UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1998
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)
(510) 749-8500
(Registrant's telephone number, including area code)
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
--------- ---------
22,349,832 shares of Common Stock of the Registrant were outstanding as of
July 31, 1998.
<PAGE>
TABLE OF CONTENTS
Page
Part I - Financial Information
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
June 30, 1998 (Unaudited) and December 31, 1997..................3
Consolidated Statements of Operations for the three and
six months ended June 30, 1998 and 1997 (Unaudited)..............4
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and 1997 (Unaudited)..............5
Notes to Consolidated Financial Statements (Unaudited)................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................12
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings....................................................25
Item 2. Changes in Securities...............................................N/A
Item 3. Defaults Upon Senior Securities.....................................N/A
Item 4. Submission of Matters to a Vote of Security Holders..................26
Item 5. Other Information....................................................26
Item 6. Exhibits and Reports on Form 8-K.....................................27
Signature.....................................................................28
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,024 $ 33,566
Marketable securities 19,219 20,301
Receivables 8,213 11,803
Other receivables 839 682
Deferred tax assets 2,164 2,164
Other current assets 800 925
------------ ------------
Total current assets 64,259 69,441
Furniture, equipment and leasehold improvements, net 9,033 10,165
Noncurrent marketable securities 7,975 1,600
Noncurrent deferred tax assets 1,971 2,297
Other assets 728 728
------------ ------------
$ 83,966 $ 84,231
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,955 $ 2,410
Accrued liabilities 4,004 2,880
Deferred revenue 1,196 3,640
Income taxes payable 866 1,153
------------ ------------
Total current liabilities 8,021 10,083
------------ ------------
Shareholders' equity:
Preferred Stock, par value $0.01 per share;
5,000,000 shares authorized; none issued
and outstanding -- --
Common Stock, par value $0.10 per share;
75,000,000 shares authorized; 22,330,798
and 22,135,949 shares issued and
outstanding, at June 30, 1998 and
December 31, 1997, respectively 2,233 2,214
Additional paid-in capital 50,172 49,133
Accumulated other comprehensive loss (392) (126)
Retained earnings 23,932 22,927
------------ ------------
Total shareholders' equity 75,945 74,148
------------ ------------
$ 83,966 $ 84,231
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Services $ 8,640 $ 9,055 $ 16,771 $ 16,858
Software licensing fees 2,499 449 5,373 2,480
-------- -------- -------- --------
Total revenues 11,139 9,504 22,144 19,338
-------- -------- -------- --------
Costs, expenses, and special items:
Services 5,056 5,139 9,614 10,282
Product development 2,902 1,361 5,445 2,813
Selling, general and administrative 3,698 4,306 7,508 8,874
Nonrecurring special items (550) 818 (550) 1,088
-------- -------- -------- --------
Total costs, expenses, and special items 11,106 11,624 22,017 23,057
-------- -------- -------- --------
Income (loss) from operations 33 (2,120) 127 (3,719)
Interest income 782 729 1,548 1,478
-------- -------- -------- --------
Income (loss) before income tax provision (benefit) 815 (1,391) 1,675 (2,241)
Income tax provision (benefit) 326 (472) 670 (761)
-------- -------- -------- --------
Net income (loss) $ 489 $ (919) $ 1,005 $ (1,480)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.02 $ (0.04) $ 0.04 $ (0.07)
======== ======== ======== ========
Weighted-average common shares 22,312 21,327 22,266 21,335
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.02 $ (0.04) $ 0.04 $ (0.07)
======== ======== ======== ========
Dilutive potential common shares 22,516 21,327 22,605 21,335
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,005 $ (1,480)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,951 1,755
Deferred tax assets 326 (1,816)
Changes in assets and liabilities:
Receivables 3,590 3,707
Other receivables (157) (810)
Other current assets 125 1,048
Accounts payable (455) (2,594)
Accrued liabilities 1,124 (1,548)
Deferred revenue (2,444) --
Income taxes payable (287) 3,981
---------- ----------
Net cash provided by operating activities 4,778 2,243
---------- ----------
Cash flows from investing activities:
Capital and leasehold improvement expenditures, net (916) (5,329)
Purchases of marketable securities (21,237) (9,090)
Maturities and sales of marketable securities 15,944 11,500
Decrease in other noncurrent assets _ 595
---------- ----------
Net cash used in investing activities (6,209) (2,324)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 1,057 752
---------- ----------
Net cash provided by financing activities 1,057 752
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (168) (86)
---------- ----------
Net change in cash and cash equivalents (542) 585
Cash and cash equivalents at the beginning of the period 33,566 30,880
---------- ----------
Cash and cash equivalents at the end of the period $ 33,024 $ 31,465
========== ==========
Supplemental disclosures of cash flow information:
Cash paid (refunds received) during the period for income taxes $ 630 $ (2,928)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the management of TCSI Corporation ("TCSI" or the
"Company"), the unaudited consolidated interim financial statements included
herein have been prepared on the same basis as the December 31, 1997 audited
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the interim
period results. The results of operations for current interim periods are not
necessarily indicative of results to be expected for the current year or for any
other period. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the fiscal year ended December 31, 1997 included in the Company's Annual
Report on Form 10-K (File No. 0-19377).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for reporting information about operating segments in annual and interim
financial statements and also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS 131 for 1998 and is currently studying its provisions which need not
be applied to interim financial statements in the initial year of its
application. The Company does not expect the provisions of SFAS 131 to result in
a material future change in the presentation of its segment financial
information nor does it expect a material future change in its current segment
groupings.
