<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 September 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 October 15, 1996, there were 21,176,086 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 Nine Months
Ended September 30, 1996 and 1995 (Unaudited)....................3
Consolidated Balance Sheets at September 30, 1996 (Unaudited)
and December 31, 1995............................................4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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......................9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K............................21
<PAGE> 3
TCSI Corporation
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Information
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Services $ 8,835 $ 11,813 $ 34,380 $ 32,285
Software licensing fees 950 2,267 8,504 7,878
Equipment - - 7,270 -
-------- -------- -------- --------
Total Revenues 9,785 14,080 50,154 40,163
-------- -------- -------- --------
Costs and expenses:
Services 12,000 6,439 24,952 17,953
Equipment - - 6,810 -
Product development 2,078 - 4,569 -
Selling, general, and
administrative 5,993 4,906 17,175 14,348
-------- -------- -------- --------
Total costs and expenses 20,071 11,345 53,506 32,301
-------- -------- -------- --------
Income (loss) from operations (10,286) 2,735 (3,352) 7,862
Interest income 719 269 1,665 712
-------- -------- -------- --------
Income (loss) before income taxes (9,567) 3,004 (1,687) 8,574
Provision for income taxes (3,061) 903 (540) 2,833
-------- -------- -------- --------
Net income (loss) $ (6,506) $ 2,101 $ (1,147) $ 5,741
======== ======== ======== ========
Earnings (loss) per share $ (0.31) $ 0.11 $ (0.06) $ 0.30
======== ======== ======== ========
Shares used in calculation of
earnings (loss) per share 21,027 19,266 20,285 19,079
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE> 4
TCSI Corporation
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,240 $ 16,946
Investments in marketable securities 10,911 5,081
Receivables 13,945 16,500
Other receivables 5,270 -
Deferred income taxes 1,801 1,913
Other current assets 3,955 3,068
-------- --------
Total current assets 63,122 43,508
Furniture, equipment, and leasehold improvements 7,473 5,134
Non-current investments in marketable securities 5,975 -
Non-current deferred income taxes 2,641 429
Other non-current assets 1,656 439
-------- --------
Total Assets $ 80,867 $ 49,510
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals $ 3,355 $ 4,005
Accrued compensation and related costs 7,240 4,823
Income taxes - 3,306
-------- --------
Total current liabilities 10,595 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; 21,156 shares issued and
outstanding, at September 30, 1996 and
18,602 at December 31, 1995 2,115 1,860
Additional paid-in capital 44,049 10,261
Retained earnings 24,108 25,255
-------- --------
Total shareholders' equity 70,272 37,376
-------- --------
Total liabilities and shareholders' equity $ 80,867 $ 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>
Nine Months Ended
September 30,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,147) $ 5,741
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operations:
Depreciation and amortization 2,327 1,107
Deferred income taxes (2,100) (71)
Changes in:
Receivables 2,555 (4,334)
Other receivables (5,270) -
Other current assets (887) (1,334)
Accounts payable and other accruals (650) 674
Accrued compensation and related costs 2,417 1,205
Income taxes 1,422 (427)
-------- --------
Net cash provided by (used in) operating
activities (1,333) 2,561
-------- --------
Investing activities:
Capital expenditures (4,665) (3,553)
Purchase of marketable securities (22,816) (7,583)
Maturity of marketable securities 11,011 13,277
Decrease (increase) in other non-current
assets (1,217) 29
-------- --------
Net cash provided by (used in) investing
activities (17,687) 2,170
-------- --------
Financing activities:
Issuance of common shares 25,845 2,945
Proceeds from exercise of options 3,469 1,216
Tax benefit from exercise of options - (660)
-------- --------
Net cash provided by financing activities 29,314 3,501
-------- --------
Net increase (decrease) in cash and cash
equivalents 10,294 8,232
Cash and cash equivalents at beginning of
period 16,946 3,680
-------- --------
Cash and cash equivalents at end of period $ 27,240 $ 11,912
======== ========
Supplemental disclosure of cash flow
information -
Cash paid for income taxes $ 934 $ 2,136
======== ========
</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) September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Billed $ 6,304 $ 7,832
Unbilled 8,041 9,068
Reserve for doubtful accounts (400) (400)
-------- --------
$ 13,945 $ 16,500
======== ========
</TABLE>
<PAGE> 7
TCSI Corporation
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.
4. Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements balances are as follows:
<TABLE>
<CAPTION>
(In thousands) September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Computer and lab equipment $ 14,451 $ 11,094
Furniture and fixtures 3,091 2,350
Leasehold improvements 2,009 1,442
-------- --------
19,551 14,886
Less accumulated depreciation and
amortization (12,078) (9,752)
-------- --------
$ 7,473 $ 5,134
======== ========
</TABLE>
5. Income Taxes
The effective tax rate used in the calculation of the income tax
benefit for the three and nine months ended September 30, 1996 was 32
percent (30 percent for the income tax provision during the three months
and 33 percent for the nine months ended September 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 operating results, the components
thereof, or changes in the tax laws effecting the Company, the effective
tax rate could change.
