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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED 0-19377
DECEMBER 31, 1997 (COMMISSION FILE NUMBER)
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LOGO
TCSI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEVADA 68-0140975
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
1080 MARINA VILLAGE PARKWAY,
ALAMEDA, CALIFORNIA 94501
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 749-8500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.10 PAR VALUE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 13, 1998 was $170,738,403.
The number of shares outstanding of the Registrant's common stock, $.10 par
value, as of February 13, 1998 was 22,227,521 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders to be held on May 6, 1998, are incorporated by reference into Part
III of this Report.
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TCSI CORPORATION
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related 12
Stockholder Matters.........................................
Item 6. Selected Consolidated Financial Data........................ 13
Item 7. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations...................................
Item 8. Financial Statements and Supplementary Data................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting 28
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and 29
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 29
PART IV
Item
14.... Exhibits, Consolidated Financial Statement Schedules, and 30
Reports on Form 8-K.........................................
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PART I
ITEM 1. BUSINESS
This Business section and other parts of this Annual Report on Form 10-K
contain certain forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to a number of risks and uncertainties which could cause
actual results to differ materially from those discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
THE COMPANY
TCSI Corporation (TCSI or the Company) provides integrated software
products and services for the global telecom industry. TCSI's products and
services enable telecom service providers and equipment manufacturers to meet
the growing demand for integrated and automated management of a wide range of
networks and services. TCSI serves its customers in offices throughout North
America, Europe, and the Pacific Rim. TCSI's software solutions are purchased by
many of the world's leading telecommunications companies, including Bell
Atlantic, BellSouth, GTE, Nippon Telegraph and Telephone, and IDC. The Company's
software is also incorporated into telecommunications equipment systems provided
by manufacturers including Hughes Network Systems, Motorola, Italtel, Lucent
Technologies, and NEC.
Since its inception in 1983, a significant portion of the Company's
revenues have been earned from telecommunications service providers and
equipment manufacturers. Since 1993, the Company's growth has been led by sales
of SolutionCore(TM) and related products and services. Prior to 1997, the
Company also earned revenue from licensing embedded software contained in
wireless products and from the development of system solutions for customers in
the transportation industry. 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, in 1997, the Company focused entirely on offering
software solutions to the telecom industry.
INDUSTRY BACKGROUND
TELECOMMUNICATIONS INDUSTRY TRENDS
The telecommunications services market can be divided into two tiers: (i)
traditional full-service providers and network operators, such as RBOCs
(Regional Bell Operating Companies) and national communications carriers
(incumbent companies) and (ii) smaller network operators and independent
telephone companies (emerging companies). Incumbent companies typically have
complex technical requirements and large budgets devoted to the acquisition of
technology to maintain their legacy systems, enhance their existing service
offerings, and deploy new services and network management systems. In contrast,
emerging telecom companies typically have limited resources for the acquisition
of advanced technology, but are often more focused on rapidly building new
networks and leveraging proven and more complete systems. Several recent trends
within the telecom industry are changing the needs of both incumbent and
emerging service providers and of telecom equipment manufacturers. These trends
include the following:
- Increased competition driving the need for rapid introduction of new
products. Deregulation and privatization of the telecom industry
worldwide have intensified competition among existing operators of
public communications networks and have encouraged the rapid entry of
new service providers. Telephone network operators also face increasing
competition from cable companies and wireless companies for the
provisioning of telephone and newer services, including high bandwidth
data and video. To remain competitive, network operators are continually
seeking to differentiate themselves by improving existing service
offerings and accelerating the time-to-market for new services, while at
the same time reducing operational costs and downsizing their
organizations. These trends have increased the need for scalable and
flexible software solutions that enable the rapid introduction of new
and enhanced services to a growing number of subscribers and improve and
automate the management of
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communications networks. The need to manage and respond quickly to
rapidly changing market and infrastructure conditions has become a focus
for many telecom companies.
- Proliferation of new communications services. Use of communications
networks has grown rapidly in recent years as a result of increased use
of computing and networking technology, wireless services, broadband
data and video services, and other services. This has resulted in
increased demand for communications capacity worldwide from operators of
advanced intelligent networks, the Internet, and other types of public
networks. At the same time, network infrastructures have become more
diverse in order to provide new services, and network operators must
enhance and maintain these increasingly complex infrastructures to
support the broadening array of services. For example, a single network
operators infrastructure can include asynchronous transfer mode (ATM),
broadband synchronous optical network (SONET), frame relay, wireless
cellular and personal communication service (PCS), and internal
signaling and control networks, all of which must interoperate to
provide reliable and efficient service. As a result of this
proliferation of services, individual networks and the interconnections
among networks have become considerably more complex. This increased
complexity places a strain on network management and control systems
which incorporate multi-vendor equipment.
- Mitigation of risk. Telecom service providers are looking to mitigate
risk by either purchasing proven reliable solutions on a referral basis
or by developing more complete solutions and retaining rights to the
intellectual property.
SYSTEM MANAGEMENT REQUIREMENTS
Competition among existing and new telecom service providers, the
proliferation of new communications services, and pressure to provision new
services quickly and cost-effectively has placed increased demands on telecom
service provider's systems and equipment manufacturers. These demands have
resulted in the following system management requirements:
- Need to link technology and customers. The International
Telecommunications Union's (ITU) Telecommunications Management Network
(TMN) standards have identified four functions of telecommunications
operations systems: element, network, service, and business management.
Historically, a telecom company's discrete network components and the
broader network have been managed separately from the activation and
monitoring of specific services and the handling of billing, customer
service, and other administrative tasks, and management of financial
controls, marketing databases, and payroll systems. An introduction of a
new service affects all components of an operator's infrastructure. For
example, a customer desiring a temporary 800 number for a special event
requires a network operator to process the order (service management),
activate the service by providing special instructions to the
appropriate network components (element management), initiate billing,
establish circuits, and support customer inquiries (service management),
monitor the network and respond to traffic bottlenecks and unexpected
service interruption or failure (network management), and update
accounting and marketing databases (business management).
In response to increased competition, there is a greater need to rapidly
introduce new services and respond to customer service requests. There
is also an increased need to tighten the link between a telecom
network's technology components and service management (and ultimately
the customer). As a result, new network software implementation will
increasingly address specific business processes and customer service
requirements rather than network technology requirements. The
implication to software and hardware vendors is the need to offer
systems with proven technical and business viability. Further,
telecommunications service provider's technology decisions are
increasingly being led by marketing personnel, and include input from
various business functional areas throughout the company. As service
providers focus more on customer care, there will be a need for network
systems designed to provide management more meaningful information with
automated links from the customer support processes straight through to
network and element management processes.
