<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-19377
TCSI Corporation
- ---------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
NEVADA 68-0140975
--------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
2121 Allston Way, Berkeley, CA 94704
--------------------------------- -----------------------------------
(Address of principal executive offices) (Zip code)
Telephone number (510) 649-3700
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 July 31, 1996, there were 21,000,224 shares of common stock of the
Registrant outstanding.
<PAGE> 2
TCSI Corporation
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Information
Consolidated Statements of Income for the Three and Six Months
Ended June 30, 1996 and 1995 (Unaudited)......................3
Consolidated Balance Sheets at June 30, 1996 (Unaudited)
and December 31, 1995.........................................4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1996 and 1995 (Unaudited)......................5
Notes to Consolidated Financial Information (Unaudited)........6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders........19
Item 6. Exhibits and Reports on Form 8-K...........................20
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Information
TCSI Corporation
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Services $ 12,962 $ 10,026 $ 25,545 $ 20,472
Software licensing fees 4,438 3,345 7,554 5,611
Equipment 4,431 - 7,270 -
-------- -------- -------- --------
Total revenues 21,831 13,371 40,369 26,083
-------- -------- -------- --------
Costs and expenses:
Services 6,824 5,522 12,952 11,514
Equipment 4,156 - 6,810 -
Product development 1,487 - 2,491 -
Selling, general, and administrative 5,899 5,232 11,182 9,442
-------- -------- -------- --------
Total costs and expenses 18,366 10,754 33,435 20,956
-------- -------- -------- --------
Income from operations 3,465 2,617 6,934 5,127
Interest income 664 237 946 443
-------- -------- -------- --------
Income before income taxes 4,129 2,854 7,880 5,570
Provision for income taxes 1,321 978 2,521 1,930
-------- -------- -------- --------
Net income $ 2,808 $ 1,876 $ 5,359 $ 3,640
======== ======== ======== ========
Earnings per share $ 0.13 $ 0.10 $ 0.25 $ 0.19
======== ======== ======== ========
Shares used in calculation of
earnings per share 22,191 19,140 21,042 18,984
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE> 4
TCSI Corporation
CONSOLIDATED BALANCE SHEETS
(In thousands, except for per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 32,328 $ 16,946
Investments in marketable securities 6,742 5,081
Receivables 22,123 16,500
Equipment receivables 7,270 -
Deferred income taxes 1,747 1,913
Other current assets 1,376 3,068
-------- --------
Total current assets 71,586 43,508
Furniture, equipment, and leasehold
improvements 6,801 5,134
Non-current investments in marketable securities 6,000 -
Non-current deferred income taxes 510 429
Other non-current assets 580 439
-------- --------
Total assets $ 85,477 $ 49,510
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals $ 4,508 $ 4,005
Accrued compensation and related costs 4,435 4,823
Income taxes 409 3,306
-------- --------
Total current liabilities 9,352 12,134
-------- --------
Shareholders' equity:
Preferred shares, $0.01 par value;
5,000 shares authorized;
none outstanding - -
Common shares, $0.10 par value;
75,000 shares authorized; 20,910 shares
issued and outstanding, at June 30, 1996
and 18,602 at December 31, 1995 2,091 1,860
Additional paid-in capital 43,420 10,261
Retained earnings 30,614 25,255
-------- --------
Total shareholders' equity 76,125 37,376
-------- --------
Total liabilities and shareholders' equity $ 85,477 $ 49,510
======== ========
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE> 5
TCSI Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 5,359 $ 3,640
Adjustments to reconcile net income
to net cash used in operations:
Depreciation and amortization 1,416 640
Deferred income taxes 85 (388)
Changes in:
Receivables (5,623) (4,046)
Equipment receivables (7,270) -
Other current assets 1,692 (471)
Accounts payable and other accruals 503 (324)
Accrued compensation and related costs (388) 1,102
Income taxes 1,832 (407)
-------- --------
Net cash used in operating activities (2,394) (254)
-------- --------
Investing activities:
Capital expenditures (3,083) (2,512)
Purchase of marketable securities (11,911) (1,980)
Maturity of marketable securities 4,250 5,641
Decrease (increase) in other
non-current assets (141) 29
-------- --------
Net cash provided by (used in)
investing activities (10,885) 1,178
-------- --------
Financing activities:
Issuance (repurchase) of common shares 25,900 (536)
Proceeds from exercise of options 2,761 1,981
Tax benefit from exercise of options - 840
-------- --------
Net cash provided by financing activities 28,661 2,285
-------- --------
Net increase in cash and cash equivalents 15,382 3,209
Cash and cash equivalents at beginning
of period 16,946 3,680
-------- --------
Cash and cash equivalents at end of period $ 32,328 $ 6,889
======== ========
Supplemental disclosure of cash flow
information -
Cash paid for income taxes $ 604 $ 1,886
======== ========
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE> 6
TCSI Corporation
NOTES TO CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial information has been
prepared by TCSI Corporation (TCSI or the Company) in accordance with
generally accepted accounting principles for interim financial statements
and pursuant to the rules of the Securities and Exchange Commission for
Form 10-Q. Accordingly, certain information and footnotes required by
generally accepted accounting principles for complete financial statements
have been omitted. It is the opinion of management that all adjustments
considered necessary for a fair presentation have been included, and that
all such adjustments are of a normal and recurring nature. Operating
results for the periods presented are not necessarily indicative of the
results that may be expected for any future periods. For further
information, refer to the audited financial statements and footnotes
included in the Company's 1995 Annual Report on Form 10-K.