<PAGE> 8
TCSI Corporation
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
Net income 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. Such
common stock equivalents are excluded from the loss per share calculation
as their effect is anti-dilutive.
8. Subsequent Event
In 1994, the Company entered into a development agreement to deploy a
solution for a transportation customer. This deployment included equipment
purchased on behalf of the customer. Such equipment amounts, and related
costs, were included in the operating results for the first half of 1996.
On October 10, 1996, TCSI and the customer terminated this agreement.
The Company has recorded a charge in the third quarter of 1996 of
approximately $3.3 million to cover the costs related to the termination of
this agreement. Such amounts have been included in cost of services. The
customer has agreed to pay the Company approximately $4.9 million to
terminate the agreement. Such amount is included in other receivables.
Additionally, the Company has $2.0 million of equipment held for sale
relating to this agreement. Management believes the equipment is stated at
its net realizable value.
9. Litigation
On November 4, 1996, a class action lawsuit on behalf of certain
shareholders was filed against the Company and various of its officers and
directors. The suit alleges violations of state securities laws during the
period between October 11, 1995 and September 25, 1996. Management
believes that the suit is without merit and intends to contest it.
<PAGE> 9
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 10-K for the fiscal year ended
December 31, 1995 and in the Company's Registration Statement on Form S-3
filed on March 27, 1996.
Overview
TCSI is a leading provider of integrated software products and
services for the global telecom industry. A significant portion of the
Company's revenues is typically earned from telecommunications service
providers and equipment manufacturers. Since 1993, the Company's most
significant source of revenues has been its Object Services Package (OSP)
and related object-oriented products and services. The Company also earns
revenues from the licensing and development of wireless products containing
software from the Company's SuperTalk portfolio.
A significant portion of the Company's revenues and operating income
have been, and are expected to continue to be, derived from software
licensing (and related service) fees from a limited number of customers.
The Company recognizes revenues from software licensing fees only after
delivery of software products and if there are no remaining significant
post-delivery obligations. The Company also provides services to customers
under level-of-effort and fixed price contracts. Service revenues are
recognized on the percentage-of-completion method. Service revenue is
generally recognized based on the percentage of contract costs incurred in
relation to total estimated contract costs. Changes to total estimated
contract costs, if any, are recognized in the period such changes are
determined. The scope and size of many of the Company's system solutions
are large and complex, typically requiring delivery over several quarters.
From time-to-time, customers have established payment milestones which can
be achieved in some circumstances only after completion of the related
services. In some cases, customers have disputed fees charged for services
provided.
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 subject to delays
associated with lengthy approval processes typically accompanying such
significant capital expenditures. Accordingly, the Company is
substantially dependent on its customers' decisions as to the timing and
level of expenditures and resource commitments, and variability in the
timing of such expenditures has continued to cause material fluctuations in
the Company's business, operating results, and financial condition. In
this regard, during the third quarter of 1996, the Company's operating
results were materially adversely affected primarily due to a decrease in
customer license fees.
<PAGE> 10
TCSI Corporation
The Company has experienced and expects to continue to experience
significant fluctuations in revenues and operating results on a quarterly
basis due to termination, cancellation, or non-renewal of agreements. In
this regard, the Company and the customer recently terminated a significant
development agreement entered into in 1994 with a transportation company.
Prior to 1996, the Company's product development efforts were
primarily funded by customers as part of the development of software
applications. The Company believes that its future success is highly
dependent upon the Company's ability to successfully develop, introduce,
and enhance software products that respond to evolving market and
technological conditions. During 1996, the Company has begun funding a
larger portion of its product development costs internally.
Revenues
Revenues for the quarter ended September 30, 1996 decreased 31 percent
to $9.8 million from $14.1 million for the same period of 1995. Revenues
for the nine months ended September 30, 1996 increased 25 percent to $50.2
million compared to $40.2 million for the same period in 1995. The third
quarter decline in revenues was primarily attributable to a decrease in
customer license fees. In addition, the Company anticipated executing one
significant services agreement during the third quarter with a regional
bell operating company (RBOC). The Company has been working closely with
such RBOC and devoting significant resources towards developing a solution
which the Company believes may be re-sellable. Although the Company has
not finalized a written contract relating to such development to date, the
Company anticipates that a written contract will ultimately be executed.
There can be no assurance, however, that such contract will be executed or
that, if executed, the Company will successfully develop solutions that
will be re-sellable to any significant degree, if at all. See "Factors
That May Affect Future Operating Results."