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- Standardization of telecommunications management systems. Competition,
innovation, and profitability are becoming the main drivers shaping the
investment decisions of telecommunication service providers in many
parts of the world. Service providers are looking for solutions that
will not require them to lock-in to complex technologies or to be
limited to a small number of equipment suppliers. Further, as
deregulation enables companies to compete on a more global scale,
telecom companies are increasingly seeking to standardize network
architecture and infrastructure (including hardware and software
components) as well as business practices. As open, distributed
computing and industry standards continue to evolve, hardware and
software vendors will need to supply telecommunications equipment and
software solutions that permit such standardization.
- New software requirements. The rapid proliferation of communication
services and networks requires highly flexible and customizable
management and control systems that can rapidly respond to changing
market and infrastructure conditions. These systems must also integrate
the increasing number of network elements involved in any given
connection. New technology must enable and automate the rapid
provisioning of new and enhanced services. Increased competition
requires network management and control software solutions that enable
cost-effective change management and offer highly reusable technology in
order to reduce the time-to-market for new or enhanced services by
taking advantage of past development work. Scalability is increasingly
important since the rates of growth of new services and number of
subscribers are highly variable and often unpredictable. Solutions that
are not highly scalable may not be adequate for mission-critical,
long-lived networks. The mission-critical nature of public networks also
demands solutions that are highly reliable. Software products that meet
all of these requirements are very complex, and suppliers of these
products must increasingly provide highly specialized implementation,
integration, and customization services in order to provide complete
software solutions. The Company believes that few companies possess both
the industry expertise and software development capabilities to provide
integrated network management solutions to the telecom industry.
PRODUCT DEVELOPMENT STRATEGY AND CORE TECHNOLOGIES
PRODUCT DEVELOPMENT
The Company believes that its future success depends primarily upon the
development and enhancement of telecom 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 internally. During 1997, the Company's product development costs totaled
$5.9 million. The Company intends to continue product development funding.*
During 1996, the Company continued to enhance its development platform,
SolutionCore, and to develop application software used to integrate and automate
processes for a range of telecom networks and services (SolutionSuites(TM)).
SolutionCore, which includes the fifth release of the Company's Object Services
Package (OSP) and new releases of supporting application templates and
middleware, became generally available in December 1997. The Company intends to
continue investing financial resources in the development of telecom software.*
Periodically, the Company has entered into strategic relationships with
third party software vendors as a means of enhancing the Company's software
products. To date, such strategic relationships have consisted of licensing and
integrating technology developed by third parties and jointly developing new
products. In 1996,
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* 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 21 for a discussion of factors that could
affect future performance.
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TCSI licensed parts of Vertel Corporation's "Power Cats" management platform
software which enables the Company to offer network management solutions with an
object-oriented TMN agent/manager. The TMN agent/manager supports the rapid
integration of business management and operational systems. In early 1997, the
Company announced the integration of IONA Technologies' Orbix product into
SolutionCore. The integration of this Object Request Broker (ORB) product
enables the Company's product line to be fully interoperable with the Common
Object Request Broker Architecture (CORBA) 2.0, a key industry standard. In both
strategic relationships, the Company has agreed to pay a license fee for sales
of all Company products that contain the integrated software products. The
Company believes these strategic relationships are a key component of its
product strategy, and will continue to seek ways to integrate third-party
technology to enhance its products.*
DISTRIBUTED OBJECT TECHNOLOGY
The Company uses object-oriented software to design reusable building
blocks for business applications. Distributed object technology accomplishes
several objectives:
- Modeling of complex systems. The building blocks of distributed object
systems are the objects, which can represent structures in business or
technology.
- Managing change. Objects support change in three principal ways. First,
it is possible to change an object's implementation without disrupting
existing applications. Second, object interfaces can be extended without
disrupting usage of existing interfaces. Third, the interface of an
object may be delegated, or redirected, to another object.
- Offering control of network services. Distributed object computing
technology supports information systems that match decentralized
organizational structures. The technology enables objects representing
the real information and actions involved in business processes to
interact using network links in a managed environment. The result is an
accurate representation of business processes in software.
- Sharing objects among different applications. Distributed object
computing technology enables the views of an object to be independent of
the object itself. For example, sales and marketing departments
typically will view customers differently from maintenance departments.
- Generating reusable code and components. Developers must be able to
design objects that represent the key underlying components of an
environment, and then use and reuse those objects in new applications.
These objects encapsulate an organization's definition of its key
business concepts.
- Enabling interoperability. Distributed objects help to integrate diverse
data. Once data values are loaded into the object environment, users may
manipulate them as if they were all of a uniform format in a variety of
applications.
- Integrating existing systems. Distributed object technology enables the
computing environment to not only integrate new applications and
systems, but existing systems as well.
SYSTEM ARCHITECTURE
The Company uses object modeling for system architectures, consisting of
three functional categories: middleware, application templates, and custom
applications. Middleware and application templates are sold as products, within
the SolutionCore product line, and applications may be customized through
implementation of services provided by the Company, its customers, or systems
integrators.
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* 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 21 for a discussion of factors that could affect
future performance.
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DEVELOPMENT ENVIRONMENT AND FRAMEWORKS
SolutionCore is a development and run-time environment that incorporates an
object engine and provides the basic infrastructure for the Company's
distributed object management systems. OSP is a set of components for object
persistence, user-interface construction, object communication and distribution,
and external communication. Each of these components is a set of cooperating
classes that solve specific application problems. Collectively, these components
constitute the ORB, standards-based object services, and common facilities that
are similar to CORBA facilities. CORBA is an industry standard governing the
interaction of objects within a distributed environment. A framework is a
reusable design of a system incorporating certain functional knowledge. The
Company's object frameworks currently focus on the unique specifications of two
of the four TMN operations systems -- element management systems, which directly
manage network equipment such as switches and multiplexors, and network
management systems, which integrate and coordinate multiple network elements
through element managers to manage an entire network consisting of nodes and
links.
