payments to
Directors or Officers
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
affiliates of the Company others
------------------------------ -----------
Construction of plant, building and facilities -- 0
Purchase and installation of machinery and
equipment -- $ 3,112,100
Purchase of real estate -- 0
Acquisition of other business(es) -- 3,729,000
Repayment of indebtedness
Debt -- 2,790,100
Capital Leases 56,100
Working capital -- 0
Temporary investment -- --
Purchase of marketable securities and cash
equivalents 14,585,000
Other purposes (specify) -
-----------
TOTAL NET PROCEEDS $24,272,300
===========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 26, 1999, at the Company's Annual Meeting of Stockholders, TSI
Software's stockholders approved the proposals listed below. Proxies were
solicited by the Company pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
23
<PAGE>
As of February 23, 1999, the record date for the Annual Meeting, there were
approximately 22,464,326 shares of TSI Common Stock outstanding and entitled to
vote, of which 19,952,108 were present in person or by proxy and voted at the
meeting.
1. Proposal to elect five directors of the Company each to serve until the next
Annual Meeting of stockholders and until his or her successor is duly
elected and qualified or until his earlier resignation or removal.
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Constance F Galley 19,496,020 456,088
Steward K. P. Gross 19,495,740 456,368
Ernest E. Keet 19,495,900 456,208
James P. Schadt 19,494,900 457,208
Dennis G. Sisco 19,496,500 455,608
</TABLE>
2. Proposal to amend the Company's Certificate of Incorporation to increase the
number of shares of Common Stock reserved for issuance thereunder by
50,000,000 shares to an aggregate of 70,000,000 shares.
For 19,346,462
Against/Withheld 601,666
Abstain 3,980
3. Proposal to amend the Company's 1997 Equity Incentive Plan to increase the
number of shares reserved for issuance thereunder by 2,500,000 to an
aggregate of 4,750,000.
For: 13,353,902
Against/Withheld 4,427,208
Abstain 5,950
4. Proposal to ratify the selection of KPMG LLP as TSI Software's independent
accountants for fiscal year ending December 31, 1999.
For 19,947,244
Withheld/Against 2,364
Abstain 2,500
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report on Form
1O-Q
2.1 Stock Purchase Agreement, dated as of March 18, 1999, by and among the
Company and
24
<PAGE>
the Braid stockholders.
11.1 Computation of Earnings Per Share
Financial Data Schedule
(b) Reports on Form 8-K.
(1) The Company filed a report on form 8-K in March, 1999 with respect to the
Company's acquisition of Braid.
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 14, 1999
-------------------------------------
Constance F. Galley
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999
--------------------------------------
Ira A. Gerard
Vice President, Finance and Administration
Chief Financial Officer and Secretary
(Principal Financial Officer)
25
<PAGE>
EXHIBIT 11.1
TSI INTERNATIONAL SOFTWARE LTD.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Weighted average common shares
outstanding 22,838,864 18,088,808
Dilutive effect of stock options and Warrants 3,679,710 3,566,464
----------- -----------
Weighted average common and common
equivalent shares outstanding - Diluted 26,518,574 21,655,272
=========== ===========
Net Income (loss)
Per Share Amount - Basic $ (0.01) $ 0.05
- Diluted $ (0.01) $ 0.04
</TABLE>
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,373,900
<SECURITIES> 12,620,400
<RECEIVABLES> 20,849,400
<ALLOWANCES> 1,760,700
<INVENTORY> 0
<CURRENT-ASSETS> 45,456,400
<PP&E> 11,246,000
<DEPRECIATION> 5,672,500
<TOTAL-ASSETS> 164,480,900
<CURRENT-LIABILITIES> 25,193,500
<BONDS> 0
0
0
<COMMON> 247,800
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 164,480,900
<SALES> 17,236,000
<TOTAL-REVENUES> 17,236,000
<CGS> 4,667,200
<TOTAL-COSTS> 17,896,900
<OTHER-EXPENSES> 511,100
<LOSS-PROVISION> 20,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (149,800)
<INCOME-TAX> 69,700
<INCOME-CONTINUING> (219,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (219,500)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