In addition, the decline in revenues during the quarter ended
September 30 is attributable to the termination of a significant
development agreement entered into in 1994 with a transportation company.
As a result of such termination, the Company did not realize approximately
$1.5 million of scheduled service revenues in the third quarter of 1996 and
recorded a one-time charge of approximately $3.3 million for costs related
to such termination. The customer has agreed to pay the Company
approximately $4.9 million to terminate the agreement. Such amount is
included in other receivables. In connection with the deployment for such
customer, the Company purchased equipment on behalf of the customer, which
purchases were included in first and second quarter revenues and cost of
services in 1996.
<PAGE> 11
TCSI Corporation
Revenues by geographic location were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
North America 54% 68% 60% 70%
Asia/Pacific 36 22 29 21
Europe 10 10 11 9
-------- -------- -------- --------
100% 100% 100% 100%
======== ======== ======== ========
</TABLE>
The Company anticipates that the proportion of international revenues
to total revenues will continue to vary in future periods.* For a
discussion of the numerous risks associated with international operations,
see "Factors That May Affect Future Operating Results -- International
Sales."
Concentration of revenue from the Company's five largest customers
increased to 61 percent for the nine months ended September 30, 1996
compared to 47 percent for the same period in 1995. The increase was
primarily due to $7.3 million of equipment revenues (associated with one of
the five largest customers, for which the associated agreement was
terminated in October 1996). For the nine months ended September 30, 1996,
three of the five largest customers were among the top five customers for
the nine months ended September 30, 1995. Three customers each represented
more than 10 percent of total revenues for the three and nine months ended
September 30, 1996. There can be no assurance that such customers will
continue to place orders with the Company which equal or exceed the
comparable levels for prior periods. See "Factors That May Affect Future
Operating Results -- Customer Concentration."
Cost of services increased 86 percent for the quarter ended September
30, 1996 to $12.0 million from $6.4 million during the same period in 1995.
For the nine months ended September 30, 1996, cost of services increased 39
percent to $25.0 million from $18.0 million for the same period in 1995. As
a percentage of revenue, cost of services increased to 123% for the three
months ended September 30, 1996 compared to 46% for the same period in
1995. The increases were attributed to a $3.3 million one-time charge
related to the termination of a system deployment for a transportation
customer discussed above. Due to a variety of factors, the Company's cost
of services as a percentage of revenues could continue to fluctuate. See
"Factors that May Affect Future Operating Results."
- --------------------
* 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 Operating Results" commencing on page 14 for a discussion of factors
that could affect future performance.
<PAGE> 12
TCSI Corporation
Selling, general, and administrative expenses for the third quarter of
1996 increased 22 percent to $6.0 million from $4.9 million for the same
period in 1995. For the nine months ended September 30, 1996, such costs
increased 20 percent to $17.2 million from $14.3 million for the nine
months ended September 30, 1995. In 1996, the Company continued to expand
its worldwide sales and marketing force and increase infrastructure to
support a growing engineer base. At September 30, 1996, total engineers
were 264 compared to 195 at September 30, 1995.
The Company anticipates that it will receive an income tax benefit of
approximately 32 percent of its operating loss during 1996 as a result of
available loss carry-backs. Realization of the Company's deferred tax
assets is dependent upon the Company generating sufficient taxable income
in future years to obtain the benefit from the reversal of temporary
differences and from tax credit carry forwards. The Company, however, has
not provided a valuation allowance against its deferred tax assets as
management believes that it is more likely than not that the Company will
realize these assets.*
Shares used in the calculation of net income (loss) per share (EPS)
increased to 21.0 million for the quarter ended September 30, 1996 compared
to 19.3 million for the same quarter in 1995. For the nine months ended
September 30, 1996, shares used in the EPS calculation increased to 20.3
million from 19.1 million for the same period 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. Shares used in the
1995 calculation also include the dilutive effect of unexercised employee
stock options. 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 nine months ended September 30, 1996, cash flows used in
operations were $1.3 million compared $2.6 million provided by operations
for the nine months ended September 30, 1995. The Company's receivables
continue to be impacted by the timing of contractual billing and collection
milestones. Receivables are primarily associated with large, credit-worthy
customers, and the Company has experienced no significant receivable write-
offs as a result of customer default. The Company strives to reduce
receivable balances, but anticipates that receivable balances will continue
to fluctuate in the future.*
The Company's other receivables include $4.9 million related to the
termination of a system deployment with a transportation customer.
Additionally, the Company has $2.0 million of equipment held for sale
relating to this agreement included in other current assets. Management
believes that the equipment is recorded at its net realizable value and
that any losses resulting from the subsequent sale of this equipment will
be insignificant.*
- --------------------
* 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 Operating Results" commencing on page 14 for a discussion of factors
that could affect future performance.