Frameworks provide telecom application developers with several advantages:
- Software reuse. The trend towards the adoption of object-oriented
techniques in software development has been driven largely by the
pressing need for software reuse. Reuse is important because building
large and complex operations systems may otherwise be impractical.
Frameworks make reuse possible in two ways. First, framework components
and object libraries are designed to be used in a variety of ways and as
a result can be used in multiple systems. Second, frameworks categorize
the components necessary to address a particular type of problem and
provide standard interfaces among those components. Using frameworks
enables developers to retain the benefits of custom solutions to
specific problems while leveraging reusable software components.
- Development speed. Object frameworks enable application developers to
build custom distributed object computing systems much faster than
developing such systems without the benefit of object frameworks. Like a
template, object frameworks include a categorization that indicates how
objects should interact and a set of pre-built, reusable object
libraries.
- Architectural support. The move towards distributed computing for large
systems has been driven not only by the need for improved
cost-performance ratios, but also by the need for open, flexible
architectures. Although most distributed systems tools focus on a
specific type of client/server architecture, object frameworks can
support most common architectures for distributed systems.
CUSTOMIZED APPLICATIONS
Applications enable customers to quickly and efficiently accomplish
business processes or tasks. Such tasks include configuration management, fault
management, and performance management of an operation's network. Applications
run on top of and work in concert with object frameworks. Applications may be
customized using an object model approach to meet the needs of both a customer's
business and individual end users.
PRODUCTS AND SERVICES
TCSI provides software solutions and services that enable its customers to
minimize the costs and risks of developing and deploying complex operations
support systems (OSS) within the telecom industry. Software licensing fees
represented 14 percent, 17 percent, and 21 percent of total revenues for the
years ended December 31, 1997, 1996, and 1995, respectively. Services revenues
accounted for 86 percent, 71 percent, and 79 percent of total revenues for 1997,
1996, and 1995, respectively. In 1996, the Company also earned revenues related
to equipment purchased on behalf of a customer which totaled 12 percent of
revenues.
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SOLUTIONCORE PRODUCT LINE
SolutionCore, introduced in 1997, provides sophisticated application
development modules that can be used to rapidly build network management,
element management and service/provisioning systems for a variety of network
technologies. Components of SolutionCore are:
- Object Services Package. OSP serves as the foundation for TCSI's
SolutionCore product line. OSP is a fifth generation suite of advanced
middleware and development tools for building and deploying large,
business-critical, OSS for the telecom industry. OSP enables application
development and customization time to be shortened; enables developers
to better manage the building of large scale, distributed applications;
enables full interoperability with TMN based applications; enables
runtime changes, such as addition of application servers or changes to
name server locations; and integrates graphical user interface, business
application, and communication layers, helping users improve quality and
reduce operating costs.
- CORBA Services Package. CORBA Services Package enables full
interoperability between OSP and CORBA applications.
- TMN Services Package. The primary standards for communications
management are consolidated in the TMN series of recommendations from
ITU and the detailed implementation guides from the Network Management
Forum (NMF). TMN Services Package provides full TMN capabilities as part
of the SolutionCore communications management platform. TMN Services
Package supports the integration and management of heterogeneous
networks and provides developers with a suite of development tools and
application programming interfaces that eliminates the complexities of
the underlying infrastructure.
- Application Templates Package. Application Templates Package, based on
an object-oriented, reusable framework for building large scale telecom
applications, contains the templates that provide the basis for fault
and event management applications. These features allow network
operators to more effectively monitor the status of their networks,
providing their customers with better services while reducing costs for
development, training, and maintenance. Product features also manage
user access and the administration of application servers.
SOLUTIONSUITE PRODUCTS
TCSI's SolutionSuite products combine application software and tools to
integrate and automate a broad range of telecom processes. Built on
client/server information architecture, SolutionSuite products support
geographically distributed systems that can be centrally managed. Such products
are available on a range of platforms, including UNIX and Windows NT servers,
and are accessible from workstations and PCs. The Company is engaged in the
process of continuously enhancing its application product offerings in an effort
to provide customers with reusable and configurable products. To date, the
Company has developed solutions in the following areas:
- Broadband. The BroadbandSuite enables service providers to achieve
increased levels of service and performance of their broadband networks.
This suite of products supports real-time activation of services that
run on customers' broadband networks, including DS1 and DS3, E1 and E3,
and higher-rates of services. The BroadbandSuite also provides features
that minimize the impact of errors in provisioning databases that are
out-of-sync with the network and reduce or eliminate the need for manual
inventory. Further, these products are designed to work across all
broadband domains including SONET, Synchronous Digital Hierarchy (SDH),
Digital Crossconnect Systems, and Next Generation Digital Loop Carriers.
- Digital Cellular. The CellularSuite provides application products that
implement efficient and effective business process and support systems
that automate and integrate network management operations and management
capabilities. This suite of products enables the customer to rapidly
provision and add new services. These applications are highly scalable,
allowing service providers to more easily increase volumes of equipment,
operators, and customers.
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- Intelligent Network. The INSuite provides applications, tools, and
middleware that operate across a wide range of intelligent network
switches from multiple users. These products improve the manageability
of SS7 networks by providing operators with a consistent set of commands
for managing equipment from multiple vendors. Managers are also able to
precisely control network utilization by setting thresholds and jeopardy
alarms to warn when utilization reaches pre-specified levels. Further, a
Mediation Module, based on industry standards, translates
bidirectionally between the proprietary interfaces of many vendor's
switches and the TMN/Q3 standard conformant TCSI application.
SOLUTIONSERVICES(TM)
The Company provides implementation services to develop customized
solutions based on its SolutionCore and configuration for SolutionSuites
products through its SolutionServices program. These services may involve the
integration of the Company's products with legacy systems and with the software
products of other companies. The Company works with its customers to specify,
design, develop, and deploy the software necessary to meet its customer's
business and operational requirements. The Company has extensive experience in
developing and implementing solutions for the telecom industry in general, and
network and element management solutions in particular. The Company engages in
careful planning of the development and deployment phases, a formal development
process, and rules or conventions that govern every phase of framework and
application development. The Company's methods combine techniques from
object-oriented design and development, quality management, and distributed
systems deployment, and the Company's solutions rely heavily on its products.
Due to the complex requirements of its customer's network systems, the Company
believes its implementation services are a key factor in customer purchasing
decisions.