In March 1998, the American Institute of Certified Public Accountants
finalized Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which defines the
types of costs that are capitalizable for computer software projects and
requires all other costs to be expensed in the period incurred. The new SOP
requires that in order for costs to be capitalizable they must be intended to
create a new system or add identifiable functionality to an existing system.
This SOP is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. Although the Company has not fully assessed the
implications of this new statement, the Company does not believe that adoption
of this statement will have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes standards
for reporting information about derivative instruments and hedging activities,
requires that an entity recognize all derivative instruments as either assets or
liabilities in the statement of financial position, and requires that those
instruments be measured at fair value. SFAS 133 is effective for fiscal quarters
beginning after June 15, 1999. The Company does not currently have any
derivative instruments nor is it currently involved in hedging. If the Company
begins to enter into such transactions in the future, it will assess the impact
that the provisions of SFAS 133 will have on its financial statements.
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Reclassifications
Certain 1997 balances have been reclassified to conform to the current
year presentation with no effect on net income (loss) and retained earnings as
previously reported.
NOTE 2 - RECEIVABLES AND CREDIT RISK
Receivable balances are primarily from large, credit-worthy customers
in the telecommunications industry. The Company performs ongoing credit
evaluations of its customers and does not require collateral. The Company does
not anticipate any significant default from a customer's inability to make a
payment for products received and/or for services rendered. Allowances are
maintained from potential credit losses.
Receivables consist of the following:
June 30, December 31,
1998 1997
---------- -----------
(In thousands)
(Unaudited)
Billed receivables $ 5,067 $ 10,366
Unbilled receivables 3,546 1,837
Allowance for doubtful accounts (400) (400)
---------- ----------
$ 8,213 $ 11,803
========== ==========
NOTE 3 - FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
Furniture, equipment, and leasehold improvements are stated at cost.
Straight-line 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 three to five years. Amortization is provided for
leasehold improvements over a five-year period utilizing the straight-line
method.
Furniture, equipment, and leasehold improvement balances consist of the
following:
June 30, December 31,
1998 1997
---------- -----------
(In thousands)
(Unaudited)
Computer and lab equipment $ 15,685 $ 14,814
Furniture and fixtures 3,700 3,613
Leasehold improvements 6,464 6,660
---------- ----------
25,849 25,087
Accumulated depreciation and amortization (16,816) (14,922)
---------- ----------
$ 9,033 10,165
========== ==========
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - INCOME TAXES
The Company recorded an income tax provision for the six months ended
June 30, 1998 of $0.7 million and an income tax benefit for the six months ended
June 30, 1997 of $0.8 million. During the quarters ended June 30, 1998 and 1997,
respectively, the Company recorded an income tax provision of $0.3 million and
an income tax benefit of $0.5 million, based on effective tax rates of 40% and
34%, respectively. In determining its effective tax rate for the quarter, the
Company considered its estimated annual effective tax rate for the year. The
effective tax rate could change to the extent that there are differences between
planned and actual net income or the components thereof or changes in the tax
laws affecting the Company.
At June 30, 1998, the Company had approximately $4.1 million of
deferred tax assets. 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 carryforwards. At June 30, 1998, there was no valuation allowance for net
deferred tax assets based on management's assessment that current levels of
anticipated taxable income will be sufficient to realize the net deferred tax
assets. However, the amount of deferred tax assets considered realizable is
subject to adjustment in future periods if estimates of future taxable income
are reduced.
