<PAGE>
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, 1997
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)
1080 Marina Village Parkway, Alameda, CA 94501
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip code)
Telephone number(510) 749-8500
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 August 1, 1997, there were 21,558,775 shares of common stock of the
Registrant outstanding.
<PAGE>
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, 1997 and 1996 (Unaudited). . . . . . . . . . . 3
Consolidated Balance Sheets at June 30, 1997 (Unaudited)
and December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996 (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 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. . . . . . . . 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . 30
-2-
<PAGE>
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 Three Months Ended
June 30, June 30,
----------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Services $ 9,055 $ 12,962 $ 16,858 $ 25,545
Software licensing fees 449 4,438 2,480 7,554
---------- ---------- ---------- ---------
Total services and licensing fees 9,504 17,400 19,338 33,099
Equipment, non-telecom -- 4,431 -- 7,270
---------- ---------- ---------- ---------
Total revenues 9,504 21,831 19,338 40,369
---------- ---------- ---------- ---------
Costs, expenses, and special items:
Services 5,139 6,824 10,282 12,952
Equipment, non-telecom -- 4,156 -- 6,810
Product development 1,361 1,487 2,813 2,491
Selling, general, and administrative 4,306 5,899 8,874 11,182
Non-recurring special items 818 -- 1,088 --
---------- ---------- ---------- ---------
Total costs, expenses, and special items 11,624 18,366 23,057 33,435
---------- ---------- ---------- ---------
Income (loss) from operations (2,120) 3,465 (3,719) 6,934
Interest income 729 664 1,478 946
---------- ---------- ---------- ---------
Income (loss) before income taxes (1,391) 4,129 (2,241) 7,880
Provision for (benefit from) income taxes (472) 1,321 (761) 2,521
---------- ---------- ---------- ---------
Net income (loss) $ (919) $ 2,808 $ (1,480) $ 5,359
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Earnings (loss) per share (EPS) $ (0.04) $ 0.13 $ (0.07) $ 0.25
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Shares used in calculation of EPS 21,327 22,191 21,335 21,042
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of this financial information.
-3-
<PAGE>
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,465 $ 30,880
Investments in marketable securities 12,452 14,352
Receivables 8,815 12,522
Other receivables 2,314 2,042
Deferred income taxes 1,731 2,178
Other current assets 1,260 2,308
----------- ------------
Total current assets 58,037 64,282
Furniture, equipment, and leasehold improvements, net 10,775 9,234
Non-current investments in marketable securities 6,975 7,375
Non-current deferred income taxes 2,478 5,000
Other non-current assets 689 1,284
----------- ------------
Total assets $ 78,954 $ 87,175
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals $ 2,098 $ 7,263
Accrued compensation and related costs 3,157 4,705
Income taxes 793 1,597
----------- ------------
Total current liabilities 6,048 13,565
----------- ------------
Shareholders' equity:
Preferred shares, $0.01 par value; 5,000 shares authorized;
none outstanding -- --
Common shares, $0.10 par value; 75,000 shares authorized;
21,516 shares issued and outstanding - 1997 (21,219 - 1996) 2,152 2,122
Additional paid-in capital 46,661 45,939
Retained earnings 24,069 25,549
Foreign currency translation adjustments (86) --
Unrealized gain on investments 110 --
----------- ------------
Total shareholders' equity 72,906 73,610
----------- ------------
Total liabilities and shareholders' equity $ 78,954 $ 87,175
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of this financial information.
-4-
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,480) $ 5,359
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization 1,755 1,416
Deferred income taxes (1,816) 85
Changes in:
Receivables 3,707 (5,623)
Equipment receivables, non-telecom -- (7,270)
Other receivables (810) --
Other current assets 1,048 1,692
Accounts payable and other accruals (2,594) 503
Accrued compensation and related costs (1,548) (388)
Income taxes 3,981 1,832
---------- ----------
Net cash provided by (used in) operating activities 2,243 (2,394)
---------- ----------
INVESTMENT ACTIVITIES
Capital expenditures (5,329) (3,083)
Purchase of marketable securities (9,090) (11,911)
Maturity and sale of marketable securities 11,500 4,250
Decrease (increase) in other non-current assets 595 (141)
---------- ----------
Net cash provided by (used in) investing activities (2,324) (10,885)
---------- ----------
FINANCING ACTIVITIES
Issuance of common shares -- 25,900
Proceeds from exercise of options 752 2,761
---------- ----------
Net cash provided by financing activities 752 28,661
---------- ----------
Effect of foreign currency exchange rate changes on cash
and cash equivalents (86) --
---------- ----------
Net increase in cash and cash equivalents 585 15,382
Cash and cash equivalents at beginning of period 30,880 16,946
---------- ----------
Cash and cash equivalents at end of period $ 31,465 $ 32,328
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refund received) for income taxes, net $ (2,928) $ 604
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of this financial information.
-5-
<PAGE>
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 1996 Annual Report on Form 10-K.
2. 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
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 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 from investments have been insignificant to the results of
operations and financial position of the Company.
3. RECEIVABLES AND CREDIT RISK
Receivable balances are primarily from large, credit-worthy customers
in the telecommunications industry and are unsecured. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company does not anticipate any significant default from a
customer's inability to make a payment for products and/or services
received. Reserves are maintained for potential credit losses.
Receivables balances are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1997 1996
-------- ------------
<S> <C> <C>
Billed receivables $ 6,700 $ 10,433
Unbilled receivables 2,515 2,489
Reserve for doubtful accounts (400) (400)
-------- ------------
$ 8,815 $ 12,522
-------- ------------
-------- ------------
</TABLE>
-6-
<PAGE>
TCSI CORPORATION
4. FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Furniture, equipment, and leasehold improvements are stated at
cost. Depreciation is provided for furniture and equipment in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives of five years and three years, respectively,
utilizing the straight-line method. Amortization is provided for leasehold
improvements in amounts sufficient to relate the cost over the shorter of
the term of the related office lease or ten years utilizing the
straight-line method.
Furniture, equipment, and leasehold improvements balances are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1997 1996
--------- ------------
<S> <C> <C>
Computer and lab equipment $ 13,430 $ 12,856
Furniture and fixtures 3,531 3,307
Leasehold improvements 6,692 4,194
--------- ------------
23,653 20,357
Less accumulated depreciation and amortization (12,878) (11,123)
--------- ------------
$ 10,775 $ 9,234
--------- ------------
--------- ------------
</TABLE>
5. INCOME TAXES
The effective tax rate used in the calculation of the income tax
provision (benefit) for the three and six months ended June 30, 1997 and
1996 was 34 percent and 32 percent, respectively. 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.
At June 30, 1997, the Company had approximately $4.2 million of
deferred tax assets. Included in this balance is approximately $0.7 million
associated with stock options. In the event these stock option related
deferred assets are not entirely realized, the unrealized balance would be
reversed to shareholders' equity. Realization of the remaining 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.
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-
<PAGE>
TCSI CORPORATION
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. Such common
stock equivalents are excluded from the loss per share calculation as their
effect is anti-dilutive for the three and six month periods ending
June 30, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share," which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in no change in primary earnings (loss) per
share for the three and six months ended June 30, 1997 and the three months
ended June 30, 1996. For the six months ended June 30, 1996, the impact is
expected to result in an increase in primary earnings per share of $0.02 to
$0.27 per share. The impact of Statement 128 is not expected to be
material.
8. LITIGATION
In late 1996, two class action lawsuits on behalf of certain
shareholders were filed against the Company and various of its officers and
directors. The suits allege violations of state securities laws during 1995
and 1996. Management believes that the claims contained in the suits are
without merit and is vigorously defending such suits. In the opinion of
management, resolution of this litigation is not expected to have a
material adverse effect on the financial position of the Company. However,
depending on the amount and timing, an unfavorable resolution of this
matter could materially affect the Company's future results of operations
or cash flows in a particular period.
On May 16, 1997, Atmel Corporation made a claim under the
TCSI/Atmel Corporation Purchase Agreement dated November 14, 1996,
asserting that TCSI breached certain representations and warranties in
connection with the sale of its Consumer Product Division to Atmel
Corporation. Pursuant to the Purchase Agreement, $1,000,000 of the sale
price was escrowed to be available for claims arising from the transaction.
Recently, Atmel has asserted that its damages exceed $3,000,000. Management
disputes this claim and intends to initiate an arbitration proceeding to
obtain the release of the $1,000,000 escrow fund. In the opinion of
management, resolution of this matter is not expected to have a material
adverse effect on the financial position of the Company. However, depending
on the amount and timing, an unfavorable resolution of this matter could
materially affect the Company's future results of operations or cash flows
in a particular period.