The Company is committed to responsive user support and believes that such
support is critical in continuing successful long-term relationships with its
customers.* The Company offers technical customer support from 8:00 a.m. to 5:00
p.m. (Pacific Time), 5 days a week, which can be extended at the customer's
option to 24 hours a day, 7 days a week for an additional fee. Support is
provided by telephone, e-mail, remote login, and on-site assistance, if
necessary. The Company has established an internet site which provides technical
information, as well as schedules of the Company's upcoming training courses.
The Company conducts training courses for its customers, on a fee basis, at
the Company's training facilities in San Jose, California, and at customer
sites. Training courses include instruction in the installation, customization,
and usage of SolutionCore and related products. Specifically, the Company offers
OSP and TMN Services courses on a regular basis. As of December 31, 1997, the
Company had approximately 16 individuals performing customer support and
training.
As part of its software licensing agreements, the Company offers software
maintenance contracts to its customers. The maintenance contract entitles
customers to telephone support, product maintenance, and upgrades to minor
product releases. Substantially, all licensees of the Company's software
products were covered by a software maintenance contract during the year ended
December 31, 1997.
MARKETING AND SALES
The Company's products are typically intended for use in applications that
may be critical to a customer's business. Further, these applications are often
complex and require significant technical knowledge of the Company's products
and the customer's operations to be successfully deployed. To date, the Company
has primarily relied on its experienced worldwide sales force to sell its
products and related services. The sales team also significantly utilizes the
Company's engineering personnel to assist in product demonstrations,
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* 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 21 for a discussion of factors that could affect
future performance.
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answer customer questions, and determine system specifications. At December 31,
1997, the Company had 27 sales and marketing personnel located in North America,
Asia, and Europe.
The Company also uses various sales channels to augment its product sales.
Such channels have included sales representatives, distributors, and system
integrators. In the past, significant training on the use of the Company's
products combined with extensive knowledge of object-oriented technology and its
use in developing advanced telecom systems was required to sell TCSI products.
Accordingly, such third party sales channels have accounted for less than 10
percent of the Company's annual sales to date. Management believes that new
sales channels are an important part of the Company's growth strategy, as they
will provide the Company access to important new customers and geographic
markets. Accordingly, management intends to continue to invest in channel
development.* Further, as object-oriented technology becomes more widely used
and the Company continues to make enhancements to its products, management
believes that the Company's products will be more attractive to third-party
developers and resellers.*
CUSTOMERS
The Company licenses its development and runtime environment, SolutionCore,
to customers around the world. The Company's initial target market has been, and
continues to be, incumbent service providers. The following chart shows a
representative sample of the Company's 1997 customers:
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TELECOMMUNICATIONS CARRIERS EQUIPMENT MANUFACTURERS
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AT&T Hughes Network Systems
Bell Atlantic Lucent
BellSouth Motorola
GTE NEC Corporation
Nippon Telegraph and Telephone (NTT) OKI Electric Industry
IDC Italtel
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To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In 1997, 1996, and 1995,
revenues from the Company's five largest customers represented 64 percent, 54
percent, and 47 percent of revenues, respectively. Further, as a percent of
telecom revenues, the five largest telecom customers represented 65 percent, 62
percent, and 63 percent of revenues in 1997, 1996, and 1995, respectively. In
1997, one customer with multiple contracts, NEC, represented approximately 27
percent of total company revenues and two customers, Italtel and IDC, each
represented approximately 11 percent of total company revenues. The Company
anticipates that it will continue to experience significant customer
concentration.*
The Company earns a significant portion of revenues from foreign customers.
Revenues outside of North America accounted for approximately 78 percent, 40
percent, and 32 percent of the Company's total revenues for the years ended
December 31, 1997, 1996, and 1995, respectively. The Company expects that
international revenues will continue to account for a significant portion of its
total revenue in future periods.*
COMPETITION
The Company offers products and services in the evolving market for
telecommunications 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
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* 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 21 for a discussion of factors that could affect
future performance.
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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 network management 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, turnkey 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.
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.
OTHER COMPANY INFORMATION
BACKLOG
Orders for the Company's software products and services are typically in
the form of licensing and service contracts, which call for the delivery of
products and the performance of services over a nine to twelve month period.
Backlog for the Company's products and services represents an estimate of
remaining unearned contract value for all signed contracts, including
unrecognized license fees, development service fees, and maintenance and support
fees. Backlog generally does not include any potential sublicense fees or
royalties, which are recognized as earned. Backlog also does not include
expected future additions to contract value associated with existing customers'
master license agreements and service contracts. Because of variations in the
magnitude and duration of orders received by the Company, and because the
Company's contracts may be canceled or rescheduled by the customer without
significant penalty, the Company's backlog at any particular date may not be a
meaningful indicator of future financial results. At December 31, 1997, the
Company's backlog amounted to approximately $20 million. At December 31, 1996,
the Company's backlog was approximately $18 million.
EMPLOYEES
At December 31, 1997, the Company had 220 employees, of which approximately
65 percent were professional engineering staff. Over 90 percent of the Company's
employees hold options for Company stock. None of the Company's employees are
represented by a labor union, and the Company has not experienced any work
stoppages. Management believes that the Company's employee relations are good.
The Company's future success will depend to a significant extent on its
ability to continue to recruit and assimilate skilled engineers, managers, and
other personnel.* The Company's future success will also depend 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
- ---------------
* 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 21 for a discussion of factors that could affect
future performance.
9
<PAGE> 12
personnel. Competition for qualified personnel in the software industry is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The complex nature of the networks of
the Company's customers requires that the Company recruit and hire personnel
with expertise in and a broad understanding of the industries in which the
Company's customers compete. Furthermore, competitors have in the past and may
in the future attempt to recruit the Company's employees.* Failure to attract
and retain key personnel could have a material adverse effect on the Company's
business, operating results, and financial condition.*
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. Prior to
1997, the Company had 28 patents and had applications pending for an additional
18 patents. However, in late 1996 the Company transferred 35 patents and patent
applications to Atmel Corporation (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Non-recurring Special Items").