NOTE 5 - NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") during the first quarter of 1998. This
statement simplifies the standards for computing earnings (loss) per share
("EPS") as previously defined in Accounting Principles Board Opinion No. 15,
"Earnings Per Share". All prior-period EPS data have been presented in
accordance with SFAS 128. SFAS 128 requires presentation of both basic EPS and
diluted EPS on the face of the statements of operations. Basic EPS is computed
by dividing net income (loss) available to common stockholders (numerator) by
the weighted-average common shares (denominator) during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during the
period (including stock options) using the treasury stock method. In computing
diluted EPS, the average stock price for the period is used in determining the
number of shares assumed to be purchased from the exercise of stock options.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings (loss) per share computations under SFAS 128:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Basic EPS Computation
Net income (loss) $ 489 $ (919) $ 1,005 $ (1,480)
========== ========== ========== ==========
Weighted-average common shares 22,312 21,327 22,266 21,335
========== ========== ========== ==========
Basic earnings (loss) per share $ 0.02 $ (0.04) $ 0.04 $ (0.07)
========== ========== ========== ==========
</TABLE>
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Diluted EPS Computation
Net income (loss) $ 489 $ (919) $ 1,005 $ (1,480)
========== ========== ========== ==========
Weighted-average common shares 22,312 21,327 22,266 21,335
Effect of dilutive options 204 -- 339 --
---------- ---------- ---------- ----------
Dilutive potential common shares 22,516 21,327 22,605 21,335
========== ========== ========== ==========
Diluted earnings (loss) per share $ 0.02 $ (0.04) $ 0.04 $ (0.07)
========== ========== ========== ==========
Antidilutive Securities
Options outstanding at end of period 1,074 2,005 256 1,479
========== ========== ========== ==========
Weighted-average exercise price $ 6.95 $ 6.98 $ 8.16 $ 7.13
========== ========== ========== ==========
</TABLE>
Antidilutive securities consist of options not included in the computation of
diluted earnings per share because the exercise price of each of these options
was greater than the average market price of the Company's Common Stock during
the period.
Antidilutive options outstanding during the three- and six-month periods ended
June 30, 1998 expire during the years 2000 through 2004. Antidilutive options
outstanding during the three- and six-month periods ended June 30, 1997 expire
during the years 2000 through 2003.
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998. SFAS
130 establishes standards for the reporting and display of comprehensive income
(loss) and its components; however, the adoption of SFAS 130 had no impact on
the Company's net income (loss) or shareholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
changes in the accumulated foreign currency translation adjustments which, prior
to the adoption of SFAS 130, were reported separately in shareholders' equity.
Prior year financial statements have been reclassified as necessary to conform
to the requirements of SFAS 130.
The following is a summary of comprehensive income (loss) for the three- and
six-month periods ended June 30, 1998 and 1997, respectively:
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ 489 $ (919) $ 1,005 $ (1,480)
Translation gains (losses) (169) (51) (169) (100)
Unrealized gains (losses) on securities 5 110 (97) 110
========== ========== ========== ==========
Comprehensive income (loss) $ 325 $ (860) $ 739 $ (1,470)
========== ========== ========== ==========
</TABLE>
NOTE 7 - LITIGATION
On November 4, 1996, a purported class action complaint was filed in
the Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice. On June 5,
1998, plaintiffs filed a second amended complaint. A demurrer to that complaint
is expected to be filed on or about August 21, 1998. Oral argument of that
demurrer is scheduled for November 5, 1998.
On November 20, 1996, a purported derivative action complaint was filed
in the Superior Court of the State of California, Alameda County, by Mike
Tinkler against the Company's Board of Directors (the "Tinkler Derivative
Action"). The complaint in the Tinkler Derivative Action also names the Company
as a nominal defendant. The complaint in the Tinkler Derivative Action alleges
that as a result of the facts alleged in the Copperstone State Action,
defendants breached their fiduciary duties to the Company, violated California
law, and were unjustly enriched. The plaintiff in the Tinkler Derivative Action
seeks damages of an unspecified amount. On February 24, 1998, plaintiff filed a
second amended complaint. On May 13, 1998 defendants filed a demurrer to that
complaint. Oral argument of that demurrer is scheduled for September 10, 1998.
On September 24, 1997, a purported class action complaint was filed in
the United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The Copperstone Federal Action
contains virtually identical factual allegations as the Copperstone State
Action, and alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the Copperstone
Federal Action also seek damages of an unspecified amount. On January 14, 1998,
defendants moved to dismiss the Copperstone Federal Action. On April 20, 1998
the Court ordered that plaintiffs seek class certification prior to adjudication
of defendants' motion to dismiss. Pursuant to that order, the parties stipulated
to the conditional certification of a plaintiff class, and plaintiffs sent
notice to the putative class members. The notice explained that putative class
members had until August 28, 1998 to opt out of the plaintiff class. Oral
argument of the motion to dismiss is scheduled for September 29, 1998.
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On May 16, 1997, Atmel Corporation made a claim under the TCSI/Atmel
Corporation Purchase Agreement dated November 14, 1996. Pursuant to that
Agreement, $1.0 million of the sale price was escrowed to be available for
claims arising from the transaction. Atmel estimated damages in excess of $3.0
million. In the second quarter of 1998, management obtained an equitable
settlement of this matter with the escrow agent releasing $550,000 plus interest
to TCSI, and the remaining $450,000 less fees to Atmel. The settlement is
reported as a nonrecurring special gain in the statements of operations.