-8-
<PAGE>
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, 1996.
OVERVIEW
TCSI Corporation provides integrated software products and services
for the global telecommunications industry. Since its inception in 1983, a
significant portion of the Company's revenues has been earned from
telecommunications service providers and equipment manufacturers. Since
1993, the Company's revenues have resulted primarily from sales of
object-oriented software products and services. During the second half of
1996, the Company divested its non-telecom product lines by licensing its
embedded software product lines and terminating its final
transportation-related development agreement. As a result, the Company's
primary focus has been on offering software solutions to the
telecommunications industry.
The Company provides services to customers under level-of-effort and
fixed price contracts. Service revenues are recognized on the
percentage-of-completion method 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 only after completion of the related services. In
some cases, customers have disputed fees charged for services provided.
The Company may write off receivable amounts if such disputes cannot be
resolved. Additionally, a significant portion of the Company's revenues and
operating income has been, and is expected to continue to be, derived from
software licensing 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 recognizes revenues from software licensing fees
with significant post-delivery obligations associated with the related
services contract on a percentage of completion basis.
-9-
<PAGE>
TCSI CORPORATION
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. The variability in the timing of
such expenditures could cause material fluctuations in the Company's
business, operating results, and financial condition. In this regard, the
consistency of the Company's 1996 and 1997 quarterly results have been
adversely affected by customer delays in the purchase of software licenses.
A substantial portion of the Company's revenues are derived from
the sale of the Company's software products and services to major
telecommunications service providers and equipment manufacturers. Due to
the complex nature of the advanced element, network, and service management
systems being developed, successful deployment of these systems often
contains significant technological risks. The Company has in the past
relied and will in the future rely on its development and implementation
expertise. Additionally, development and implementation of these systems
often occurs over several quarters. There exists the risk that a change in
the customer's technology or business strategy during such lengthy
development and implementation periods may cause early termination of the
project or discontinuance of future phases. In this regard, 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.
Management believes that revenue growth is highly dependent upon the
development and enhancement of software products that meet market needs.
Prior to 1996, 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 agreed to
restrict its use of such products to certain markets and during certain
time periods. During 1996, the Company began internally funding a larger
portion of its product development costs. Management intends to target
product development spending at levels consistent with other software
companies. Furthermore, management expects that from time to time it may
acquire businesses, products, or technologies to enhance the Company's
current product offerings. To date, the Company has not consummated any
such acquisitions and the Company has no current agreements to effect any
such acquisitions. The failure to successfully evaluate, negotiate, and
effect such an acquisition could have a material adverse effect on the
Company's business, operating results, and financial condition.
-10-
<PAGE>
TCSI CORPORATION
RESULTS OF OPERATIONS
REVENUES. The Company generates revenues from the sale of its
software products and related services to the telecommunications industry.
For the three and six months ended June 30, 1997 and 1996, revenues were as
follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
TOTAL COMPANY REVENUES:
Services $ 9,055 $ 12,962 $ 16,858 $ 25,545
Software licensing fees 449 4,438 2,480 7,554
Equipment, non-telecom -- 4,431 -- 7,270
----------- ------------- ----------- -----------
Totals $ 9,504 $ 21,831 $ 19,338 $ 40,369
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
TELECOM REVENUES:
Services $ 9,055 $ 11,153 $ 16,796 $ 20,221
Software licensing fees 449 2,145 2,059 4,662
----------- ------------- ----------- -----------
Totals $ 9,504 $ 13,298 $ 18,855 $ 24,883
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
Total Company revenues for the three months ended June 30, 1997
decreased 56 percent to $9.5 million from $21.8 million for the same
period in 1996. For the six months ended June 30, 1997, the Company's
total revenues decreased 52 percent to $19.3 million from $40.4 million for
the comparable 1996 period. The decline in revenues for both periods is,
in part, due to $8.5 million and $15.5 million of revenues generated for
the three and six months ended June 30, 1996, respectively, by non-telecom
business units which were discontinued in late 1996. For the three months
ended June 30, 1997, total telecom related revenues declined to $9.5
million from $13.3 million, or 29 percent, and for the six months ended
June 30, telecom revenues decreased 24 percent to $18.9 million in 1997
compared to $24.9 million in 1996. The decline in telecom services
revenues is due primarily to delayed or canceled customer deployments.
Such delays in deployments additionally resulted in decreased telecom
software licensing fees for the three and six months ended June 30, 1997.
The Company expects software licensing fees to continue to decline in the
near term and to vary from period to period.*
__________________
* 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. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.
-11-
<PAGE>
TCSI CORPORATION
The following summarizes revenues by geographic location:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended,
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
------- -------- -------- -------
<S> <C> <C> <C> <C>
TOTAL COMPANY:
North America 28% 62% 29% 61%
Asia and the Pacific Rim 50 28 45 28
Europe 22 10 26 11
------- -------- -------- -------
100% 100% 100% 100%
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
<TABLE>
Three Months Ended Six Months Ended,
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
------- -------- -------- -------
<S> <C> <C> <C> <C>
TELECOM:
North America 28% 55% 29% 53%
Asia and the Pacific Rim 50 29 45 29
Europe 22 16 26 18
------- -------- -------- -------
100% 100% 100% 100%
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
Telecom revenues from Asia and the Pacific Rim and Europe increased
approximately 15 percent for both the three and six months ended
June 30, 1997. Such revenues were $6.9 million for the three months ended
June 30, 1997 compared to $5.9 million for the same period in 1996 and
$13.4 million for the first six months of 1997 compared to $11.7 million
for the comparable 1996 period. The increase is attributable to continued
relationships with existing customers resulting in revenues from follow-on
contracts signed in early 1997. Telecom revenues from North America for
the three months ended June 30 declined to $2.6 million in 1997 from
$7.3 million in 1996. For the six months ended June 30, 1997 and 1996
telecom revenues from North America decreased to $5.4 million from
$13.2 million, respectively. As a result of low North American based
telecom bookings during 1996, telecom revenues from North America declined
in 1997, as the Company generally realizes services revenues involving
design, development, testing, and deployment over a twelve to eighteen
month period. The Company anticipates that revenues from Asia and the
Pacific Rim and European customers will continue to account for a
significant portion of its total revenue in future periods.*
__________________
* 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. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.
-12-
<PAGE>
TCSI CORPORATION
To date, a significant portion of revenues has been concentrated
among a limited number of customers. For the six months ended June 30, the
concentration of total revenue from the Company's five largest customers
remained relatively unchanged at just over 60 percent for both 1997 and
1996. The concentration of revenue from the Company's five largest telecom
customers for the six months ended June 30, declined to 61 percent in 1997
from 68 percent in 1996. The decline is primarily due to the associated
decline in telecom revenues for the six months ended June 30, 1997 compared
to the same period in 1996. Two customers each represented 15 percent or
more of total revenues for the six months ended June 30, 1997. 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 Affecting Operating Results and Market Price of Stock -- Customer
Concentration."
DIRECT COSTS OF SERVICES. The Company incurs direct costs in the
development and deployment of its customer's software solutions. The major
components of direct costs are employee compensation, subcontractor fees,
training costs, and other billable direct costs, including travel expenses.
Direct costs also include an allocation for benefits, facilities, and
depreciation. For the three months ended June 30, 1997, costs of services
declined 25 percent to $5.1 million from $6.8 million for the same period
in 1996. For the six months ended June 30, costs of services declined to
$10.3 million in 1997 from $13.0 million in 1996, a 21 percent decrease.
The decrease is primarily due to the divestiture of the Company's
non-telecom business units in late 1996. As a percentage of services
revenues, cost of services were 57 percent for the three months ended
June 30, 1997 compared to 53 percent for the same period in 1996. For the
six months ended June 30, costs of services as a percentage of services
revenues were 61 percent in 1997 compared to 51 percent in 1996. As in
1996, during the first three months of 1997 the Company continued to invest
in the completion of telecom software solutions. Such customer-related
investments have been reduced in the second quarter of 1997 bringing
directs costs to 54 percent of revenue for the three months ended
June 30, 1997. Direct costs of services for the three months ended
June 30, 1996 were 31 percent of revenues. The Company anticipates that
such investments will continue to decrease as a percentage of revenue
throughout the remainder of 1997.*
__________________
* 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. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.