2. Receivables and Credit Risk
Receivable balances are primarily from large, credit-worthy customers
in the telecommunications and transportation industries and are unsecured.
The Company performs ongoing credit evaluations of these companies and
generally does not require collateral. Reserves are maintained for
potential credit losses.
Receivables balances are as follows:
<TABLE>
<CAPTION>
(In thousands) June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Billed $ 10,252 $ 7,832
Unbilled 12,271 9,068
Reserve for doubtful accounts (400) (400)
-------- --------
$ 22,123 $ 16,500
======== ========
</TABLE>
From time to time, the Company purchases equipment on behalf of its
customers. The customer receivables are generally secured by the equipment.
At June 30, 1996, unbilled receivable balances for such equipment totaled
$7,270,000. The Company is earning market rate interest from the customer
for these equipment purchases until paid.
3. Cash, Cash Equivalents, and Marketable Securities
The Company accounts for its marketable securities under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Management determines the appropriate
classification of investments and debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date.
Investments and debt securities are classified as held-to-maturity when the
Company has the intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Investments and
debt securities not classified as such are classified as available-for-
sale. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported in a separate component
of shareholder's equity. Realized and unrealized gains and losses have
been insignificant to the results of operations and financial position of
the Company.
<PAGE> 7
TCSI Corporation
4. Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements balances are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Computer and office equipment $ 13,303 $ 11,094
Furniture and fixtures 2,914 2,350
Leasehold improvements 1,752 1,442
-------- --------
17,969 14,886
Less accumulated depreciation and
amortization (11,168) (9,752)
-------- --------
$ 6,801 $ 5,134
======== ========
</TABLE>
5. Income Taxes
The effective tax rate used in the calculation of the income tax
provision for the three and six months ended June 30, 1996 was 32 percent
(35 percent for the three and six months ended June 30, 1995). In
determining its effective tax rate for the quarter, the Company used its
estimated effective tax rate for the year. To the extent there are
differences between planned and actual net income, the components thereof,
or changes in the tax laws effecting the Company, the effective tax rate
could change.
As provided by tax regulations, the Company receives a tax benefit on
the exercise of nonstatutory stock options for the amount of the fair
market value at the time of exercise over the option exercise price. The
Company will receive a tax benefit of $4,728,000 for the six months ended
June 30, 1996 compared to $840,000 for the six months ended June 30, 1995.
6. Stock Based Compensation
The Company grants stock options for a fixed number of shares to
employees, consultants, and directors with an exercise price equal to the
fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25,"Accounting for
Stock Issued to Employees," and, accordingly, recognizes no compensation
expense for the stock option grants.
7. Per Share Information
Earnings per share is computed using the weighted average number of
shares outstanding and dilutive common stock equivalents from the Company's
stock option plans, calculated using the treasury stock method. In May
1996, the Company declared a stock split whereby shareholders of record as
of May 28, 1996 received three shares for every two shares of common stock
held. All shares, common stock equivalents, and per share amounts
applicable to prior periods have been restated to reflect the stock split
(see Exhibit 11.1).
<PAGE> 8
TCSI Corporation
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to historical information contained herein, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. The forward-looking
statements contained herein are subject to certain factors that could cause
actual results to differ materially from those reflected in the forward-
looking statements. Such factors include, but are not limited to, those
discussed below and in the Company's Form 10-K for the fiscal year ended
December 31, 1995.
Results of Operations
The Company provides services under level-of-effort and fixed-price
contracts. Services revenues are recognized on the percentage-of-
completion method. Service revenue is earned based on the percentage of
contract costs incurred to date in relation to current total estimated
contract costs. Changes to total estimated contract costs, if any, are
recognized in the period they are determined. The Company recognizes
revenues from software licensing fees only after delivery of software
products and if there are no remaining significant post-delivery
obligations.