Currently, the Company has 7 patents and 2 applications pending for additional
patents. The Company expects to continue to file patent applications where it
believes it is appropriate to protect its proprietary technologies.*
EXECUTIVE OFFICERS OF THE COMPANY
The following are executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ram A. Banin, Ph.D. 56 President and Chief Executive Officer
Chief Financial Officer, Secretary, and
Arthur H. Wilder 56 Treasurer
</TABLE>
Dr. Banin joined TCSI in May 1992 and has served as President since
December 1996 and Chief Executive Officer and as a member of the Board of
Directors since July 1997. Prior to joining TCSI, Dr. Banin founded and operated
Banin Associates. Dr. Banin was also co-founder and Chief Executive Officer of
Atherton Technology from 1986 to 1989, as well as co-founder and Senior Vice
President of Daisy Systems from 1980 to 1985. Dr. Banin holds a Ph.D. in
Computer Science from the University of California at Berkeley, and an M.S. and
B.S. in Physics from the Hebrew University of Jerusalem, Israel.
Mr. Wilder joined TCSI in November 1997. Prior to joining TCSI, Mr. Wilder
operated his own financial consulting practice in the San Francisco Bay Area.
Previously, he spent more than seven years with Flow Industries Inc. and its
affiliated companies near Seattle, Washington. Initially, Mr. Wilder served as
Chief Financial Officer of the parent company and its pre-public subsidiary
companies. He later became Executive Vice President and then President of
FloWind Corporation, a subsidiary of Flow Industries Inc. Mr. Wilder holds a
B.A. in Economics and an M.B.A. from San Jose State University.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, customer
support, and product development facilities are located in Alameda and San Jose,
California. In addition, the Company leases sales offices in Newmarket, United
Kingdom, and Tokyo, Japan. The Company currently has approximately 130,000
square feet of facilities. The Company's leases have various terms, expiring at
different times through the year 2007. The Company believes that its existing
facilities are adequate to meet its current needs and that suitable additional
or alternative space will be available in the future on commercially reasonable
terms as needed.*
- ---------------
* 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 21 for a discussion of factors that could affect
future performance.
10
<PAGE> 13
ITEM 3. 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 - 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. Plaintiffs
are scheduled to file a second amended complaint on or about April 6, 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 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 filed a motion to dismiss the Copperstone Federal Action.
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 licensing
of its embedded software product lines 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
commence proceedings to obtain the release of the $1,000,000 escrow fund.
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 result 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 operation or cash flows in a particular period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of the Company (Common Stock) commenced trading on The
Nasdaq National Market under the symbol "TCSI" in July 1991. The following table
sets forth the high and low closing sale prices of the Common Stock for the
periods indicated, as reported by The Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
First quarter.............................................. $22.17 $11.33
Second quarter............................................. 29.75 17.50
Third quarter.............................................. 27.50 10.75
Fourth quarter............................................. 15.75 5.75
1997
First quarter.............................................. $ 8.25 $ 4.38
Second quarter............................................. 7.00 4.63
Third quarter.............................................. 8.00 4.63
Fourth quarter............................................. 9.00 5.25
</TABLE>
The market price of the shares of 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 of 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.*
As of February 13, 1998, the number of shareholders of record of the
Company's Common Stock was 98 and the number of beneficial holders was
approximately 4,400. The Company has declared no cash dividends on its Common
Stock since the Company's initial public offering. The Company currently intends
to retain any earnings for use in its business and does not anticipate paying
any cash dividends in the foreseeable future.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will
meet the Company's current expectations. The Company strongly encourages review
of the section entitled "Factors Affecting Operating Results and Market Price
of Stock" commencing on page 21 for a discussion of factors that could affect
future performance.
12
<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Services....................................... $33,970 $42,733 $43,790 $34,872 $27,970
Software licensing fees........................ 5,608 10,230 11,572 5,434 4,081
------- ------- ------- ------- -------
Total services and licensing fees................ 39,578 52,963 55,362 40,306 32,051
Equipment, non-telecom......................... -- 7,270 -- -- --
------- ------- ------- ------- -------
Total revenues................................... 39,578 60,233 55,362 40,306 32,051
Costs, expenses, and special items:
Services....................................... 21,071 28,773 24,945 17,985 15,098
Equipment, non-telecom......................... -- 6,810 -- -- --
Product development............................ 5,932 6,642 -- -- --
Selling, general, and administrative........... 18,563 25,010 19,498 14,556 12,995
Non-recurring special items, net............... 1,088 (4,587) -- -- --
------- ------- ------- ------- -------
Total costs, expenses, and special items......... 46,654 62,648 44,443 32,541 28,093
------- ------- ------- ------- -------
Income (loss) from operations.................... (7,076) (2,415) 10,919 7,765 3,958
Gain on sale of investment in common stock....... -- 585 -- -- --
Interest income.................................. 3,104 2,276 982 591 567
------- ------- ------- ------- -------
Income (loss) before income taxes................ (3,972) 446 11,901 8,356 4,525
Provision for (benefit from) income taxes........ (1,350) 152 3,831 2,926 1,829
------- ------- ------- ------- -------
Net income (loss)................................ $(2,622) $ 294 $ 8,070 $ 5,430 $ 2,696
======= ======= ======= ======= =======
Earnings (loss) per share (EPS) -- Basic......... $ (0.12) $ 0.01 $ 0.45 $ 0.31 $ 0.15
======= ======= ======= ======= =======
Shares used in calculation of EPS -- Basic....... 21,638 20,515 18,069 17,525 18,155
======= ======= ======= ======= =======
Earnings (loss) per share (EPS) -- Diluted....... $ (0.12) $ 0.01 $ 0.42 $ 0.30 $ 0.15
======= ======= ======= ======= =======
Shares used in calculation of EPS -- Diluted..... 21,638 21,542 19,224 18,216 18,302
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash, cash equivalents, and investments in
marketable securities.......................... $55,467 $52,607 $22,027 $22,212 $18,371
Working capital.................................. 59,358 50,717 31,374 18,675 12,179
Total assets..................................... 84,231 88,133 50,630 35,324 28,091
Shareholders' equity............................. 74,148 73,610 37,376 23,792 17,879
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to the 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 in "Factors
Affecting Operating Results and Market Price of Stock."
13
<PAGE> 16
COMPANY 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 have been earned from telecommunications
service providers and equipment manufacturers. Since 1993, the Company's growth
has been led by sales of SolutionCore(TM) and related products and services.
Prior to 1997, the Company also earned revenue from licensing embedded software
contained in wireless products and from the development of system solutions for
customers in the transportation industry. 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, in 1997, the Company focused 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 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 limited cases, some customers have disputed fees charged for
services provided. Although the Company was 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. 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 1997
and 1996 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 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 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.*
- ---------------
* 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 21 for a discussion of factors that could affect
future performance.