-13-
<PAGE>
TCSI CORPORATION
PRODUCT DEVELOPMENT. Product development includes employee
compensation, subcontractor fees, training costs, and other product
development costs, including an allocation for benefits, depreciation, and
facilities. In 1996, the Company began internally funding its product
development costs. Prior to 1996, such product development had been
primarily funded by customers as part of the development of software
applications for the customer. In the second quarter of 1997, the Company
invested $1.4 million or 14 percent of revenues on internally funded
product development compared with $1.5 million or 7 percent of revenues for
the second quarter of 1996. For the six months ended June 30, 1997 the
Company invested $2.8 million or 15 percent of revenues on such product
development compared to $2.5 million or 6 percent in 1996. In 1997, the
funds have been used primarily for the development of the Company's
SolutionCore-TM- product, which includes the fifth release of Object
Services Package (OSP) and new releases of related development tools.
The Company expects to continue to invest in SolutionCore, as well as
its new components-based applications, SolutionSuites-TM-, throughout
1997, in amounts generally consistent with the current period's spending
levels.*
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling expenses
include sales and marketing employee compensation, promotional material,
trade shows, travel, and facilities expenses. General and administrative
costs include compensation costs related to executive management, finance,
and administrative personnel along with the other administrative costs
including recruiting, legal and accounting fees, insurance, and bad debt
expense. Selling, general, and administrative expenses decreased 27 percent
to $4.3 million for the three months ended June 30, 1997 from $5.9 million
in the comparable 1996 period. For the six months ended June 30, selling,
general, and administrative expenses decreased 21 percent to $8.9 million
in 1997 from $11.2 million in 1996. The decrease is due to the
discontinuance of non-telecom business units in late 1996, as well as the
Company's efforts to reduce general and administrative costs through
efficiencies and the consolidation of its facilities. The Company's
resources devoted to sales and marketing have declined slightly over 1996
levels. The Company expects to continue its efforts to reduce general and
administrative costs throughout 1997.* As a percent of revenue, selling,
general, and administration expense was 45 percent for the three months
ended June 30, 1997 compared to 27 percent for the same 1996 period. For
the six months ended June 30, such costs as a percent of revenue were
46 percent for 1997 and 28 percent for 1996. The increase is primarily
attributed to the decline in revenues for the three and six months ended
June 30, 1997, compared to the same periods in 1996.
NON-RECURRING SPECIAL ITEMS. The Company incurred an expense of $0.8
million in the second quarter of 1997 resulting from an adjustment to the
market-value of equipment held for resale related to the termination of a
non-telecom contract in the third quarter of 1996. Such charges for the six
months ended June 30, 1997 were $1.1 million. The Company expects to
conclude the sale of the equipment in the next six months and does not
anticipate future expenses associated with this equipment.*
__________________
* 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. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.
-14-
<PAGE>
TCSI CORPORATION
INCOME TAXES. The Company records income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The Company's effective tax rate was 34 percent and 32 percent for
the three and six months ended June 30, 1997 and 1996, respectively. The
Company realized a tax benefit of $0.5 million for the quarter ended
June 30, 1997 compared to income tax expense of $1.3 million in 1996. For
the six months ended June 30, the Company realized a tax benefit of
$0.8 million in 1997 compared to income tax expense of $2.5 million in
1996.
EARNINGS PER SHARE. Shares used in the calculation of earnings (loss)
per share (EPS) decreased to 21.3 million in 1997 from 22.2 million in
1996 for the quarters ended June 30, resulting in EPS of $(0.04) and $0.13,
respectively. For the six months ended June 30, shares used in the EPS
calculation increased to 21.3 million in 1997 compared to 21.0 million in
1996, resulting in EPS of $(0.07) and $0.25, respectively. For the three
and six months ended June 30, 1997 the calculation of EPS excludes
unexercised option shares as such shares would be anti-dilutive as a result
of the net loss for the periods. Such exclusion of unexercised option
shares attributed to the decline in shares used in the calculation of EPS
for the second quarter of 1997 compared to the same period in 1996. For
the six months ended June 30, 1997, the exclusion of unexercised option
shares was offset by options exercised during the first six months of 1997
resulting in a net increase in the shares used in the calculation of EPS
compared to the first six months of 1996.
__________________
* 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. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.
-15-
<PAGE>
TCSI CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
Net cash generated from operating activities was $2.2 million for the
six months ended June 30, 1997 compared to net cash used in operations of
$2.4 million for the comparable period in 1996. The increase in cash
generated from operations is primarily due to a decline in the Company's
accounts receivable. In the first period of 1996, accounts receivable
balances included a significant amount related to transportation and
wireless product lines which were discontinued in late 1996. As in the
past, the Company's operating cash flows in the future may be affected by
fluctuating receivable balances. The Company's receivables are primarily
from large, credit-worthy customers and, as a result, the Company does not
anticipate any significant default from a customer's inability to make a
payment for products and/or services received.*
Cash provided by financing activities declined $27.9 million to
$0.8 million for the six months ended June 30, 1997 compared to
$28.7 million for the comparable 1996 period. In early 1996, the Company
raised funds through a follow-on public offering, realizing net proceeds
of approximately $25.9 million. For the six months ended June 30, 1997,
$2.3 million cash was used in investment activities compared to
$10.9 million used in investment activities for the same period in 1996.
In 1997, the six month period included the purchase of $9.1 million of
marketable securities and $11.5 million of maturities of marketable
securities compared to the purchase of $11.9 million of marketable
securities and $4.3 million of maturities for the comparable period in
1996. The net decrease in cash used in such investment activities also
included $5.3 million of cash used for capital expenditures and
leasehold improvements during the first six months of 1997 compared to
$3.1 million of cash used for capital expenditures for the comparable 1996
period. The increase in capital expenditures is primarily related to the
consolidation of the Company's facilities in northern California and the
Company's new office in the United Kingdom. The Company expects such
expenditures to be significantly lower in the near term.* The Company
currently has no significant commitments for capital expenditures, although
management intends to support operational needs as necessary.
__________________
* 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. The Company
strongly encourages review of the section entitled "Factors Affecting
Operating Results and Market Price of Stock" commencing on page 17 for a
discussion of factors that could affect future performance.
-16-
<PAGE>
TCSI CORPORATION
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
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 the risks the Company faces.
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 operating income has been
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 customers 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, 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.
-17-
<PAGE>
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 (averaging
approximately nine to twelve 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 services revenue 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 may take multiple quarters to complete. From time to time
the Company has provided services to implement certain large projects, and,
although no contractual basis exists for the customer to do so, certain
customers have delayed payment of a portion of service fees and in some
cases have disputed the fees charged. 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 and
annual operating results and financial condition are likely to vary
significantly in the future.
ACCEPTANCE OF THE COMPANY'S PRODUCTS; 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 software
solutions to major corporations 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. Due to the complex nature of the
advanced element, network, and service management systems developed by the
Company, 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.
-18-
<PAGE>
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 in general
and the Company's portfolio of products and services in particular. 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.
Prior to 1996, 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 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. Management intends to target product development
spending at amounts consistent with other software companies. 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. In particular, the
Company anticipates that, in 1997, a large portion of revenues will be
derived from contracts negotiated through a large equipment manufacturer
in Asia. 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, transferred, 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.
-19-
<PAGE>
TCSI CORPORATION
PRODUCT DEFECTS
The Company provides complex software products for major
corporations. The development and enhancement of such software entails
substantial risks of product defects. The Company has in the past
identified software defects in certain of its products. 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.
IMPLEMENTATION RISKS
As characteristic of companies providing software solutions to the
telecommunications industry, the complexities involved in implementing the
Company's software solutions entail risks of performance failures. In some
cases the Company has agreed to accept some financial responsibility, in
the form of negotiated penalty amounts, should the Company's products not
meet specifications or cause customer system downtime. There can be no
assurance that the Company will not encounter 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.
-20-
<PAGE>
TCSI CORPORATION
INTERNATIONAL SALES
Revenues outside of North America accounted for just over 70
percent of the Company's total revenues for the three and six months ended
June 30, 1997. 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.
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, generally pays the expenses of its international
operations in local currencies and generally does not engage in hedging
transactions with respect to such obligations. Upward 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.
-21-
<PAGE>
TCSI CORPORATION
DEPENDENCE ON TELECOMMUNICATIONS 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 from 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 network management
software 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.
COMPETITION
The Company offers products and services in the evolving markets
for telecom network management software 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 software 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.
-22-
<PAGE>
TCSI CORPORATION
The Company's current and prospective competitors offer a variety
of solutions to address telecom software needs. The Company faces
competition in each of the three functional areas the Company believes
are necessary for the delivery of complete network management software
solutions: development environments, object frameworks, and customized
applications. Because certain of the Company's competitors focus only on
one of these functional areas, 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,
systems integrators, and equipment 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 does the Company.