Revenues for the quarter ended June 30, 1996 increased 63 percent to
$21.8 million from $13.4 million during the same period of 1995. For the
six months ended June 30, 1996 and 1995, revenues were $40.4 million
compared to $26.1 million, representing a 55 percent increase. The
increase in revenues year-over-year is primarily the result of the
continued growth of revenues from TCSI's flagship product, Object Services
Package (OSP), and related object-oriented products and services. Second
quarter OSP-related revenues increased 54 percent to $13.3 million in 1996
compared to $8.6 million in the same quarter of 1995. For the six months
ended June 30, 1996, OSP-related revenues were $24.9 million, an increase
of 60 percent over the same period in 1995. Software licensing fees for
the quarter ended June 30, 1996 were $4.4 million, a 33 percent increase
over the same period in 1995. For the six months ended June 30, software
licensing fees increased 35 percent to $7.6 million in 1996 from $5.6
million during the same period a year ago. In the second quarter of 1996,
the Company signed contracts with ten new customers which included four new
software licensing agreements. In the near-term, management expects
software licensing revenues to fluctuate from quarter to quarter as the
result of a number of factors.* (See Factors that May Affect Future
Results of Operations)
Throughout 1996, the Company will be deploying a software solution
relating to a development agreement entered into in late 1994. The
deployment includes expected revenue of $11 million of equipment purchased
on behalf of the customer. For the quarter ended June 30, 1996, the
revenue related to this equipment totaled $4.4 million representing 20
percent of total revenues. For the first six months of 1996, equipment
revenues relating to this customer were $7.3 million, representing 18
percent of total revenues. In addition, service revenues related to the
deployment represented approximately 6 percent of total year-to-date
revenues. See "Liquidity and Capital Resources."
- ---------------------
*This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors that May Affect
Future Results of Operations" commencing on page 12 for a discussion of
factors that could affect future performance.
<PAGE> 9
TCSI Corporation
In late 1995 and during the first half of 1996, the Company expanded
its international operations to meet the growing demand for its products and
services. As a result, revenues from Asia and the Pacific Rim doubled and
represented approximately 28 percent of total revenues for both the three
and six month periods ended June 30, 1996 compared to approximately 23
percent for the same two periods in 1995. Revenues from Europe increased
to 10 percent of total revenues for the quarter ended June 30, 1996
compared to 8 percent for the quarter ended June 30, 1995. For the six
month period ended June 30, 1996, revenues from Europe increased to 11
percent of total revenues from 9 percent for the same period in 1995. The
Company expects that the proportion of international revenues to total
revenues may continue to vary in future periods.* (See Factors that May
Affect Future Results of Operations - International Sales)
Concentration of revenue from the Company's five largest customers
increased to 63 percent for the six months ended June 30, 1996 compared to
49 percent for the same period in 1995. The increase was primarily due to
software licensing fees and $7.3 million of equipment revenues (associated
with one of the five largest customers). For the six months ended June 30,
1996, three of the five largest customers were among the top five customers
for the six months ended June 30, 1995. Only two customers each
represented more than 10 percent of total revenues for both the three and
six months ended June 30, 1996. As the Company attempts to broaden its
product and service offerings to existing customers, it anticipates that
increasing amounts of revenues may be earned from such customers.* There
can be no assurance, however, that such customers will continue to place
orders with the Company which equal or exceed the comparable levels for
prior periods.
Cost of services increased 24 percent for the quarter ended June 30,
1996 to $6.8 million from $5.5 million during the same period in 1995. For
the six months ended June 30, 1996, cost of services increased 12 percent
over the same period in 1995. These increases are primarily the result of
increased revenues and the associated expansion of the Company's
engineering staff from 188 engineers at the end of the second quarter of
1995 to 247 engineers at the end of the current quarter. For the three and
six months ended June 30, 1996, cost of services, as a percentage of non-
equipment revenues, decreased slightly to approximately 40 percent for both
periods compared to 41 and 44 percent, respectively, a year ago. The
Company has been actively recruiting engineers to support anticipated
revenue growth. As a result of training and other costs relating to the
hiring of such additional engineers, the Company anticipates that cost of
services as a percent of non-equipment revenues may fluctuate from quarter
to quarter in the near term.*
Selling, general, and administrative expenses for the second quarter
ended June 30, 1996 increased 13 percent to $5.9 million compared to $5.2
million for the same quarter in 1995. For the six months ended June 30,
such costs increased to $11.2 million in 1996 from $9.4 million in 1995.
These increases are primarily due to the Company's expansion of its
operations. As a percentage of non-equipment revenues, selling, general,
and administrative expenses decreased for the three and six months ended
June 30, 1996 to approximately 35 percent for both periods compared to 39
percent and 36 percent, respectively, a year ago.
- ---------------------
*This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors that May Affect
Future Results of Operations" commencing on page 12 for a discussion of
factors that could affect future performance.
<PAGE> 10
TCSI Corporation
Prior to 1996, internal product development costs were not material
and external product development costs were included in cost of services,
as they were generally funded by customers. In 1996, TCSI has
begun funding internal development efforts to accelerate the enhancement of
the Company's product portfolio. There can be no assurance that such
funding will result in the successful introduction of new products.