<PAGE> 13
TCSI Corporation
Cash and investments in marketable securities totaled $44.1 million at
September 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 nine months of 1996
increased to $29.3 million compared to $3.5 million for the same period in
1995. The Company generally invests in securities with maturities less
than two years.
For the nine months ended September 30, 1996, the Company used $17.7
million in cash in investing activities. The maturity of $11.0 million of
marketable securities was offset by the purchase of $22.8 million of
marketable securities and $4.7 million of capital expenditures associated
with hardware, software, and the expansion of the Company's facilities.
The Company has no significant capital commitments other than commitments
under facilities and operating leases which are expected to be $2 to $3
million in the fourth quarter of 1996. The Company believes that its
available sources of funds 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 Operating Results" commencing on page 14 for a discussion of factors
that could affect future performance.
<PAGE> 14
TCSI Corporation
Factors that May Affect Future Operating Results
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 period, as in third quarter 1996, the Company's revenues 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> 15
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. During the third
quarter of 1996, for example, the Company had anticipated executing a
significant agreement with an RBOC with whom the Company has been working
closely for an extended period of time. 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> 16
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
nine months ended September 30, 1996, the Company funded $4.6 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 have 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> 17
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 46 and
40 percent of the Company's total revenues for the three and nine month
periods ended September 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> 18
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> 19
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.
<PAGE> 20
TCSI Corporation
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.
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> 21
TCSI Corporation
PART II. OTHER INFORMATION
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 income (loss) 23
(b) Reports on Form 8-K filed in the third quarter of 1996.
(a) Press Release dated July 16, 1996, "TCSI Announces Completion of
Software for the Japanese Personal Digital Cellular Standard; Million
Dollar Award to TCSI Fuels Development Effort"
(b) Press Release dated July 17, 1996, "TCSI Names Four New Executives in
Response to Global Growth; New Hires Bring Additional Telecom Software
Experience to TCSI International Operations"
(c) Press Release dated July 18, 1996, "TCSI Corporation Reports Second
Quarter Results"
(d) Press Release dated July 22, 1996, "TCSI's Object Technology Selected
for 120-Site Intranet at the Federal Aviation Administration;
Government Systems Incorporated Uses OSP to Build State-of-the-Art
Telecommunications Applications"
(e) Press Release dated August 27, 1996, "TCSI's Software Solutions Widely
Adopted by the Cellular Industry for Building Object-Based Operations
and Maintenance Centers; Leading Provider of Telecom Software Secures
Over $6 Million from Cellular Communications Companies"
(f) Press Release dated September 9, 1996, "TCSI Teams Up with Two Premier
Telecom Industry Forums; Leading Telecom Software Provider Becomes
Board Member of the Network Management Forum and Member of SONET
Interoperability Forum"
(g) Press Release dated September 18, 1996, "TCSI Named World's Number One
Provider of Object Middleware for Second Year Running; IDC Report
Validates TCSI's Track Record in Designing and Delivering
Enterprise-Scale, Object-Based Software Solutions"
(h) Press Release dated September 25, 1996, "TCSI Corporation Anticipates
a Loss For Third Quarter"
<PAGE> 22
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)
November 7, 1996 /s/ Paul A. Farmer
- ----------------------- -------------------------------------
Date Paul A. Farmer, Chief Financial Officer,
Secretary, Treasurer, and Vice President
<PAGE> 23
TCSI Corporation
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE INCOME (LOSS)
COMPUTATION OF SHARES USED IN PER SHARE CALCULATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data) Three Months Ended Nine Months Ended
September 30, September30,
------------------ -----------------
1996 1995 1996 1995
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock 21,027 18,056 20,285 17,937
Common stock equivalents - 1,210 - 1,142
-------- -------- -------- --------
Shares used in calculation of
earnings (loss) per share 21,027 19,266 20,285 19,079
======== ======== ======== ========
Net income (loss) $(6,506) $ 2,101 $(1,147) $ 5,741
======== ======== ======== ========
Earnings (loss) per share $ (0.31) $ 0.11 $ (0.06) $ 0.30
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the financial statement as of September 30,
1996 of TCSI Corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000875315
<NAME> TCSI Corporation
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Sep-30-1996
<CASH> 27,240
<SECURITIES> 16,886
<RECEIVABLES> 19,215
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,122
<PP&E> 7,473
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,867
<CURRENT-LIABILITIES> 10,595
<BONDS> 0
0
0
<COMMON> 2,115
<OTHER-SE> 68,157
<TOTAL-LIABILITY-AND-EQUITY> 80,867
<SALES> 0
<TOTAL-REVENUES> 50,154
<CGS> 0
<TOTAL-COSTS> 53,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,687)
<INCOME-TAX> (540)
<INCOME-CONTINUING> (1,147)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,147)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