Furthermore, many of the Company's current and potential customers
continuously evaluate whether to design, develop, and support internally
the software 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.
-23-
<PAGE>
TCSI CORPORATION
The Company's products are designed to operate on a variety of
hardware and software platforms and with a variety of 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 have a material adverse impact on 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 revenues could have a material adverse effect on the Company's
business, operating results, and financial condition.
PROTECTION OF INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in part
upon its proprietary software technology. The Company relies on a
combination of patent, trade secret, copyright and trademark laws,
nondisclosure and other contractual agreements, and technical measures
to protect its proprietary rights. To date, the Company has patents and
patents pending related to its telecom products. The Company expects to
continue to file patent applications where it believes it is appropriate
to protect its proprietary technologies. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will prevent
misappropriation of such technology, and such protections may not preclude
competitors from developing products with functionality or features similar
to the Company's products. In addition, effective patent, copyright,
trademark, and trade secret protection may be unavailable or limited in
certain foreign countries. The failure of the Company to protect its
proprietary information could have a material adverse effect on the
Company's business, operating results, and financial condition.
-24-
<PAGE>
TCSI CORPORATION
While the Company believes that its products and trademarks and
their use by customers does not infringe upon the proprietary rights of
third parties, there can be no assurance that the Company will not receive
future communications from third parties asserting that the Company's
products or their use by customers infringe, or may infringe, the
proprietary rights of such third parties. The Company expects that software
product developers will be increasingly subject to infringement claims as
the numbers of products and competitors in the Company's industry segment
grows and the functionality of products in different industry segments
overlaps. Any such claims, including meritless claims, could result in
costly, time-consuming litigation, and diversion of technical and
management personnel. In the event any third party were to make a valid
claim and a license were not made available on commercially reasonable
terms, or if the Company were unable to develop non-infringing alternative
technology, the Company's business, operating results, and financial
condition could be materially adversely affected.
In addition, certain of the Company's customers regard the
solutions provided by the Company to be proprietary to such customers and
may attempt to prohibit the Company from using or otherwise benefiting from
certain of the advances made in developing such solutions. Although the
Company intends to increasingly standardize its integration solutions
through the use of object-oriented software products, there can be no
assurance that the prohibition or restrictions imposed by certain customers
of the use of certain intellectual property will not adversely affect the
Company's business, operating results, and financial condition.
The Company relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurance that these third party software licenses will continue
to be available to the Company on commercially reasonable terms or that
such licenses will not be terminated. Although the Company believes that
alternative software is available from other third-party suppliers, the
loss of or inability to maintain any of these software licenses or the
inability of the third parties to enhance their products in a timely and
cost-effective manner could result in delays or reductions in product
shipments by the Company until equivalent software could be developed
internally or identified, licensed, and integrated, which would have a
material adverse effect on the Company's business, operating results, and
financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company's future growth and success depends to a significant
extent on the ability to attract and retain qualified managerial, sales,
and software engineering personnel. The Company has at times experienced
and continues to experience difficulty in attracting and retaining
qualified personnel. The Company's future success will also depend on the
ability of its current and future management personnel to operate
effectively, both independently and as a group. The Company has recently
experienced a change in and temporary loss of executive management
personnel. Competition for the hiring of such personnel in the software
industry is intense, and there can be no assurance that the Company will
be successful in locating candidates with appropriate qualifications.
Failure to attract and retain key personnel could have a material adverse
effect on the Company's business, operating results, and financial
condition.
-25-
<PAGE>
TCSI CORPORATION
RISKS ASSOCIATED WITH ACQUISITIONS
The Company from time to time evaluates potential acquisitions of
complementary businesses, products, and technologies. To support its growth
plans, the Company may acquire companies that have a significant installed
base of products not yet offered by the Company, have strategic
distribution channels or customer relationships, or otherwise present
opportunities which management believes enhance the Company's competitive
position. Such acquisitions would subject the Company to numerous risks,
including risks associated with the integration into the Company of new
employees and technology. Moreover, the negotiation and acquisition of such
transactions involve the diversion of substantial management resources and
the evaluation of such opportunities requires substantial diversion of
engineering and technological resources. In addition, transactions
involving the issuance by the Company of common stock or other securities
could result in immediate and substantial dilution to the Company's
existing shareholders, large one-time write-offs, or the creation of
goodwill or other intangible assets that could result in amortization
expenses. To date, the Company has not consummated an acquisition
transaction. The failure to successfully evaluate, negotiate, and effect
acquisition transactions could have a material adverse effect on the
Company's business, operating results, and financial condition.
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of the Company's common stock has
been and is likely to continue to be highly volatile and may be
significantly affected by factors such as actual or anticipated
fluctuations in the Company's business, operating results, and financial
condition, announcements of technological innovations, new products, or new
contracts by the Company or its competitors, developments with respect to
proprietary rights, adoption of new accounting standards affecting the
software industry, general market conditions, and other factors. In
addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market
prices for the common stocks of technology companies. These types of broad
market fluctuations may adversely affect the market price of the Company's
common stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has
often been initiated against such company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results, and financial condition. In this regard, in late 1996,
two class action lawsuits on behalf of certain of the Company's
shareholders were filed against the Company and various of its officers and
directors. The suits allege violations of state securities laws during 1995
and 1996. Management believes that the lawsuits are without merit and is
contesting them.
-26-
<PAGE>
TCSI CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On November 4, 1996, a securities class action complaint,
Copperstone et al. v. TCSI Corporation, et al., No. 0775199-2, was filed in
the Superior Court of California, County of Alameda, against the Company
and certain of its directors and current and former officers. The complaint
alleged that, between October 11, 1995, and September 25, 1996, the
defendants violated California state law by making false or misleading
statements of material fact about the Company's prospects, and by failing
to follow certain generally accepted accounting principles. Specifically,
the complaint alleged causes of actions for violation of Sections 25400
and 25500 of the California Corporations Code, Sections 1709-1710 of the
California Civil Code, and Section 17200 of the California Business &
Professions Code. The complaint sought an unspecified amount of damages.
Defendants filed a motion to dismiss the claims; in April 1997 the court
dismissed with leave to amend as to the Corporations Code and Civil Code
claims and the Court dismissed the Business & Professions Code claim with
prejudice. On June 2, 1997, the plaintiffs filed and amended complaint
alleging one cause of action alleging the defendants violated California
state law by making false and misleading statements of material fact about
the Company's prospects, and by failing to follow certain generally
accepted accounting principles. In addition, the defendants filed a demur,
which is scheduled to be argued on September 4, 1997. The Company believes
there is no merit to the case and intends to defend the case vigorously.
On November 20, 1996, a putative shareholder derivative complaint,
Tinkler v. Hasler et al. and TCSI Corporation, No. 776206-4, was filed in
the Superior Court of California, County of Alameda, against certain
officers and directors of the Company and, nominally, against the Company.
The derivative complaint is based on the allegations of the Copperstone
action, and alleges that, if the individual defendants engaged in the
wrongdoing alleged in Copperstone, they also violated their duties to the
Company. Specifically, the derivative complaint alleged causes of action
for breach of fiduciary duty, violations of Sections 25402 and 25502.5 of
the California Corporations Code, and unjust enrichment. The derivative
complaint sought an unspecified amount of damages, a declaration that the
individual defendants violated their duties to the Company, and other
remedies purportedly on behalf of the Company. On March 21, 1997, the
Company and the individual defendants demurred to the derivative complaint.
On April 1, 1997, the Superior Court of California, the county of Alameda,
sustained nominal defendant TCSI's demur to the derivative complaint with
leave to amend. On July 21, 1997, the plaintiff filed an amended derivative
complaint alleging that if the individual defendants engaged in the wrong
doing alleged in Copperstone, they also violated their duties to the
Company. The Company and the individual defendants intend to respond to
this amended derivative complaint by filing an amended demur. The Company
believes there is no merit to the case and intends to defend the case
vigorously.
On May 16, 1997, Atmel Corporation made a claim under the
TCSI/Atmel Corporation Purchase Agreement dated November 14, 1996,
asserting that TCSI breached certain representations and warranties in
connection with the sale of its Consumer Product Division to Atmel
Corporation. Pursuant to the Purchase Agreement, $1,000,000 of the sale
price was escrowed to be available for claims arising from the transaction.