On April 24, 1998, a former employee served TCSI Corporation with a
complaint filed in Alameda County Superior Court alleging wrongful termination.
The former employee seeks relief for pay, compensatory damages, punitive
damages, and attorneys' fees. The discovery phase has commenced.
No trial in any of these actions is scheduled. The Company believes it
has meritorious defenses to all of these actions, and intends to defend each of
them vigorously. The Company is also a party as a defendant in various lawsuits,
contractual disputes, and other legal claims, the results of which are not
presently determinable. In the opinion of management, resolution of these legal
actions 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 any of these matters could materially affect the
Company's future results of operations or cash flows in a particular period.
<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, 1997.
Overview
TCSI Corporation provides integrated software products and services for
the global telecommunications ("telecom") industry. Since its inception in 1983,
a significant portion of the Company's revenues has been earned from telecom
service providers and equipment manufacturers. Since 1993, the Company's telecom
growth has been led by sales of SolutionCore(TM) and related products and
services. Prior to 1997, the Company also earned revenues from licensing
embedded software contained in wireless products and from the development of
system solutions for customers in the insurance, healthcare, and transportation
industries. 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, since 1997,
the Company has focused almost entirely on offering software solutions to the
telecom industry.
The Company provides services to customers under level-of-effort and
fixed price contracts. Service revenues are generally 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 the Company's system solutions can be 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 limited cases, some
customers have disputed fees charged for services provided. Although the Company
has been and is under no obligation to compromise its billed amounts, the
Company from time to time has reduced its accounts receivable when such disputes
could not be amicably resolved and may do so in the future. Additionally, a
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.
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 1998
and 1997 quarterly results have been adversely affected by delays in the
purchase of software licenses.
A substantial portion of the Company's revenues is derived from the
sale of the Company's software products and services to major telecom 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 can contain 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
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
implementation of these systems often occurs over several quarters. There exists
the risk that a change in a customer's technology or business strategy during
such lengthy development and implementation periods may cause early termination
of a project or discontinuance of future phases. In this regard, the Company, in
limited cases, has experienced and may continue to experience fluctuations in
revenues and operating results on a quarterly basis due to termination,
cancellation, or non-renewal of agreements. For example, in the third quarter of
fiscal 1996, the Company experienced fluctuations in revenues due to a delay in
a substantial follow-on contract with a regional bell operating company ("RBOC")
and due to termination of a development agreement to deploy a software solution
for a transportation company.
Management believes that continued 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 funding a larger portion of its product development
costs. Although management intends to target product development spending at
levels consistent with other software companies, from time-to-time, spending may
be greater or less than these amounts, as circumstances dictate. 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.
Results of Operations
Revenues. The Company generates revenues from the sale of its software
products and related services to the telecom industry. Total revenues for the
quarter ended June 30, 1998 increased 17% to $11.1 million. Total revenues for
the six months ended June 30, 1998 increased 15% to $22.1 million. NEC, Lucent
Technologies ("Lucent"), Bell Atlantic and Motorola, Inc. ("Motorola") were the
largest customers during the 1998 second quarter. NEC and Lucent each accounted
for more than 10% of the Company's total 1998 revenue. Revenue from software
licensing fees ("license revenues") improved by 457% from $0.5 million to $2.5
million, or 22% of 1998 second quarter revenues. License revenues improved to
$5.4 million, or 24% of total 1998 revenues. The Company expects that runtime
license revenues will continue to vary from quarter to quarter. License revenues
for the quarter were split almost equally between development and runtime
licenses. Bell Atlantic, Siemens Nixdorf Information Systems, Ltd., Motorola,
and Lucent accounted for 82% of TCSI's 1998 second quarter license revenues.
Revenues from the Asia-Pacific regions increased to $6.0 million and
$12.1 million for the three and six months ended June 30, 1998, respectively,
compared to $4.8 million and $8.7 million for the comparable 1997 periods. The
increases are attributable to continued relationships with existing customers,
particularly through ICONET and NEC, which resulted in revenues from follow-on
contracts. Revenues from the Americas increased to $3.9 million and $7.0 million
for the three and six months ended June 30, 1998, respectively, compared to $2.6
million and $5.4 million for the comparable 1997 periods. The increase results
from the deployment of the Data Network Management System for Bell Atlantic and
continued strong follow-on contract revenues with Lucent and Motorola. Revenues
from Europe decreased to $1.2 million and
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
$3.0 million for the three and six months ended June 30, 1998,
respectively, compared to $2.1 million and $5.0 million for the comparable 1997
periods. The decreases were due to delays in contract negotiation with some of
the major telecom equipment manufacturers in Europe. The Company generally
recognizes service revenues involving design, development, testing and
deployment over a twelve- to eighteen-month period. The Company expects that
Europe revenue will improve and account for approximately 25% of total 1998
revenues but there can be no assurance that this percentage will be attained or
exceeded. The Company expects the geographical mix of revenues to vary from
period to period as it responds to global buying habits and develops
relationships with new and existing partners and channels.