Product development costs increased to $1.5 million in the second quarter
of 1996 from $1.0 million in the first quarter of this year. The Company
expects that future product development costs may approximate the levels
incurred by other providers of internally generated software products.
Shares used in the calculation of earnings per share (EPS) increased
to 22.2 million compared to 19.1 million for the quarters ended June 30,
1996 and 1995, respectively. For the six months ended June 30, shares used
in the EPS calculation increased to 21.0 million in 1996 from 19.0 million
in 1995. These increases are primarily due to option exercises and 1.5
million common shares issued in the Company's first quarter 1996 follow-on
offering. All share and per share amounts reflect the Company's three-for-
two stock split in the second quarter of 1996.
Liquidity and Capital Resources
For the six months ended June 30, 1996, cash flows used in operations
were $2.4 million compared to $0.3 million for the six months ended June
30, 1995. Operating cash flows were effected by an increase in receivables
partially offset by higher net income. The Company's receivables continue
to be affected by the timing of contractual billing and collection
milestones. Customer receivables are primarily associated with large,
credit-worthy customers, and the Company has experienced no significant
receivable write-offs. The Company strives to reduce receivable balances,
but anticipates that receivable balances will continue to fluctuate in
the future.* Equipment receivables of $7.3 million as of June 30, 1996
relate to the purchase of equipment on behalf of a customer. The
deployment of this system is expected to continue throughout 1996.* The
Company uses existing cash to finance these receivables and is earning
market rate interest on outstanding balances.
Cash and investments in marketable securities totaled $45.1 million at
June 30, 1996 compared to $22.0 million at December 31, 1995. The increase
is primarily the result of funds raised in the Company's follow-on offering
of common stock in the first quarter of 1996. As a result, cash flows
generated by financing activities in the first six months of 1996 increased
to $28.7 million compared to $2.3 million for the same period in 1995.
Such amounts are invested in securities with maturities less than two
years.
- ---------------------
*This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors that May Affect
Future Results of Operations" commencing on page 12 for a discussion of
factors that could affect future performance.
<PAGE> 11
TCSI Corporation
For the six months ended June 30, 1996, the Company used $10.9 million
of cash in investing activities. The maturity of $4.3 million of
marketable securities was offset by the purchase of $11.9 million of
marketable securities and $3.1 million of capital expenditures associated
with hardware, software, and the expansion of the Company's facilities.
During the remainder of 1996, the Company anticipates that capital
expenditures will continue to accommodate the Company's planned expansion.*
The Company has no significant capital commitments other than commitments
under facilities and operating leases. The Company believes that its
available sources of funds and anticipated cash flows from operations will
be adequate to finance current operations, anticipated investments, and
capital expenditures for the foreseeable future.
- ---------------------
*This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Investors are
strongly encouraged to review the section entitled "Factors that May Affect
Future Results of Operations" commencing on page 12 for a discussion of
factors that could affect future performance.
<PAGE> 12
TCSI Corporation
Factors that May Affect Future Results of Operations
The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company's control. The
following discussion highlights some of these risks.
Potential Fluctuations in Future Operating Results
The Company has experienced and expects to continue to experience
significant fluctuations in revenues and operating results on an annual or
quarterly basis as a result of a number of factors, many of which are
beyond the control of the Company. These factors include the cancellation,
modification or non-renewal of service, license, or maintenance agreements;
the size and timing of significant customer engagements and license fees;
the relative proportion of services and software licensing fees; personnel
changes; capital spending patterns of the Company's customers;
concentration of the Company's customers; the lengthy sales cycles of the
Company's products and services; industry acceptance of the Company's
products and services; changes in operating expenses; new product
introductions and product enhancements by the Company or its competitors;
the ability of the Company to develop, introduce, and market new products
and product enhancements on a timely basis; changes in pricing policies by
the Company or its competitors; regulatory changes, currency fluctuations,
and general economic factors. These factors are difficult to forecast, and
these or other factors could have a material adverse effect on the
Company's business, operating results, and financial condition.