Recently, Atmel
-27-
<PAGE>
TCSI CORPORATION
has asserted that its damages exceed $3,000,000. Management disputes this
claim and intends to initiate an arbitration proceeding to obtain the
release of the $1,000,000 escrow fund.
The Company believes the resolution of the matters cited above will
not have a material adverse effect on its financial position. However,
depending on the amount and timing of any unfavorable resolution of these
lawsuits, it is possible that the Company's future results of operations or
cash flows could be materially affected in a particular period.
-28-
<PAGE>
TCSI CORPORATION
Item 4. Submission of Matters to Vote of Security Holders
An annual meeting of shareholders was held in Alameda, California on
May 7, 1997. 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(1) 17,663,286 - 131,310
John C. Bolger 17,687,386 - 107,210
William A. Hasler 17,686,336 - 108,260
David G. Messerschmitt, Ph.D. 17,687,036 - 107,560
Daniel H. Miller(1) 16,833,436 - 961,160
Harvey E. Wagner 17,684,486 - 110,110
</TABLE>
A proposal to approve the TCSI Employee Stock Purchase Plan was approved by
the shareholders. The following votes were cast as to such proposal:
For: 11,354,452; Against: 850,341; Abstain: 66,340; No Vote: 5,523,463.
A proposal to ratify the selection of Ernst & Young LLP as independent
auditors for the Company for the fiscal year ending December 31, 1997, was
approved by the shareholders. The following votes were cast as to such
proposal: For: 17,700,596; Against: 54,310; Abstain: 39,690.
__________________
(1) Roger A. Strauch, chairman of the board and chief executive officer,
resigned from the board of directors and the Company effective
June 30, 1997. Daniel H. Miller also resigned from the board of directors
effective June 30, 1997. In addition, Ram A. Banin, president and chief
operating officer, was appointed chief executive officer and president by
the board of directors and was also elected to serve on the board of
directors effective July 1, 1997.
-29-
<PAGE>
TCSI CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit Number Document Description Page Number
------------------------------------------------------------------------------
<S> <C> <C>
10.27 Arrangements with Executive Officer 32
Amendment to Employment Agreement
10.28 Arrangements with Executive Officer 37
Employment Agreement
10.29 Arrangements with Executive Officer 40
Termination Agreement
11.1 Statement re: computation of per share earnings 48
27 Financial Data Schedule 49
</TABLE>
(b) Reports on Form 8-K filed in the second quarter of 1997.
(i) Press release dated June 17, 1997, "TCSI Announces Management
Changes"
(ii) Press release dated June 4, 1997, "TCSI and DSI Partner To Provide
State-of-the-Art Telecommunications Solutions to Israeli Service
and Equipment Suppliers; TCSI Addresses International Telecom
Opportunities Through Strategic Alliances with Industry Leaders"
(iii) Press release dated April 28, 1997, "TCSI Teams with SMARTS to
Provide Sophisticated, Automated Network Management Solutions;
Leading Telecom Software Provider Adds Advanced Event Correlation
to Next Generation of Products"
(iv) Press release dated April 22, 1997, "TCSI Corporation Expands
Operations to Alameda, California; Leading Telecom Software Provider
Hosts Grand Opening at New Silicon Island Facility April 24"
(v) Press release dated April 17, 1997, "TCSI Corporation Reports First
Quarter Results"
-30-
<PAGE>
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 13, 1997 /s/ Ram A. Banin
- ----------------------------- -------------------------------------------
Date Ram A. Banin, President and Chief Executive
Officer, and Acting Chief Financial Officer
-31-
<PAGE>
EXHIBIT 10.27
AMENDMENT TO EMPLOYMENT AGREEMENT
This amendment to Employment Agreement (the "Amendment") is entered into
as of June 11, 1997 by and between Ram Banin (the "Employee") and TCSI
Corporation, a Nevada corporation (the "Employer"). The Amendment is an
amendment to the Employment Agreement dated as of May 11, 1992 by and between
Employee and Teknekron Communications Systems, Inc. Employer's predecessor
(the "1992 Agreement").
AMENDMENT. Except as herein amended, all of the terms and conditions of the
1992 Agreement remain in full force and effect.
TERM OF EMPLOYMENT. Paragraph 2 of the 1992 Agreement is deleted in its
entirety and replaced with the following:
2. TERM OF EMPLOYMENT. The employment relationship between Employee and
Employer may be terminated by either party at any time, with or without
cause, upon thirty (30) days written notice, subject to the terms of
paragraph 15.
THE FOLLOWING PARAGRAPHS ARE ADDED TO THE 1992 AGREEMENT:
14. CHANGE OF CONTROL.
(a) In the event of a change in control of Employer, as defined
immediately below, all Employee's options shall be deemed exercisable
vested options, regardless of their vesting date, prior to the consummation
of such transaction. Moreover, Employee shall be entitled to any other
acceleration of stock vesting and no less favorable terms respecting any
acceleration of vesting than granted to any other executive of Employer.
(b) A "change in control of Employer" shall mean: a merger
transaction or sale of stock by existing shareholders of Employer to a
single purchaser or group of affiliated purchasers, as a result of either
of which actions shareholders of Employer's voting capital stock
immediately prior to such transaction do not own at least a majority of the
outstanding shares (or other equivalent evidence of ownership) immediately
following such transaction; or, a sale of all or substantially all of
Employer's assets to a third party.
15. TERMINATION OF EMPLOYMENT
(a) TERMINATION BY EMPLOYER WITH CAUSE. In the event Employer
terminates Employee's employment for cause, all compensation and benefits
under the 1992 Agreement as hereby amended shall cease. Cause is defined
as:
(i) the willful and continued failure by Employee to
substantially perform his duties hereunder, after demand therefor
is delivered by the Employer in writing; or
<PAGE>
(ii) the willful engaging by Employee in misconduct which is
materially injurious to the Employer.
(iii) No act or failure to act by Employee shall be
considered "willful" unless done or omitted by him in bad faith
and without reasonable belief that his action or omission was in
the best interest of Employer.
(b) TERMINATION BY EMPLOYER WITHOUT CAUSE. In the event Employer
terminates Employee without cause, as cause is above defined,
Employer shall continue Employee's salary and target bonus,
benefits, stock option grants and vesting for a period of one (1)
year.
(c) TERMINATION BY EMPLOYEE. A termination by Employee shall be
deemed a "termination without cause" and the provisions of sub-
paragraph 15(b) above shall apply should Employee terminate his
employment for any of the following reasons after providing (30)
days written notice to Employer:
(i) if there occurs a change in control of Employer (as defined
above); or
(ii) if there has been a failure by the Employer to comply with
any material provision of the 1992 Agreement as hereby amended, which
has not been cured with ten (10) days after notice thereof
(iii) if there is a change in the place of employment beyond
the San Francisco Bay Area
(iv) if there is material reduction in the Employee's base
salary, bonus, benefits or responsibilities.
16. ARBITRATION. Any controversy between Employer and Employee arising
under or in connection with the 1992 Agreement, as hereby amended,
shall on the written request of either party served on the other, be
submitted to final and binding arbitration and judgment on the award
rendered by the arbitrator may be entered in any court having
jurisdiction. arbitration shall comply and be governed by the
provisions of the Employment Arbitration Rules of the American
Arbitration Association. The cost of arbitration and reasonable
attorney fees of the prevailing party in any such arbitration shall be
borne by the losing party.
17. ATTORNEY FEES AND COSTS. If any arbitration or action at law or in
equity is necessary to enforce or interpret the terms of the 1992
Agreement, as hereby amended, the prevailing party shall be entitled
to reasonable attorneys' fees and costs in addition to any other
relief to which that party may be entitled. This provision shall be
construed as applicable to the entire contract.
TCSI Corporation Ram Banin
/s/ John C. Bolger /s/ Ram A. Banin
------------------------------- ----------------------------
By: Chairman
Its: Compensation Committee
<PAGE>
Teknekron Communications Systems
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the 11th day of May, 1992 by and
between Ram Banin (the "EMPLOYEE") and Teknekron Communications Systems, Inc.
(the "EMPLOYER").
1. EMPLOYMENT. EMPLOYER employs EMPLOYEE, and EMPLOYEE accepts employment
with EMPLOYER, on the terms and conditions set forth in the Agreement.
2. TERMS OF EMPLOYMENT. The employment relationship between EMPLOYEE and
EMPLOYER may be terminated as follows:
(a) During the first (90) days of employment, either party may terminate
without prior notice and for any reason whatsoever, or for no reason
and without cause; or
(b) After the first ninety (90) days of employment, either party may
terminate for any reason whatsoever, or for no reason and without
cause, upon the giving of (i) two weeks' written notice to the other
party or (ii) pay equal two (2) weeks of EMPLOYEE's salary in lieu of
such notice; or
(c) At any time, EMPLOYER may terminate EMPLOYEE without prior notice if
EMPLOYEE materially fails to perform any obligation or duty owed to
EMPLOYER.