To date, a portion of revenues has been concentrated among a limited
number of customers. For the six months ended June 30, 1998, the concentration
of revenues from the Company's five largest customers increased to 79% from 61%
for the comparable 1997 period. The revenues from these customers represent many
separate and distinct projects that are geographically dispersed throughout the
world. There can be no assurance that such customers will continue to place
orders with the Company which will equal or exceed the comparable levels for
prior periods. (See the "Factors That May Affect Future Results and Market Price
of Stock-Customer Concentration" section at the end of this discussion and
analysis.)
Costs of Services. The Company incurs direct costs in the development
and deployment of its customers' 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, telephone expenses, information
systems support, and depreciation. Direct costs of services for the quarter
ended June 30, 1998 remained consistent at $5.1 million with the comparable 1997
period. For the six months ended June 30, 1998, costs of services declined 7% to
$9.6 million from $10.3 million for the comparable 1997 period. As a percentage
of service revenues, costs of services were 59% for the quarter ended June 30,
1998 compared to 57% for the comparable 1997 period. Costs of services were 57%
for six months ended June 30, 1998 compared to 61% for the comparable 1997
period. The cost of service percentage remained consistent for the quarter and
lower for the six months ended June 30, 1998 compared to the comparable 1997
period due to improved utilization and efficiency of resources, which resulted
in lower costs. The Company plans to continue its efforts to control costs and
expenses.
Product Development. Product development expenses include employee
compensation, subcontractor fees, training costs, and other product development
costs, including an allocation for benefits, facilities, telephone expenses,
information systems support, and depreciation. For the quarter ended June 30,
1998, the Company invested $2.9 million or 26% of revenues on internally-funded
product development compared with $1.4 million or 14% of revenues for the
quarter ended June 30, 1997. For the six months ended June 30, 1998, the Company
invested $5.5 million or 25% of revenues on internally-funded product
development compared with $2.8 million or 15% of revenues for the six months
ended June 30, 1997. Product development spending increased as planned during
the second quarter and six-month period of 1998 compared to the same periods of
1997, reflecting the Company's continuing commitment to become a true software
product supplier. In 1997, product development funds were used primarily for the
development of the Company's SolutionCore(TM) product, which included 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). There can be
no assurance, however, that the Company's product development spending will
result in the successful introduction of new products.
Selling, General, and Administrative Expenses. Selling expenses include
sales and marketing, employee compensation, promotional material, trade shows,
travel, and facilities expenses. General and administrative expenses include
compensation costs related to executive management, finance, and
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
administrative personnel along with the other administrative costs
including recruiting, legal and accounting fees, insurance, and bad debt
expense. For the quarter ended June 30, 1998, selling, general, and
administrative expenses decreased 16% to $3.7 million from $4.3 million for the
comparable 1997 period. For the six months ended June 30, 1998, selling,
general, and administrative expenses decreased 18% to $7.5 million from $8.9
million for the comparable 1997 period. Selling, general, and administrative
expenses were 33% of revenues for the quarter ended June 30, 1998 compared to
45% of revenues in the second quarter of 1997. For the six months ended June 30,
1998, selling, general, and administrative expenses were 34% of revenues
compared to 46% of revenues in the comparable 1997 period. The decrease in
spending is due to lower headcount and a reallocation of telephone and
information systems support expenses to their corresponding user departments.
Telephone and information systems support expenses were charged to general and
administrative expense in prior periods.
Nonrecurring special items. During the quarter ended June 30, 1998, the
Company settled litigation relating to the sale of a non-telecom business unit.
This settlement resulted in a nonrecurring gain of $550,000.
The Company incurred a charge to operations of $1.1 million in the
first two quarters of 1997 resulting from adjustments to the market value of
equipment held for resale related to the termination of a transportation
contract in the third quarter of 1996. The Company concluded the sale of the
equipment in the third quarter of 1997.