A significant portion of the Company's revenues and operating income
have been, and are expected to continue to be, derived from software
licensing fees from a limited number of customers. Variability in the
timing of such license fees has caused and may continue to cause material
fluctuations in the Company's business, operating results, and financial
condition. The Company's products and services generally require
significant capital expenditures by customers as well as the commitment of
resources to implement, monitor, and test the Company's enhancements to
such customer's systems. Accordingly, the Company is substantially
dependent on its customers' decisions as to the timing and level of such
expenditures and resource commitments. In addition, the Company typically
realizes a significant portion of license revenues in the last weeks or
even days of a quarter. As a result, the magnitude of quarterly
fluctuations may not become evident until late in, or after the close of, a
particular quarter. The Company's expenses are based in part on the
Company's expectations as to future revenue levels and to a large extent
are fixed in the short-term. If revenues do not meet expectations, the
Company's business, operating results, and financial condition are likely
to be materially adversely affected. In particular, because only a small
portion of the Company's expenses varies with revenues, net income may be
disproportionately affected by a reduction in revenues. As a result, the
Company believes that period-to-period comparisons of its operating results
are not necessarily meaningful and should not be relied upon as indications
of future performance. Due to the foregoing factors, it is likely that in
some future quarter the Company's revenue or operating results will be
below the expectations of public market analysts and investors. In such
event the price of the Company's Common Stock could be materially adversely
affected.
<PAGE> 13
TCSI Corporation
Lengthy Sales and Implementation Cycles
The Company's products are typically intended for use in applications
that may be critical to a customer's business. The licensing and
implementation of the Company's software products generally involves a
significant commitment of resources by prospective customers. As a result,
the Company's sales process is often subject to delays associated with
lengthy approval processes that typically accompany significant capital
expenditures. For these and other reasons, the sales cycles associated with
the license of the Company's products is often lengthy (recently averaging
approximately six to nine months) and subject to a number of significant
delays over which the Company has little or no control. In addition, the
Company does not recognize service revenues until the services are
rendered. The time required to implement the Company's products can vary
significantly with the needs of its customers and is generally a process
that extends for several months. Because of their complexity, larger
implementations can involve implementation cycles that can take multiple
quarters. As a result, revenue recognition may be delayed in many
instances. When the Company has provided services to implement certain
large projects, although no contractual basis exists to do so, a few
customers have in the past delayed payment of a portion of revenue until
implementation is complete and in some cases have disputed the fees charged
for implementation. There can be no assurance the Company will not
experience additional delays or disputes regarding payment in the future,
particularly if the Company receives orders for large, complex
installations. Therefore, the Company believes that its quarterly operating
results and financial condition are likely to vary significantly in the
future.
Acceptance of Integrated Service Management; Product Development Risks
A substantial portion of the Company's revenues are derived from the
sale of the Company's products and services which provide enterprise
software solutions to major corporations, primarily in the worldwide
telecom services and equipment industries. Although many telecom companies
currently seek to integrate their business operation systems and network
operation systems, there can be no assurance that these or other service
providers will continue to seek the integration of such systems or that
such companies will use the Company's products for integrated service
management ("ISM"). The Company has designed software solutions for the
management of business and network operations systems; however, the Company
has not yet implemented a comprehensive ISM solution for the management of
both types of systems with a single customer. The Company has in the past
relied and will in the future rely on its development and implementation
expertise. The Company continues to develop distributed object software
products that reduce the customization necessary to fully integrate
customers' systems. There can be no assurance, however, that the Company
will continue to successfully develop and market such products or, if
successful, that the revenue from such products will compensate for any
concurrent loss of development and implementation service revenues. The
failure by the Company to successfully develop and market such products and
technologies would have a material adverse effect on its business,
operating results, and financial condition.
<PAGE> 14
TCSI Corporation
Revenues attributable to the Company's distributed object software
products and services have in the past accounted for and are expected to
continue to account for a substantial majority of the Company's revenues.
Accordingly, the Company's future business, operating results, and
financial condition are significantly dependent upon the continued market
acceptance of distributed object software products and services and the
Company's portfolio of products and services. There can be no assurance
that distributed object technology will continue to achieve market
acceptance or that the Company will be successful in developing,
introducing, or marketing improvements to its distributed object products.
Moreover, the life cycle of distributed object products is difficult to
estimate due in large part to the recent emergence of many of the Company's
markets, the effect of future product enhancements, and competition. A
decline in the demand for distributed object technology as a result of new
or existing competing technologies, or other factors would have a material
adverse effect on the Company's business, operating results, and financial
condition.
Through the end of 1995, the Company's product development was
primarily funded by customers as part of the development of software
applications for such customers. The Company typically retained certain
rights to developed software products. In certain circumstances, however,
the Company has agreed to restrict its use of such products to certain
markets and during certain time periods. Management believes that continued
revenue growth is highly dependent upon the development and enhancement of
software products that meet market needs. Prior to 1996, internally funded
product development costs were nominal and were not capitalized. During the
six months ended June 30, 1996, the Company funded $2.5 million of product
development. The Company anticipates continued funding of product
development. There can be no assurance, however, that such funding will
result in the successful introduction of new products.
Customer Concentration
To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. The Company anticipates
that it will continue to experience significant customer concentration.