3. DUTIES. EMPLOYEE shall perform such tasks and duties as may be assigned by
EMPLOYER, from time to time. At all times EMPLOYEE shall follow all of
EMPLOYER's legal instructions and directions and shall abide by all of
EMPLOYER's rules and procedures in force from time to time while employed.
EMPLOYEE shall devote his full time, attention, skill and efforts to the
tasks and duties assigned by EMPLOYER. Without the prior written consent
of EMPLOYER, EMPLOYEE shall not provide services, for compensation, to any
other person or business entity while employed by EMPLOYER.
EMPLOYEE understands and acknowledges that EMPLOYER has a policy not to
engage directly or indirectly, deliberately or inadvertently, in any
recruitment or employment policies that cause the EMPLOYEE to violate any
contract commitment such EMPLOYEE may have with a prior EMPLOYER or other
third party. By accepting employment, EMPLOYEE certifies that no such
conflict exists and that any questions regarding a potential conflict have
been fully disclosed in writing to EMPLOYER.
4. COMPENSATION. As compensation for all services to be rendered by EMPLOYEE
to EMPLOYER, EMPLOYEE shall be paid a salary at the annual rate of
$165,000.00. Said salary shall be payable in accordance with EMPLOYER's
standard procedures. EMPLOYER shall withhold from any amounts payable as
compensation all federal state, municipal or other taxes as are required by
any law, regulation or ruling.
(a) EMPLOYEE understands and agrees that EMPLOYEE's salary may be adjusted
by EMPLOYER prospectively, and at its sole discretion from time to
time, without affecting the remaining terms of this Agreement.
(b) EMPLOYEE understands and agrees that any other compensation that may
be paid to EMPLOYEE for services rendered, or to be rendered, (whether
by way of an incentive payment,
<PAGE>
opportunity to acquire stock or any other form of additional
compensation) shall rest in the sole discretion of EMPLOYER.
5. PROPERTY RIGHTS; DUTY TO DISCLOSE. EMPLOYEE hereby acknowledges and agrees
to be bound by the provisions of the EMPLOYER's "Non-Disclosure/Assignment
Agreement" attached hereto as Exhibit A and made a part hereof by this
reference as though set forth in full herein. The provisions of Exhibit A
shall survive any termination of this Agreement.
6. NONSOLICITATION OF EMPLOYEES. EMPLOYEE specifically agrees that during the
term of this Agreement and for a period of one (1) year thereafter,
EMPLOYEE shall not, directly or indirectly, either for himself or for any
other person, firm, corporation or other legal entity, solicit any then
employee of EMPLOYER to leave the employment of EMPLOYER.
7. NO ASSIGNMENT. This Agreement may not be assigned by EMPLOYEE without the
written consent of EMPLOYER. This Agreement shall be binding on the heirs,
executors, administrators, personal representatives, successors and assigns
of EMPLOYEE and EMPLOYER.
8. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with and subject to the laws of the State where the
EMPLOYEE was principally rendering services for EMPLOYER.
9. NOTICES. All notices or other communications provided for or by this
Agreement shall be made in writing and shall be deemed properly delivered
when (i) delivered personally or (ii) by the mailing of such notice by
registered or certified mail, postage prepaid, to the parties at the
addresses set forth on the signature page of this Agreement (or to such
other address as one party designates to the other in writing).
10. ENTIRE AGREEMENT AND WAIVER. This Agreement is the entire agreement
between the parties relating to EMPLOYEE's employment. It supersedes all
prior agreements, arrangements, negotiations and understandings related
thereto. No waiver of any term, provision or condition of this Agreement
shall be deemed to be, or shall constitute, a waiver of any other term,
provision of condition herein, whether or not similar. No such waiver
shall be binding unless in writing and signed by the waiving party.
11. AMENDMENTS. No supplement, modification or amendment of any term,
provision or condition of this Agreement shall be binding or enforceable
unless evidenced in writing executed by the parties hereto.
12. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
13. REFORMATION/SERVERABILITY. In any provision of this Agreement is declared
invalid by any tribunal, then such provision shall be deemed automatically
adjusted to the minimum extent necessary to conform to the requirements for
validity as declared at such time and, as so adjusted, shall be deemed a
provision of this Agreement as though originally included herein. In the
event that the provision invalidated is of such a nature that it cannot be
so adjusted, the provision shall be deemed deleted from this Agreement as
though such provision had never been included herein. In either case, the
remaining provisions of this Agreement shall remain in effect.
<PAGE>
After carefully reading and considering the foregoing provisions and Exhibit
A, EMPLOYEE has voluntarily signed this Agreement on as of the date first
above written.
- --------------------------------------------------------------------------------
COMPANY: EMPLOYEE:
- --------------------------------------------------------------------------------
Teknekron Communications Systems, Inc. /s/Ram A. Banin
- --------------------------------------- -------------------------------------
Name of Company EMPLOYEE Signature
2121 Allston Way
- --------------------------------------- -------------------------------------
Address Address
Berkeley, CA 94704
- --------------------------------------- -------------------------------------
City, State City, State
-------------------------------------
Telephone
-------------------------------------
Social Security #
5/7/92
-------------------------------------
Date
<PAGE>
EXHIBIT 10.28
Teknekron Communications Systems
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
THIS EMPLOYMENT AGREEMENT is entered into as of the 20th day of December, 1993
by and between Paul A. Farmer (the "EMPLOYEE") and Teknekron Communications
Systems, Inc. (the "EMPLOYER").
1. EMPLOYMENT. EMPLOYER employs EMPLOYEE, and EMPLOYEE accepts employment
with EMPLOYER, on the terms and conditions set forth in the Agreement.
2. TERMS OF EMPLOYMENT. The employment relationship between EMPLOYEE and
EMPLOYER may be terminated as follows:
(a) During the first (90) days of employment, either party may terminate
without prior notice and for any reason whatsoever, or for no reason
and without cause; or
(b) After the first ninety (90) days of employment, either party may
terminate for any reason whatsoever, or for no reason and without
cause, upon the giving of (i) two weeks' written notice to the other
party or (ii) pay equal two (2) weeks of EMPLOYEE's salary in lieu of
such notice; or
(c) At any time, EMPLOYER may terminate EMPLOYEE without prior notice if
EMPLOYEE materially fails to perform any obligation or duty owed to
EMPLOYER.
3. DUTIES. EMPLOYEE shall perform such tasks and duties as may be assigned by
EMPLOYER, from time to time. At all times EMPLOYEE shall follow all of
EMPLOYER's legal instructions and directions and shall abide by all of
EMPLOYER's rules and procedures in force from time to time while employed.
EMPLOYEE shall devote his full time, attention, skill and efforts to the
tasks and duties assigned by EMPLOYER. Without the prior written consent
of EMPLOYER, EMPLOYEE shall not provide services, for compensation, to any
other person or business entity while employed by EMPLOYER.
EMPLOYEE understands and acknowledges that EMPLOYER has a policy not to
engage directly or indirectly, deliberately or inadvertently, in any
recruitment or employment policies that cause the EMPLOYEE to violate any
contract commitment such EMPLOYEE may have with a prior EMPLOYER or other
third party. By accepting employment, EMPLOYEE certifies that no such
conflict exists and that any questions regarding a potential conflict have
been fully disclosed in writing to EMPLOYER.
4. COMPENSATION. As compensation for all services to be rendered by EMPLOYEE
to EMPLOYER, EMPLOYEE shall be paid a salary at the annual rate of
$140,000.00. Said salary shall be payable in accordance with EMPLOYER's
standard procedures. EMPLOYER shall withhold from any amounts payable as
compensation all federal state, municipal or other taxes as are required by
any law, regulation or ruling.
(a) EMPLOYEE understands and agrees that EMPLOYEE's salary may be adjusted
by EMPLOYER prospectively, and at its sole discretion from time to
time, without affecting the remaining terms of this Agreement.
(b) EMPLOYEE understands and agrees that any other compensation that may
be paid to EMPLOYEE for services rendered, or to be rendered, (whether
by way of an incentive payment,
<PAGE>
opportunity to acquire stock or any other form of additional
compensation) shall rest in the sole discretion of EMPLOYER.