Income Taxes. The Company's effective tax rate was 40% and 34% for the
quarters ended June 30, 1998 and 1997, respectively. The Company incurred a tax
provision of $0.3 million on pre-tax income of $0.8 million for the quarter
ended June 30, 1998 compared to a tax benefit of $0.5 million on a pre-tax loss
of $1.4 million for the second quarter ended June 30, 1997. For the six months
ended June 30, 1998, the Company incurred a tax provision of $0.7 million on
pre-tax income of $1.7 million compared to a tax benefit of $0.8 million on a
pre-tax loss of $2.2 million for the comparable 1997 period.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was $4.8 million for the six
months ended June 30, 1998, compared to $2.2 million for the comparable 1997
period. Cash flows from operating activities for the six months ended June 30,
1998 primarily reflected net income of $1.0 million, depreciation and
amortization of $2.0 million, and decreases in receivables and deferred revenue
of $3.6 million and $2.4 million, respectively. Cash flows from operating
activities for the six months ended June 30, 1997 primarily reflected a net loss
of $1.5 million, depreciation and amortization of $1.8 million, and decreases in
receivables of $3.7 million. The increase in cash provided by operating
activities over 1997 is primarily due to the decrease in accounts payable from
the payment of year-end liabilities related to the buildout of the Alameda
facility in the first quarter of 1997 and from the decrease in accrued
liabilities resulting from reductions in bonus and commission payments in 1998
compared to 1997.
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Investing Activities
Net cash used in investing activities was $21.2 million for the six months
ended June 30, 1998 compared to $2.3 million for the comparable 1997 period. The
Company purchased $21.2 million of marketable securities while $15.9 million of
marketable securities matured, compared to the purchase of $9.1 million and
$11.5 million of maturities for the comparable period in 1997. The net decrease
in cash used in such investing activities also included $5.3 million of cash
used for capital expenditures and leasehold improvements during the first six
months of 1997 compared to $0.9 million of cash used for capital expenditures
for the comparable period of 1998. The capital expenditures during the first
half of 1997 are primarily related to the consolidation of the Company's
facilities in Northern California and to the establishment of the Company's new
office in the United Kingdom.
Financing Activities
Net cash provided by financing activities was $1.1 million for the six
months ended June 30, 1998 compared to $0.8 million for the comparable 1997
period. The increase was the result of stock options exercised and stock
purchased pursuant to the Employee Stock Purchase Plan.
As of June 30, 1998, the Company had cash and cash equivalents and
marketable securities of $60.2 million. The Company believes that existing cash
balances (including cash equivalents and marketable securities), together with
existing sources of liquidity, including cash flows from operating activities
will provide adequate cash to fund its operations for at least the next twelve
months
Certain Factors That May Affect Future Results and Market Price of Stock
Statements in this report which are prefaced with words such as
"expects," "anticipates," "believes" and similar words and other statements of
similar sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances which may or may not be within the Company's control and as to
which there can be no firm assurances given. These forward-looking statements,
like any other forward-looking statements, involve risks and uncertainties that
could cause actual results to differ materially from those projected or
anticipated.
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
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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.
Historically, a 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
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.
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 licensing 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 service revenues until
the services are rendered. The time required to implement the Company's products
can vary significantly with the needs of its customers and is generally a
process that extends for several months. Because of their complexity, larger
implementations 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.
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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 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 revenues 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.
Revenues attributable to the Company's 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 its portfolio of products and
services. There can be no assurance that the Company's technology will continue
to achieve market acceptance or that the Company will be successful in
developing, introducing, or marketing improvements to its products. Moreover,
the life cycle of distributed object products is difficult to estimate due in
large part to the recent changes in the telecom market, the effect of future
product enhancements, and competition. A decline in the demand for the Company's
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.
Customer Concentration
To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In particular, in 1997 and in
the first quarter of 1998, a large portion of revenues was derived from
contracts negotiated through a large equipment manufacturer in Asia. While the
recent economic crisis in Asia has not materially adversely affected the
Company, there can be no assurance that it will not do so in the future. In
addition, 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.
Product Defects
The Company provides complex software products for major corporations.
The development and enhancement of such complex 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
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
found in existing or new products or releases after commencement of commercial
licensing, which may result in delay or loss of revenues, 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
telecom industry, the complexities involved in implementing the Company's
software solutions entail risks of performance shortfalls. 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 product defects or implementation errors would
be potentially damaging to the Company's reputation. Any such occurrence could
have a material adverse effect upon the Company's business, operating results,
and financial condition.
International Sales
Revenues outside of the Americas accounted for 68% of the Company's
total revenues for the six months ended June 30, 1998. The Company expects that
international revenues will continue to account for a significant portion of its
total revenues 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 of 1997,
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, while the recent
economic crisis in Asia has not materially adversely affected the Company, there
can be no assurance that it will not do so in the future. Also, 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 revenues 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 revenues 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
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
receivable and accounts payable arising from international operations may
contribute to fluctuations in the Company's operating results. In order to
reduce the risk of exchange rate losses from foreign currency denominated sales,
the Company may engage in hedging transactions. There can be no assurance that
such hedging transactions will not have a material adverse effect on the
Company's business, operating results, and financial condition.
Dependence on Telecommunications Carriers; Government Regulation
Many of the Company's principal customers are major telecom carriers.
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 market for
telecommunications Operations Support System ("OSS") software. 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 telecommunications network management
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.