There can be no assurance that such customers or any other customers will
in the future continue to place orders with the Company which equal or
exceed the comparable levels for prior periods. In addition, the Company's
customers typically designate one individual to procure network management
software. If any of such individuals were terminated or replaced, the
Company would be vulnerable to cancellation of an order if, for example,
the Company's competitors had pre-existing relationships with such
individual's replacement. As a result of these factors, the Company's
business, operating results, and financial condition could be materially
adversely affected.
<PAGE> 15
TCSI Corporation
Product Defects; Implementation Risks
The Company develops complex object-oriented software that provides
ISM solutions to major corporations. The development, enhancement, and
implementation of such complex software solutions entails substantial risks
of product defects or failures. The Company has in the past discovered
software defects in certain of its products and software solutions.
Although to date the Company has not experienced material adverse effects
resulting from any such defects, there can be no assurance that errors will
not be found in existing or new products or releases after commencement of
commercial licensing, which may result in delay or loss of revenue, loss of
market share, failure to achieve market acceptance, or may otherwise
adversely impact the Company's business, operating results, and financial
condition. Moreover, the complexities involved in implementing the
Company's software solutions entail additional risks of performance
failures. There can be no assurance that the Company will not encounter
substantial delays or other difficulties due to such complexities. Because
the Company's customer base consists of a relatively limited number of
customers, the reputational harm resulting from product defects or
implementation errors would be damaging to the Company. Any such occurrence
could have a material adverse effect upon the Company's business, operating
results, and financial condition.
International Sales
Revenues outside of North America accounted for approximately 40
percent of the Company's total revenues for the three and six month periods
ended June 30, 1996. The Company expects that international revenues will
continue to account for a significant portion of its total revenue in
future periods. The Company intends to penetrate additional international
markets and to further expand its existing international operations. The
Company's international business involves a number of inherent risks,
including longer receivables collection periods and greater difficulty in
accounts receivable collection, difficulty in staffing and managing foreign
operations, a longer sales cycle than with domestic customers, potentially
unstable political and economic conditions, language barriers, cultural
differences in the conduct of business, seasonality due to the slowdown in
European business activity during the Company's third fiscal quarter,
unexpected changes in regulatory requirements, including a slowdown in the
rate of privatization of telecom service providers, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences, tariffs, and other trade barriers. In addition, access to
foreign markets is often difficult due to the established relationships
between government owned or controlled communications companies and local
suppliers of communications products. There can be no assurance the Company
will be able to successfully penetrate such foreign markets. In addition,
there can be no assurance that the Company will be able to sustain or
increase revenue derived from international licensing and services or that
the foregoing factors will not have a material adverse effect on the
Company's future international business, and consequently, on the Company's
business, operating results, and financial condition.
<PAGE> 16
TCSI Corporation
International sales also entail risks associated with currency
fluctuations. The Company has attempted to reduce the risk of fluctuations
in currency exchange rates associated with international revenue by pricing
its products and services in United States dollars whenever possible. The
Company, however, currently pays the expenses of its international
operations in local currencies and generally does not engage in hedging
transactions with respect to such obligations. Fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to foreign customers, leading to a reduction in sales or
profitability. Furthermore, future international activity may result in
foreign currency denominated sales, and, in such event, gains and losses on
the conversion to U.S. dollars of accounts receivable and accounts payable
arising from international operations may contribute to fluctuations in the
Company's operating results. In order to reduce the risk of exchange rate
losses from foreign currency denominated sales, the Company may engage in
hedging transactions. There can be no assurance that such hedging
transactions will not have a material adverse effect on the Company's
business, operating results, and financial condition.
Dependence on Telecom Carriers; Government Regulation
The Company's principal customers are concentrated among major telecom
carriers, including regional bell operating companies ("RBOCs"). Such
companies operate within the telecom industry, which has recently been
characterized by intense competition in the development of new technology,
equipment, and customer services. The Company believes that large telecom
carriers have become increasingly cautious in making significant capital
expenditures, due in part to increased competition with smaller, rapidly
developing alternative carriers, decreasing prices for telecom services and
equipment, and regulatory rate structures that have become less dependent
on the level of carriers' capital expenditures. These and other factors
have in the past and may in the future cause such customers to experience
significant fluctuations in capital expenditures for ISM solutions.
The telecom industry is subject to extensive regulation in the United
States and other countries, and the Company's customers generally must
receive regulatory approvals in conducting their businesses. Although the
telecom industry has recently been characterized by government
deregulation, there can be no assurance that deregulatory trends will
continue or that reregulation will not occur. Government regulatory
policies are likely to continue to have a major impact on the Company's
ability to attract and retain customers. For example, regulatory
authorities may continue to oversee the pricing of new and existing telecom
services, which, in turn impact carriers' ability to make significant
capital expenditures. The enactment by federal, state, or foreign
governments of new laws or regulations or change in the interpretation of
existing regulations could adversely affect the Company's customers, and
thereby affect the Company's business, operating results, and financial
condition.