5. PROPERTY RIGHTS; DUTY TO DISCLOSE. EMPLOYEE hereby acknowledges and agrees
to be bound by the provisions of the EMPLOYER's "Non-Disclosure/Assignment
Agreement" attached hereto as Exhibit A and made a part hereof by this
reference as though set forth in full herein. The provisions of Exhibit A
shall survive any termination of this Agreement.
6. NONSOLICITATION OF EMPLOYEES. EMPLOYEE specifically agrees that during the
term of this Agreement and for a period of one (1) year thereafter,
EMPLOYEE shall not, directly or indirectly, either for himself or for any
other person, firm, corporation or other legal entity, solicit any then
employee of EMPLOYER to leave the employment of EMPLOYER.
7. NO ASSIGNMENT. This Agreement may not be assigned by EMPLOYEE without the
written consent of EMPLOYER. This Agreement shall be binding on the heirs,
executors, administrators, personal representatives, successors and assigns
of EMPLOYEE and EMPLOYER.
8. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with and subject to the laws of the State where the
EMPLOYEE was principally rendering services for EMPLOYER.
9. NOTICES. All notices or other communications provided for or by this
agreement shall be made in writing and shall be deemed properly delivered
when (i) delivered personally or (ii) by the mailing of such notice by
registered or certified mail, postage prepaid, to the parties at the
addresses set forth on the signature page of this Agreement (or to such
other address as one party designates to the other in writing).
10. ENTIRE AGREEMENT AND WAIVER. This Agreement is the entire Agreement
between the parties relating to EMPLOYEE's employment. It supersedes all
prior agreements, arrangements, negotiations and understandings related
thereto. No waiver of any term, provision or condition of this Agreement
shall be deemed to be, or shall constitute, a waiver of any other term,
provision of condition herein, whether or not similar. No such waiver
shall be binding unless in writing and signed by the waiving party.
11. AMENDMENTS. No supplement, modification or amendment of any term,
provision or condition of this Agreement shall be binding or enforceable
unless evidenced in writing executed by the parties hereto.
12. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
13. REFORMATION/SERVERABILITY. In any provision of this Agreement is declared
invalid by any tribunal, then such provision shall be deemed automatically
adjusted to the minimum extent necessary to conform to the requirements for
validity as declared at such time and, as so adjusted, shall be deemed a
provision of this Agreement as though originally included herein. In the
event that the provision invalidated is of such a nature that it cannot be
so adjusted, the provision shall be deemed deleted from this Agreement as
though such provision had never been included herein. In either case, the
remaining provisions of this Agreement shall remain in effect.
<PAGE>
After carefully reading and considering the foregoing provisions and Exhibit A,
EMPLOYEE has voluntarily signed this Agreement on as of the date first above
written.
- --------------------------------------------------------------------------------
COMPANY: EMPLOYEE:
- --------------------------------------------------------------------------------
Teknekron Communications Systems, Inc. /s/ Paul A. Farmer
- -------------------------------------- --------------------------------------
Name of Company EMPLOYEE Signature
2121 Allston Way
- -------------------------------------- --------------------------------------
Address Address
Berkeley, CA 94704
- -------------------------------------- --------------------------------------
City, State City, State
--------------------------------------
Telephone
--------------------------------------
Social Security #
12/20/93
--------------------------------------
Date
<PAGE>
EXHIBIT 10.29
SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS
This Severance Agreement and Release of All Claims ("Agreement") is made
by and between TCSI Corporation, its subsidiaries, affiliates, successors,
assigns, officers, directors, partners, shareholders, agents, employees,
former employees, attorneys and representatives (hereinafter collectively
referred to as the "Company"), on the one hand, and Paul A. Farmer, his
heirs, family members, executors, and administrators (hereinafter
collectively referred to as "Employee") on the other hand. The Company and
Employee are sometimes collectively referred to as "the Parties."
WHEREAS, Employee has resigned his position as the Chief Financial
Officer of the Company as of July 21, 1997; and it is the present intention
of the Parties that Employee continue to be employed by the Company as a
business advisor through June 30, 1998 (the "Termination Date").
WHEREAS, the express purpose of this Agreement is to set forth the terms
of Employee's employment with the Company during the Employment Continuation
Period (defined below) and to forever release the Company, as defined above,
from any and all potential liability regarding every claim, cause of action,
complaint and dispute that Employee has, or may ever have, against the
Company arising out of, or related to, any and all events, whether currently
known or unknown, occurring prior to the execution of this Agreement.
NOW THEREFORE, in consideration of the mutual promises made herein, the
Company and Employee hereby agree as follows:
1. RESIGNATION OF OFFICER POSITIONS. Effective July 21, 1997 (the
"Effective Date") Employee agreed to step down from the position of Chief
Financial Officer and Secretary and Treasurer of the Company. Employee shall
continue to be employed by the Company from the Effective Date in the capacity
of business advisor until the close of business on June 30, 1998, or, if
earlier, upon the voluntary resignation of Employee (the "Termination Date").
A form letter of resignation of Employee's position as Chief Financial Officer
of the Company is attached hereto as Exhibit A.
2. SEVERANCE PAYMENT. The Company shall pay Employee a severance payment
of $12,500 per month, less applicable withholding and deductions, through the
Termination Date (the "Employment Continuation Period"). Such payments shall be
made according to the normal practices of the Company.
3. WAIVER OF BONUS. No individual performance bonus shall be paid to
Employee in 1997 or 1998.
4. STOCK OPTIONS. All stock options of Employee shall continue to vest
and become exercisable during the Employment Continuation Period. Upon the
Termination Date, such options
<PAGE>
shall cease to vest and shall be exercisable according to the terms of the
applicable option agreement(s).
5. EMPLOYEE BENEFITS. Employee shall continue to be eligible to
participate in the employee benefit plans of the Company during the Employment
Continuation Period.
6. INDEMNIFICATION. The Company shall continue to indemnify and hold
Employee harmless to the extent Employee was so indemnified as of the Effective
Date against any and all expenses, liabilities, and losses (including, without
limitation, reasonable attorneys' fees and disbursements of counsel reasonably
satisfactory to Company) in connection with his service as an officer of the
Company.
7. RELEASE OF CLAIMS. Employee agrees that the benefits provided
hereunder represent settlement in full of all of employee's claims and disputes
against the Company. The Company on one hand, and Employee on the other, on
behalf of themselves, and their respective heirs, family members, board members,
executors, officers, directors, employees, investors, shareholders,
administrators, affiliates, divisions, subsidiaries, predecessor and successor
corporations, and assigns, hereby fully and forever release each other and their
respective heirs, family members, board members, executors, officers, directors,
employees, investors, shareholders, administrators, affiliates, divisions,
subsidiaries, predecessor and successor corporations, and assigns, from, and
agree not to sue concerning, any claim, duty, obligation or cause of action
relating to any matters of any kind, whether presently known or unknown,
suspected or unsuspected, that any of them may possess arising from any
omissions, acts or facts that have occurred up until and including the Effective
Date of this Agreement including, without limitation:
(a) any and all claims relating to or arising from Employee's
employment relationship with the Company and the termination of that
relationship;
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of the Company, including,
without limitation, any claims for fraud, misrepresentation, breach of fiduciary
duty, breach of duty under applicable state corporate law, and securities fraud
under any state or federal law;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied; negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage;
defamation; negligence; personal injury; assault; battery; invasion of privacy;
false imprisonment; and conversion;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act
of 1990, the Family and Medical Leave Act, the Fair Labor Standards Act, the
California Fair Employment and Housing Act, and Labor Code Section 201, ET SEQ.;
<PAGE>
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
The Company and Employee agree that the release set forth in this section shall
be and remain in effect in all respects as a complete general release as to the
matters released. This release does not extend to any obligations incurred
under this Agreement.
8. CIVIL CODE SECTION 1542. The Parties represent that they are not
aware of any claim by either of them other than the claims that are released by
this Agreement. Employee and the Company acknowledge that they have had the
opportunity to consult legal counsel, have read, are familiar with, and
understand the provisions of California Civil Code Section 1542, which provides
as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
The Parties, being aware of said code section, voluntarily agree to
expressly waive any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect, including both known and
unknown claims.
9. DISCLOSURE OF THIRD PARTY CLAIMS. Employee has informed the Company
of any actual or potential claim or dispute of any third party against the
Company about which Employee currently has any knowledge, and Employee agrees to
inform the Company of any such matter to the extent he becomes aware of it
during the Employment Continuation Period.