14
<PAGE> 17
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. 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.*
RESULTS OF OPERATIONS
The following table sets forth selected income statement data for each of
the years ended December 31 as a percentage of revenues:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Services............................................ 86% 71% 79%
Software licensing fees............................. 14 17 21
Equipment, non-telecom.............................. -- 12 --
--- --- ---
100 100 100
Costs, expenses, and special items:
Services............................................ 53 48 45
Equipment, non-telecom.............................. -- 11 --
Product development................................. 15 11 --
Selling, general, and administrative................ 47 42 35
Non-recurring special items, net.................... 3 (8) --
--- --- ---
Income (loss) from operations......................... (18) (4) 20
Interest and investment income........................ 8 5 2
Income (loss) before income taxes..................... (10) 1 22
Net income (loss)..................................... (7) -- 15
</TABLE>
REVENUES
The Company generates revenues primarily from the sale of its services and
software products to the telecommunications industry. In 1997, software
licensing fees represented 14 percent and services represented 86 percent of
total revenues. In 1996, software licensing fees represented 17 percent and
services represented 71 percent of total revenues. Additionally, 1996 included
equipment revenues representing 12 percent of total revenues. The equipment
revenues were the result of the deployment phase of a significant development
agreement the Company entered into in 1994 with a transportation customer that
included the purchase of equipment on behalf of the customer. During the third
quarter of 1996, the Company agreed to terminate this agreement and does not
have any other agreements with significant provisions to purchase equipment. In
1995, software licensing fees represented 21 percent and services represented 79
percent of total revenues.
- ---------------
* 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 21 for a discussion of factors that could affect
future performance.
15
<PAGE> 18
For the years ended December 31, the revenue breakdown is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Total Company revenues:
Services.................................... $33,970 $42,733 $43,790
Software licensing fees..................... 5,608 10,230 11,572
Equipment, non-telecom...................... -- 7,270 --
------- ------- -------
Totals.............................. $39,578 $60,233 $55,362
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Telecom revenues:
Services.................................... $33,908 $36,191 $26,802
Software licensing fees..................... 5,071 6,725 8,951
------- ------- -------
Totals.............................. $38,979 $42,916 $35,753
======= ======= =======
</TABLE>
Total Company revenues decreased 34 percent in 1997 to $39.6 million from
$60.2 million in 1996. The decline is primarily attributable to $17.3 million of
revenues generated in 1996 by non-telecom business units which were discontinued
in late 1996. Total Company revenues increased 9 percent in 1996 to $60.2
million from $55.4 million in 1995. The increase in revenues for 1996 was
attributable to $7.3 million of equipment purchased on behalf of a customer, as
described above. Excluding such equipment revenues, total revenues attributable
to services and software licensing fees declined to $53.0 million in 1996 from
$55.4 million in 1995 primarily due to the discontinuance of non-telecom
business units in late 1996. Total telecom revenues decreased 9 percent to $39.0
million in 1997 from $42.9 million in 1996. The decline in telecom revenues is
primarily the result of a 25 percent decline in telecom software licensing fees
in 1997 as the result of delayed system deployments in North America. The
Company expects software licensing fees to vary from period to period.* In 1996,
total telecom revenues increased 20 percent to $42.9 million compared to $35.8
million in 1995.
Total Company revenues from services for the year ended December 31, 1997
decreased 21 percent to $34.0 million from $42.7 million in 1996. For the year
ended December 31, 1996, such revenues decreased 2 percent from $43.8 million in
1995. The decline in total company services revenues in 1997 and 1996 is
primarily attributable to the discontinuance of non-telecom business units in
late 1996. Total telecom revenues from services for the year ended December 31,
1997 decreased 6 percent to $33.9 million compared to $36.2 million for the same
period in 1996. For the year ended December 31, 1996, telecom services revenues
increased 35 percent from $26.8 million in 1995.
Total Company software licensing revenues decreased 45 percent for the year
ended December 31, 1997 compared to the same period in 1996. For the year ended
December 31, 1996, such revenues decreased 12 percent compared to the same
period in 1995. The decline in each year is primarily the result of the
discontinuance of non-telecom product lines in late 1996. Total telecom software
licensing revenues decreased 25 percent for the year ended December 31, 1997
compared to the same period in 1996. The decline in telecom software licensing
fees in 1997 is attributed to delayed system deployments in North America. For
the year ended December 31, 1996, telecom software licensing revenues also
declined 25 percent over the comparable period in 1995. Telecom licensing fees
in 1995 included software licensing revenues related to the purchase of the
Company's development platform in connection with several large projects. In
1996, the demand centered more on follow-on services than on new licenses. The
Company expects software licensing revenues to continue to vary on a quarterly
and annual basis.*
- ---------------
* 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 21 for a discussion of factors that could affect
future performance.
16
<PAGE> 19
For the years ended December 31, the percentage of revenues by geographic
location are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total Company:
North America....................................... 22% 60% 68%
Asia Pacific........................................ 54 28 22
Europe.............................................. 24 12 10
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Telecom:
North America....................................... 21% 56% 73%
Asia Pacific........................................ 54 28 12
Europe.............................................. 25 16 15
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
The 1997 and 1996 increases in total Company and telecom revenues from
customers in Asia and Europe is attributable to continued relationships with
existing customers, particularly through NEC, the Company's business partner in
Japan, resulting in revenues from follow-on contracts signed earlier in 1997.
The decline in total Company and telecom revenues in 1997 and 1996 from
customers in North America is the result of merger activity among the RBOCs that
slowed the decision making process, low telecom bookings during 1996 and delayed
deployments in 1997, as the Company generally realizes services revenues
involving design, development, testing, and deployment over a twelve to eighteen
month period. The Company expects that international revenues will continue to
account for a significant portion of its total revenue in future periods.*
To date, a significant portion of revenues has been concentrated among a
limited number of customers. In 1997, 1996, and 1995, total company revenues
from the Company's five largest customers represented 64 percent, 54 percent,
and 47 percent of revenues, respectively. Further, as a percentage of total
telecom revenues, the top five telecom customers represented 65 percent, 62
percent, and 63 percent of revenues in 1997, 1996, and 1995, respectively. In
1997, one customer with multiple contracts, NEC, represented approximately 27
percent of total company revenues and two customers, Italtel and IDC, each
represented approximately 11 percent of total company revenues. 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.