<PAGE> 17
TCSI Corporation
Competition
The Company offers products and services in the evolving market for
ISM and distributed object technology. Competition in this market is
intense and is characterized by rapidly changing technologies, evolving
industry standards, changing regulatory requirements, frequent new product
introductions, and rapid changes in customer requirements. To maintain and
improve its competitive position, the Company must continue to develop and
introduce, in a timely and cost-effective manner, new services, products,
and product features that keep pace with competitive offerings by telecom
companies and independent software vendors, technological developments, and
emerging industry standards in the development of ISM solutions. The
principal competitive factors in the Company's market are quality,
performance, price, customer support, corporate reputation, and product
features such as scalability, interoperability, functionality,
customizability, and ease of use.
The Company's current and prospective competitors offer a variety of
solutions to address ISM needs. The Company faces competition in each of
the three functional areas the Company believes are necessary for the
delivery of complete ISM solutions: development environments, object
frameworks, and customized applications. Because certain of the Company's
competitors focus only on one functional area of ISM solutions, such
competitors may be in a position to develop competitive products targeted
solely at the segment they serve. These competitors include major
communications service providers, RBOCs, and equipment and computer
manufacturers, each of which has substantially greater financial,
manufacturing, technical, marketing, distribution, and other resources,
greater name recognition and longer-standing relationships with customers
than the Company. Furthermore, many of the Company's current and potential
customers continuously evaluate whether to design, develop, and support
internally the ISM solutions provided by the Company, thereby obviating the
need for relying on an outside vendor, such as the Company. There can be no
assurance that the Company's current or potential competitors will not
develop products comparable or superior to those developed by the Company
or adapt more quickly than the Company to new technologies, evolving
industry standards, new product introductions, or changing customer
requirements.
Rapid Technological Change; Need to Manage Product Transitions
The market for the Company's products is characterized by rapidly
changing technologies, evolving industry standards, changing regulatory
environments, frequent new product introductions, and rapid changes in
customer requirements. The introduction of products embodying new
technologies and the emergence of new industry standards and practices can
render existing products obsolete and unmarketable. As a result, the life
cycles of the Company's products are difficult to estimate. This poses
substantial risks for the Company because the Company's products and
software solutions typically have lengthy development and sales cycles. The
Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective
basis, new products and product features that keep pace with technological
developments and emerging industry standards and address the evolving needs
of its customers. There can be no assurance that the Company will be
successful in developing and marketing new products or product features
that respond to technological change or evolving industry standards, that
the Company will not experience difficulties that could delay or prevent
the successful development, introduction, and marketing of these new
products and features, or that its new products or product features will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons,
to develop and introduce enhancements of existing products or new products
in a timely manner, the Company's business, operating results, and
financial condition will be materially adversely affected.
<PAGE> 18
TCSI Corporation
The Company's products are designed to operate on a variety of
hardware and software platforms and with a variety of relational databases
employed by its customers in their networks. The Company must continually
modify and enhance its products to keep pace with changes in hardware and
software platforms and database technology. As a result, uncertainties
related to the timing and nature of new product announcements,
introductions or modifications by systems vendors, particularly Sun
Microsystems, Inc. and Hewlett Packard Company, and by vendors of
relational database software, particularly Oracle Corporation, Sybase,
Inc., and Informix Corporation, could materially adversely impact the
Company's business, operating results, and financial condition. In
addition, the failure of the Company's products to operate across the
various existing and evolving versions of hardware and software platforms
and database environments employed by consumers would have a material
adverse effect on the Company's business, operating results, and financial
condition.
The introduction or announcement of products by the Company or one or
more of its competitors embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's software
products and solutions obsolete or unmarketable. The introduction of new or
enhanced versions of its products requires the Company to manage the
transition from older products in order to minimize disruption in customer
ordering. There can be no assurance that the introduction or announcement
of new product offerings by the Company or one or more of its competitors
will not cause customers to defer licensing of existing Company products or
engaging the Company's services. Any deferral of license or service revenue
could have a material adverse effect on the Company's business, operating
results, and financial condition.
<PAGE> 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders was held in San Jose, California on May
15, 1996. The following matters were voted upon by the shareholders:
The following persons, who were the only nominees, were re-elected as
directors to hold office for one year and received the following number of
votes:
<TABLE>
<CAPTION>
For Against Withheld
<S> <C> <C> <C>
___________ ___________ ___________
Roger A. Strauch 10,983,203 - 89,913
Harvey E. Wagner 10,983,203 - 89,913
Daniel H. Miller 10,983,203 - 89,913
David G. Messerschmitt, Ph.D. 10,983,266 - 89,850
John C. Bolger 10,983,203 - 89,913
William C. Hasler 10,983,203 - 89,913
</TABLE>
A proposal to amend the 1991 Stock Incentive Plan was approved by the
shareholders. The following votes were cast as to such proposal: For:
7,237,558; Against: 2,427,197; Abstain: 51,830; No Vote: 1,356,531.