The Company's current and prospective competitors offer a variety of
solutions to address OSS needs. The Company faces competition in each of the
three functional areas the Company believes are necessary for the delivery of
complete OSS software telecom applications platform, configurable applications,
and custom services. The Company's SolutionCore and SolutionSuites product lines
enable the Company to provide its customers with both application development
software and telecom applications.
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Because certain of the Company's competitors focus only on one functional area
of OSS software, such competitors may be in a position to develop competitive
products targeted solely at the segment they serve. These competitors include
major communications service providers, RBOCs, and equipment and computer
manufacturers, each of which may have substantially greater financial,
manufacturing, technical, marketing, distribution, greater name recognition,
longer-standing relationships with customers than the Company and other
resources. 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.
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 materially adversely impact the Company's
business, operating results, and financial condition. In addition, the failure
of the Company's products to operate across the various existing and evolving
versions of hardware and software platforms and database environments employed
by consumers would have a material adverse effect on the Company's business,
operating results, and financial condition.
The introduction or announcement of products by the Company or one or
more of its competitors embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's software products
and solutions obsolete or unmarketable. The introduction of new or enhanced
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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.
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
was to make a valid claim and a license was not made available on commercially
reasonable terms, or if the Company was 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 on 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
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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 its 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 changes in its executive management
personnel. For example, the Company's current Chief Financial Officer joined the
Company in November 1997. 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.
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.
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
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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 lawsuits on behalf of
certain of the Company's shareholders were filed against the Company and various
of its officers and directors. In late September 1997, a class action lawsuit
was filed in U.S. Federal Court on behalf of certain shareholders against the
Company and various of its officers and directors. The state actions allege
violations of state securities laws during 1995 and 1996, and the federal action
alleges violations of the federal securities laws. Management believes that the
lawsuits are without merit and is contesting them.
Year 2000 Compliance
While the Company believes its products are Year 2000 compliant, it has not
concluded its final assessments of the Year 2000 problem. Many currently
installed computer systems and software products are coded to accept only
two-digit entries in the date code field. Beginning in the year 2000, these date
code fields will need to accept four-digit entries to distinguish 21st century
dates from 20th century dates. As a result, in less than two years, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. In early 1998, the Company developed
procedures for evaluating and managing the risks and costs associated with Year
2000 problems. TCSI believes it is devoting the necessary resources to identify
and modify its systems and products impacted by the Year 2000 problem and to
implement new systems and release new product versions to become Year 2000
compliant in a timely manner.
The Company believes that its costs associated with implementing these
procedures will not have a material adverse effect on the results of operations
or financial condition of the Company. However, there can be no assurance that
unexpected delays or increased costs associated with implementation will not
have an adverse effect on the Company's operations. In addition, there can be no
assurance that the Company's software contains all date code changes necessary
to prevent processing errors potentially arising from calculations using the
Year 2000 date. Any disruptions in product development or other operations of
the Company as a result of Year 2000 noncompliance would materially adversely
affect the Company's business, financial condition and results of operations.
TCSI believes that the purchasing patterns of customers and potential
customers may also be affected by Year 2000 issues as companies expend
significant resources to upgrade their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to purchase
products such as those offered by the Company. Furthermore, there can be no
assurance that the Company's customers and suppliers are or will be Year 2000
compliant. Failure of the Company's customers and suppliers to address the Year
2000 issues at all, sufficiently, or in a timely manner, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
<PAGE>
TCSI CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
On November 4, 1996, a purported class action complaint was filed in
the Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice. On June 5,
1998, plaintiffs filed a second amended complaint. A demurrer to that complaint
is expected to be filed on or about August 21, 1998. Oral argument of that
demurrer is scheduled for November 5, 1998.
On November 20, 1996, a purported derivative action complaint was filed
in the Superior Court of the State of California, Alameda County, by Mike
Tinkler against the Company's Board of Directors (the "Tinkler Derivative
Action"). The complaint in the Tinkler Derivative Action also names the Company
as a nominal defendant. The complaint in the Tinkler Derivative Action alleges
that as a result of the facts alleged in the Copperstone State Action,
defendants breached their fiduciary duties to the Company, violated California
law, and were unjustly enriched. The plaintiff in the Tinkler Derivative Action
seeks damages of an unspecified amount. On February 24, 1998, plaintiff filed a
second amended complaint. On May 13, 1998 defendants filed a demurrer to that
complaint. Oral argument of that demurrer is scheduled for September 10, 1998.