DIRECT 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, and depreciation. Costs of services declined 27 percent to
$21.1 million in 1997 from $28.8 million in 1996. Costs of services increased 15
percent in 1996 from $24.9 million in 1995. As a percentage of services
revenues, cost of services were 62 percent, 67 percent, and 57 percent for 1997,
1996, and 1995, respectively. In 1996, costs of services included increased
investments in the completion of a number of North American telecom software
solutions. Such customer-related investments were reduced in the first half of
1997 thereby
- ---------------
* 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 21 for a discussion of factors that could affect
future performance.
17
<PAGE> 20
contributing to lower direct costs of services in 1997. In addition, the decline
in cost of services in 1997 compared to 1996 is also attributable to the
divestiture of non-telecom business units in late 1996.
EQUIPMENT COSTS
Equipment costs relate to equipment purchased on behalf of a transportation
customer. In 1996, the Company had one significant system development contract
which provided for the delivery of equipment. In October 1996, TCSI agreed to
terminate this contract. The Company does not anticipate that such equipment
costs, or related revenues, will be significant in the future.*
PRODUCT DEVELOPMENT
Product development includes employee compensation, subcontractor fees,
training costs, and other product development costs, including an allocation for
benefits, facilities, and depreciation. Prior to 1996, the Company's product
development had been primarily funded by customers as part of the development of
software applications for such customers. As a result, internally funded product
development costs had not been material. The Company began internally funding
its product development costs in 1996.
The Company invested $5.9 million, or 15 percent of revenues, on internally
funded product development in 1997 compared to $6.6 million, or 11 percent of
revenues, in 1996. In 1996, such costs included two major upgrades of the
Company's SolutionCore product as well as non-telecom product development costs
from its divested business units. In 1997, the funds were used primarily for
enhancements made to the Company's SolutionCore 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, in future
periods.*
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 26 percent to $18.6
million in 1997 from $25.0 million in 1996. The decline was primarily due to the
discontinuance of non-telecom business units in late 1996, as well as the
Company's business realignment decisions taken over the past year. In 1996,
selling, general, and administrative expenses increased 28 percent from $19.5
million in 1995. The increase was primarily due to the expansion of the Company
facilities, bad debt expense, employee benefit costs, and increased
international sales and marketing programs. Selling, general, and administrative
expenses as a percentage of revenue were 47 percent, 42 percent, and 35 percent
in 1997, 1996, and 1995, respectively. The increase in selling, general, and
administrative expenses as a percentage of revenues in 1997 is primarily
attributed to the decline in total revenues for the year compared to 1996 total
revenues.
NON-RECURRING SPECIAL ITEMS
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. Related to this same agreement, in the third quarter of
1996, the Company recorded a
- ---------------
* 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 21 for a discussion of factors that could
affect future performance.
18
<PAGE> 21
charge of approximately $3.3 million to cover the costs related to the
termination of this agreement. The customer paid the Company approximately $5.3
million to terminate the agreement.
As part of the Company's strategy to focus on its core telecom operations,
in November 1996, the Company licensed its embedded wireless technology and
related product lines to Atmel Corporation (Atmel) in exchange for Atmel Common
Stock valued at $10.0 million. In the fourth quarter of 1996, the Company
recorded a gain on this licensing of its technology, net of transaction costs
and project commitments, totaling $7.9 million and a gain of approximately $0.6
million from the sale of the Atmel stock.
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 for 1997 and 1996 and 32 percent for 1995. In
1995, the Company's tax rate was lower primarily as a result of tax benefits
from nontaxable interest income, foreign sales, and research and development tax
credits. Such benefits were not fully available in 1997 and 1996, causing the
tax rate to increase slightly.
At December 31, 1997, the Company had approximately $4.5 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 carry forwards. It is management's assessment that current levels of
anticipated taxable income will be sufficient to realize the net deferred tax
asset.
EARNINGS PER SHARE
As a result of the new Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share" issued in February 1997, earnings (loss) per share
(EPS) is computed using two different methods, basic and diluted earnings per
share. Basic EPS is computed using only the weighted average number of common
shares outstanding. Diluted EPS is computed using the weighted average number of
common shares outstanding and dilutive stock equivalents from the Company's
stock option plans.
Basic earnings (loss) per share was $(0.12), $0.01, and $0.45 for 1997,
1996, and 1995, respectively. Shares used in the calculation of basic earnings
(loss) per share increased to 21.6 million in 1997 from 20.5 million in 1996 and
18.1 million in 1995. The increase in shares in 1997 is attributable to option
exercises and employee stock purchases related to the Company's employee stock
purchase plan. The 1996 share increase was primarily due to option exercises and
1.5 million shares of Common Stock issued in the Company's follow-on public
offering in the first quarter of 1996.
Diluted earnings (loss) per share was $(0.12), $0.01, and $0.42 for 1997,
1996, and 1995, respectively. Shares used in the calculation of diluted earnings
(loss) per share increased to 21.6 million in 1997 from 21.5 million in 1996 and
19.2 million in 1995. The calculation of earnings (loss) per share for 1997
excludes unexercised option shares as such shares would be anti-dilutive as a
result of the net loss for the period.