A proposal to amend Article Four of the Company's Restated Articles of
Incorporation which increased the authorized number of shares of common
stock was approved by the shareholders. The following votes were cast as
to such proposal: For: 10,698,593; Against: 268,341; Abstain: 24,132; No
Vote: 82,050.
A proposal to ratify the selection of Ernst & Young as independent auditors
for the Company for the fiscal year ending December 31, 1996, was approved
by the shareholders. The following votes were cast as to such proposal:
For: 11,054,793; Against: 1,838; Abstain: 16,485.
<PAGE> 20
TCSI Corporation
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit Number Document Description Page Number
- ---------------------------------------------------------------------------
11.1 Statement re: computation of per share earnings. 22
27 Financial Data Schedule. 23
(b) Reports on Form 8-K filed in the second quarter of 1996.
(i) Press release dated April 1, 1996, "TCSI Corporation Announces
Closing of Public Offering."
(ii) Press release dated April 8, 1996, "TCSI Appoints Human Resources
Executive to Manage Growing Workforce; Steve Sheehan, Former General
Electric Executive, Joins Object-Based Software Company as Vice President,
Human Resources."
(iii) Press release dated April 16, 1996, "TCSI Awarded $4.9 Million
Contract From Telstra- Australia's Leading Telecom Provider; OSP-Based SS7
System Expected to Improve Telephone Service For More Than 50 Percent of
Australian Households."
(iv) Press release dated April 17, 1996, "TCSI Corporation Reports
First Quarter Results."
(v) Press release dated April 23, 1996, "TCSI Announces Software
Products for the North American TDMA IS-136 Cellular Interface Standard;
Products Enable Faster and More Affordable Development of Next-Generation
Cellular Applications."
(vi) Press release dated May 6, 1996, "TCSI Selected to Receive
Funding From Israel-U.S. Foundation; Leading Object-Oriented Software
Company Chosen on the Basis of Its Flagship Product - Object Services
Package."
(vii) Press release dated May 6, 1996, "TCSI Appoints New Director of
International Sales."
(viii) Press release dated May 14, 1996, "TCSI Announces Second Multi-
Million Dollar Contract with Telstra - Australia's Leading
Telecommunications Provider; Telstra Builds on the Power, Openness, and
Scalability of OSP 4.0."
(ix) Press release dated May 15, 1996, "TCSI Corporation Announces
Stock Split."
(x) Press release dated June 11, 1996, "TCSI Signs Strategic
Partnership Agreement with Duet Technologies, Inc. for Software Development
in India; New Alliance Expected to Strengthen Leading Telecom Software
Supplier's Presence in Asia and European Markets."
<PAGE> 21
TCSI Corporation
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto authorized.
TCSI Corporation
---------------------------------------------------
(Registrant)
August 12, 1996 /s/ Paul A. Farmer
- ---------------- ---------------------------------------------------
Date Paul A. Farmer, Chief Financial Officer, Secretary,
Treasurer, and Vice President
<PAGE> 22
TCSI Corporation
Exhibit 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
COMPUTATION OF SHARES USED IN PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except ------------------ ------------------
per share data) 1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares of common
stock outstanding 20,839 17,960 19,910 17,876
Common stock equivalents 1,352 1,180 1,132 1,108
-------- -------- -------- --------
Shares used in calculation of
earnings per share 22,191 19,140 21,042 18,984
======== ======== ======== ========
Net income $ 2,808 $ 1,876 $ 5,359 $ 3,640
======== ======== ======== ========
Earnings per share $ 0.13 $ 0.10 $ 0.25 $ 0.19
======== ======== ======== ========
</TABLE>
<PAGE> 23
TCSI Corporation
Exhibit 27
FINANCIAL DATA SCHEDULE
[ARTICLE] 5
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENT AS OF JUNE 30,
1996 OF TCSI CORPORATION AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[CIK] 0000875315
[NAME] TCSI CORPORATION
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MOS
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] JUN-30-1996
[CASH] 32,328
[SECURITIES] 12,742
[RECEIVABLES] 29,393
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 71,586
[PP&E] 6,801
[DEPRECIATION] 0
[TOTAL-ASSETS] 85,477
[CURRENT-LIABILITIES] 9,352
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 2,091
[OTHER-SE] 74,034
[TOTAL-LIABILITY-AND-EQUITY] 85,477
[SALES] 0
[TOTAL-REVENUES] 40,369
[CGS] 0
[TOTAL-COSTS] 33,435
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 7,880
[INCOME-TAX] 2,521
[INCOME-CONTINUING] 5,359
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 5,359
[EPS-PRIMARY] 0.25
[EPS-DILUTED] 0.25
</TABLE>