On September 24, 1997, a purported class action complaint was filed in
the United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The Copperstone Federal Action
contains virtually identical factual allegations as the Copperstone State
Action, and alleges violations of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the Copperstone
Federal Action also seek damages of an unspecified amount. On January 14, 1998,
defendants moved to dismiss the Copperstone Federal Action. On April 20, 1998
the Court ordered that plaintiffs seek class certification prior to adjudication
of defendants' motion to dismiss. Pursuant to that order, the parties stipulated
to the conditional certification of a plaintiff class, and plaintiffs sent
notice to the putative class members. The notice explained that putative class
members had until August 28, 1998 to opt out of the plaintiff class. Oral
argument of the motion to dismiss is scheduled for September 29, 1998.
On May 16, 1997, Atmel Corporation made a claim under the TCSI/Atmel
Corporation Purchase Agreement dated November 14, 1996. Pursuant to that
Agreement, $1.0 million of the sale price was escrowed to be available for
claims arising from the transaction. Atmel estimated damages in excess of $3.0
million. In the second quarter of 1998, management obtained an equitable
settlement of this matter with the Escrow Agent releasing $550,000 plus interest
to TCSI, and the remaining $450,000 less fees to Atmel. The settlement is
reported as a nonrecurring special gain in the statements of operations.
On April 24, 1998, a former employee served TCSI Corporation with a
complaint filed in Alameda County Superior Court alleging wrongful termination.
The former employee seeks relief for pay, compensatory damages, punitive
damages, and attorneys' fees. The discovery phase has commenced.
<PAGE>
TCSI CORPORATION
Item 1. Legal Proceedings (Continued)
No trial in any of these actions is scheduled. The Company believes it
has meritorious defenses to all of these actions, and intends to defend each of
them vigorously. The Company is also a party as a defendant in various lawsuits,
contractual disputes, and other legal claims, the results of which are not
presently determinable. In the opinion of management, resolution of these legal
actions 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 any of these matters could materially affect the
Company's future results of operations or cash flows in a particular period.
Item 4. Matters Submitted to a Vote of Security Holders
An annual meeting of shareholders of the Company was held at Alameda, California
on May 5, 1998. The following matters were voted upon by the shareholders:
The following persons, who were only nominees, were re-elected as directors to
hold office to serve until the next annual meeting or until their respective
successors are elected or appointed, and received the following number of votes:
For Withheld
---------- --------
John C. Bolger 19,965,016 166,672
Ram A. Banin 19,962,516 169,172
Norman E. Friedmann, Ph.D. 19,959,276 172,412
William A. Hasler 19,965,166 166,522
David G. Messerschmitt, Ph.D. 19,955,166 176,522
Harvey E. Wagner 19,952,034 179,654
A proposal to ratify the selection of Ernst & Young LLP as independent auditors
for the Company for the fiscal year ending December 31, 1998 was approved by the
shareholders. The following votes were cast as to such proposal: For:
20,112,088; Against: 11,440; Abstain: 8,160.
Item 5. Other Information
Pursuant to Rule 14a-4(c)(1) under the Securities Exchange Act of 1934,
in connection with the Company's annual meeting of stockholders, if a
stockholder of the Company fails to notify the Company of a proposal that such
stockholder intends to raise at the Company' annual meeting of stockholders at
least 45 days prior to April 6, 1999, then the proxies of management would be
allowed to use their discretionary voting authority with respect to such a
non-Rule 14a-8 stockholder proposal raised at the Company's annual meeting of
stockholders, without any discussion of the matter in the Company's proxy
statement.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule.
See Exhibit Index on page 29.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended June 30, 1998.
During the quarter ended March 31, 1998, the Company filed the following reports
on Form 8-K:
Report on Form 8-K dated February 25, 1998 reporting the appointment of John
Bolger to Chairman of the Board and of Dr. Norman E. Friedmann to the Board as
reported in the press release of same date
Report on Form 8-K dated January 30, 1998 reporting an exclusive agreement with
Ameritech to market advanced wholesale billing technology as reported in the
press release of same date
Report on Form 8-K dated January 29, 1998 reporting 1997 results as reported in
the press release of same date
<PAGE>
TCSI CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 12, 1998.
TCSI CORPORATION
(Registrant)
By /s/ Arthur H. Wilder
---------------------------------------
Arthur H. Wilder
Chief Financial Officer, Secretary, and
Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
TCSI CORPORATION
INDEX OF EXHIBITS
Exhibit No. Description
- ---------------- -----------------------------------------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 33,024
<SECURITIES> 19,219
<RECEIVABLES> 9,452
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 64,259
<PP&E> 25,849
<DEPRECIATION> 16,816
<TOTAL-ASSETS> 83,966
<CURRENT-LIABILITIES> 8,021
<BONDS> 0
0
0
<COMMON> 2,234
<OTHER-SE> 73,003
<TOTAL-LIABILITY-AND-EQUITY> 83,966
<SALES> 0
<TOTAL-REVENUES> 22,144
<CGS> 0
<TOTAL-COSTS> 22,017
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,675
<INCOME-TAX> 670
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