10. CONFIDENTIAL INFORMATION. Employee agrees to continue to maintain the
confidentiality of all confidential and proprietary information of the Company
and shall continue to comply with the terms and conditions of any agreement
between Employee and the Company concerning confidential information of the
Company. Employee agrees to return confidential and proprietary information in
his possession to the Company by August 15, 1997.
11. COOPERATION. The Employee agrees that he shall assist the Company in
every proper way as reasonably requested by the Company in the Company's
response to or defense of any disputes, differences, grievances, claims,
charges, or complaints by any third party related to events prior to the
Effective Date against the Company and/or any officer, director, employee,
agent, representative, shareholder or attorney of the Company.
12. CONFIDENTIALITY. The Parties hereto each agree to use their best
efforts to maintain in confidence the underlying facts leading up to this
Agreement, the existence of this Agreement, the
<PAGE>
contents and terms of this Agreement, and the consideration for this
Agreement (hereinafter collectively referred to as "Settlement Information").
Each Party hereto agrees not to disclose or use and to take every reasonable
precaution to prevent disclosure or use of any Settlement Information to
third parties, and each agrees that there will be no publicity, directly or
indirectly, concerning any Settlement Information. The Parties hereto agree
to take every precaution to disclose Settlement Information only to those
employees, officers, directors, attorneys, accountants, governmental
entities, and family members who have a reasonable need to know of such
Settlement Information. The Parties shall cooperate in preparing a mutually
agreed-upon press release with respect to Employee's resignation as Chief
Financial Officer of the Company.
13. ARBITRATION.
(a) The Parties agree that any dispute or controversy arising out of,
relating to, or in connection with this Agreement, the interpretation, validity,
construction, performance, breach, or termination hereof, or any of the matters
herein released shall be settled by binding arbitration to be held in Alameda
County, California in accordance with the National Rules for the Resolution of
Employment Disputes then in effect of the American Arbitration Association (the
"Rules"). The arbitrator shall be selected by mutual agreement of the Parties,
which agreement shall not be unreasonably withheld by either Party. The
arbitrator may grant injunctions or other relief in such dispute or controversy.
The decision of the arbitrator shall be final, conclusive and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's
decision in any court having jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of any
dispute or claim, without reference to conflicts of law rules. The arbitration
proceedings shall be governed by federal arbitration law and by the Rules,
without reference to state arbitration law. Employee hereby consents to the
personal jurisdiction of the state and federal courts located in California for
any action or proceeding arising from or relating to this Agreement or relating
to any arbitration in which the Parties are participants.
(c) The Company agrees to pay the costs, expenses and counsel fees
and expenses of both Parties incurred in connection with such arbitration.
(d) EMPLOYEE HAS READ AND UNDERSTANDS THIS SECTION 13, WHICH
DISCUSSES ARBITRATION. EMPLOYEE UNDERSTANDS THAT BY SIGNING THIS AGREEMENT,
EMPLOYEE AGREES TO SUBMIT ANY CLAIMS ARISING OUT OF, RELATING TO, OR IN
CONNECTION WITH THIS AGREEMENT, THE INTERPRETATION, VALIDITY, CONSTRUCTION,
PERFORMANCE, BREACH OR TERMINATION THEREOF, OR ANY OF THE MATTERS Herein TO
BINDING ARBITRATION, AND THAT THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF
EMPLOYEE'S RIGHT TO A JURY TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES
RELATING TO ALL ASPECTS OF THIS SEVERANCE AGREEMENT AND RELEASE OF ALL CLAIMS.
<PAGE>
14. NON-DISPARAGEMENT. The Parties agree to refrain from any
disparagement, defamation, slander of the other, or tortious interference with
the contracts and relationships of the other.
15. TAX CONSEQUENCES. The Company makes no representations or warranties
with respect to the tax consequences of any benefits conferred on Employee
under the terms of this Agreement. Employee agrees and understands that he is
responsible for payment, if any, of local, state and/or federal taxes on the
sums paid hereunder by the Company and any penalties or assessments thereon.
Employee further agrees to indemnify and hold the Company harmless from any
claims, demands, deficiencies, penalties, assessments, executions, judgments, or
recoveries by any government agency against the Company for any amounts claimed
due on account of Employee's failure to pay federal or state taxes or damages
sustained by the Company by reason of any such claims, including reasonable
attorneys' fees.
16. NO ADMISSION OF LIABILITY. No action taken by the Parties hereto, or
either of them, either previously or in connection with this Agreement shall be
deemed or construed to be (a) an admission, directly or by implication of the
truth or falsity of any claims heretofore made or that the Company has violated
any law, rule, regulation, or contractual right, duty or obligation owed to
Employee or (b) an acknowledgment or admission by either party of any fault or
liability whatsoever to the other party or to any third party. It is agreed
that the fact of this settlement cannot be used by any Party or any other person
to demonstrate or suggest an admission on the part of the Company.
17. COSTS. The Company shall pay the Employee's attorneys' fees and other
fees incurred in connection with this Agreement up to a maximum total amount of
$3500.
18. AUTHORITY. The Company represents and warrants that the undersigned
has the authority to act on behalf of the Company and to bind the Company and
all who may claim through it to the terms and conditions of this Agreement.
Employee represents and warrants that he has the capacity to act on his own
behalf and on behalf of all who might claim through him to bind them to the
terms and conditions of this Agreement. Each Party warrants and represents that
there are no liens or claims of lien or assignments in law or equity or
otherwise of or against any of the claims or causes of action released herein.
19. NO REPRESENTATIONS. Each Party represents that it has carefully read
and understands the scope and effect of the provisions of this Agreement. The
Parties agree that they do not rely and have not relied upon any representations
or statements made by any other party hereto which are not specifically set
forth in this Agreement.
20. SEVERABILITY. In the event that any provision hereof becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision.
21. ENTIRE AGREEMENT. This Agreement represents the entire agreement and
understanding between the Parties as to the subject matter herein and supersedes
and replaces any and all prior agreements and understandings, whether written or
oral.
<PAGE>
22. NO ORAL MODIFICATION. This Agreement may only be amended in writing
signed by all Parties.
23. GOVERNING LAW. This Agreement shall be governed by the internal
substance laws, but not the choice of laws rules, of the State of California.
24. COUNTERPARTS. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
25. VOLUNTARY EXECUTION OF AGREEMENT. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
any Parties hereto, with the full intent of releasing all claims. The Parties
acknowledge that:
(a) they have read this Agreement;
(b) they have had the opportunity to consult legal counsel of their
own choice to the fullest extent they deem appropriate and necessary;
(c) this Agreement reflects a negotiated agreement between the
Parties;
(d) they understand the terms and consequences of this Agreement and
of the releases it contains; and
(e) they are fully aware of the legal and binding effect of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company and Employee voluntarily agree to and have
executed this Agreement on the respective dates set forth below.
Dated: July 31, 1997 /s/ Paul A. Farmer
---------------------------------
Paul A. Farmer
Dated: July 31, 1997 TCSI CORPORATION
By /s/ Ram Banin
----------------------------------
Ram Banin, Chief Executive Officer
<PAGE>
EXHIBIT A
[Date]
To the Board of Directors of TCSI Corporation:
I hereby resign my position as Chief Financial Officer and Secretary and
Treasurer of TCSI Corporation, effective July 21, 1997.
Further, I accept the Company's offer of subsequent employment as business
advisor, subject to the terms and conditions set forth in the attached Severance
Agreement and Release of All Claims, which I have executed as of the date
hereof.
Very truly yours,
/s/ Paul A. Farmer
Paul A. Farmer
<PAGE>
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) 1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares of common stock 21,327 20,839 21,335 19,910
Common stock equivalents -- 1,352 -- 1,132
---------- ---------- ---------- ----------
Shares used in calculation of earnings (loss) per share 21,327 22,191 21,335 21,042
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) $ (919) $ 2,808 $ (1,480) $ 5,359
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per share $ (0.04) $ 0.13 $ (0.07) $ 0.25
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statement as of June 30, 1997 of TCSI Corporation and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 31,465
<SECURITIES> 19,427
<RECEIVABLES> 11,129
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,037
<PP&E> 10,775
<DEPRECIATION> 0
<TOTAL-ASSETS> 78,954
<CURRENT-LIABILITIES> 6,048
<BONDS> 0
0
0
<COMMON> 2,152
<OTHER-SE> 70,754
<TOTAL-LIABILITY-AND-EQUITY> 78,954
<SALES> 0
<TOTAL-REVENUES> 19,338
<CGS> 0
<TOTAL-COSTS> 23,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,241)
<INCOME-TAX> (761)
<INCOME-CONTINUING> (1,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,480)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>