STOCK OPTION PLANS
In 1996, the Company implemented the provisions of Financial Accounting
Standards Boards (FASB) Statement No. 123, "Accounting for Stock-Based
Compensation." As provided in the Statement, the Company continues to account
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. For the years ended December 31, 1997, 1996, and
1995, the Company has provided pro-forma disclosure of what net income (loss)
and earnings (loss) per share would have been had the fair value, as defined by
FASB No. 123, of the options been recognized. In accordance with FASB No. 123,
in determining the fair value of the options, the Company uses the Black-Scholes
option pricing model. In calculating the value of the options and its effect on
net income and EPS, management has made certain assumptions regarding the length
of time an employee holds the options and the expected stock volatility. The
underlying assumptions are based upon past experience and management's best
estimates and are subject to significant
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<PAGE> 22
subjectivity. Accordingly, the ultimate value that an employee receives and the
actual number of options exercised may vary significantly from amounts used in
the pro-forma calculation.*
In January 1997, the Company's Board of Directors approved the repricing of
1.1 million options granted under the 1991 Stock Incentive Plan. All employees
were given the opportunity to exchange their current options for new options
with an exercise price of $6.63 per share (fair market value of the related
Common Stock as of January 28, 1997). These options generally vest 50 percent in
January 1998 and 25 percent each in January 1999 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
Over the past three years, the Company has satisfied its liquidity needs
principally through cash flows from operating activities. During 1997, the
Company generated approximately $6.4 million of cash from operations primarily
resulting from a reduction in the Company's accounts receivable, other
receivables and other current assets offset by a reduction in accounts payable,
accrued compensation and related balances offset by the net loss. The decline in
accounts payable is primarily due to payment in early 1997 of amounts owed
related to the Company's consolidation of its Northern California facilities,
and the decline in accrued compensation is the result of reduced bonus and
salary accruals in 1997. Cash flow from operating activities in 1997 also
included approximately $4.0 million in income tax refunds resulting from prior
year net operating loss carrybacks. In addition, deferred revenue increased by
$2.7 million in 1997 due to increases in advance payments under development and
maintenance contracts where additional contract performance must occur before
revenue can be recognized. During 1996, net cash generated from operating
activities was $6.9 million primarily resulting from the licensing of the
Company's embedded wireless product lines. In 1995, net cash used in operating
activities of $0.3 million was affected by a $9.4 million increase in
receivables over the prior year. A significant amount of these receivables were
related to non-telecom business units. 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 and investments in marketable securities totaled $55.5 million at
December 31, 1997 and $52.6 million at December 31, 1996. During 1997, working
capital increased $8.6 million to $59.4 million at December 31, 1997. The
increase is primarily due to the maturity of approximately $5.8 million of
long-term marketable securities which were reinvested in short-term instruments
and the receipt of approximately $4.0 million in income tax refunds. Cash
provided by financing activities declined $28.8 million to $3.3 million in 1997
compared to 1996. In 1997, the cash provided by financing activities was
received as a result of the exercise of employee stock options and the employee
stock purchase plan. In early 1996, the Company raised funds through a follow-on
public offering, realizing net proceeds of approximately $25.8 million. In
addition, the Company raised approximately $10.0 million from the licensing of
its embedded wireless software in late 1996. The Company has no outstanding
debt.
In 1997, the Company incurred approximately $7.2 million in capital
expenditures, which primarily related to the expansion of the Company's United
Kingdom and Tokyo facilities to accommodate additional employees and the
completion of the tenant improvements for the Company's Northern California
facilities. 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 21 for a discussion of factors that could affect
future performance.
20
<PAGE> 23
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.
Historically, 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
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
21
<PAGE> 24
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 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.
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 has been
concentrated among a limited number of customers. In particular, in 1997, a
large portion of revenues was 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.
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<PAGE> 25
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 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 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 reputational harm resulting from product
defects or implementation errors would be damaging to the Company. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results, and financial condition.
INTERNATIONAL SALES
Revenues outside of North America accounted for 78 percent of the Company's
total revenues for the year ended December 31, 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.
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<PAGE> 26
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 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 network management 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, turnkey 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.
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.
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<PAGE> 27
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 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
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<PAGE> 28
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 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
26
<PAGE> 29
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 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.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. 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/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Currently, the Company believes there are no material
operational issues or costs associated with preparing its internal systems for
the year 2000. There can be no assurance, however, that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which include third party software and hardware technology. In
addition, there can be no assurance that the Company's customers will have
completed the same assessment of their internal systems.
The Company believes that its products are fully Year 2000 compliant
assuming four digit entries are acceptable to distinguish 21st century dates
from 20th century dates. The Company's fifth release of OSP and the prior
release, OSP 4.X, manage and manipulate dates greater than December 31, 1999,
and will not cause an abnormal ending scenario within the application or result
in the generation of incorrect values involving such dates. Additionally, the
software will not allow errors or incorrect calculations caused by "wrapping"
the century date, by failure to recognize the year 2000 as a leap year, or
errors in computing dates. Currently, only the time module of OSP is
time-dependent, and it can represent time to an upper limit of February 5, 2106.
It is not expected that the Company's products will be adversely affected
by date changes in the year 2000. However, there can be no assurance that the
Company's products contain and will contain features and functionality
considered necessary for its customers to be Year 2000 compliant.
27
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is incorporated by reference herein from
Part IV Item 14(a)(1) and (2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
<PAGE> 31
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (Proxy Statement) not later than 120 days after the end of the
fiscal year covered by this Report, and certain information included therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is set forth under the captions
"Proposal 1: Election of Directors," "Board Meetings, Committees, and Director
Compensation," and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement and under the caption "Executive Officers of the
Registrant" in Part I hereof, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is set forth under the caption
"Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is set forth under the caption
"Security Ownership of Directors, Officers, and Principal Shareholders" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is set forth under the caption
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement, which information is incorporated herein by reference.
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of TCSI are filed as part
of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-1
Consolidated Balance Sheets at December 31, 1997 and 1996... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995......................... F-3
Consolidated Statements of Shareholders' Equity for the
years ended
December 31, 1997, 1996, and 1995......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995......................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of TCSI Corporation
is filed as part of this report and should be read in conjunction with the
consolidated financial statements of TCSI Corporation:
<TABLE>
<CAPTION>
SCHEDULE PAGE
- -------- ----
<C> <S> <C>
II Valuation and Qualifying Accounts........................... S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
30
<PAGE> 33
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
3.1 Restated Articles of Incorporation of the Company
incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement No. 33-40872 on Form S-1
filed on May 29, 1991.
3.2 Certificate of Amendment of the Restated Articles of
Incorporation of the Company, dated December 12, 1994,
incorporated herein by reference to Exhibit 3.2 of Form 10-K
filed March 9, 1995.
3.3 Amended By-laws of the Company incorporated herein by
reference to Exhibit 3.2 of the Company's Registration
Statement No. 33-40872 on Form S-1 filed on May 29, 1991.
10.1# Teknekron Communications Systems, Inc. 1991 Stock Incentive
Plan as amended Plans in February 28, 1992, incorporated
herein by reference to Exhibit 4 of the Company's
Registration which Statement No. 33-57540 on Form S-8 filed
on January 28, 1993.
10.2# Amendment to Teknekron Communications Systems, Inc. 1991
Stock Incentive Plan, dated March 3, 1995, changing the name
of the plan to TCSI Corporation 1991 Stock Incentive Plan,
incorporated herein by reference to Exhibit 10.2 of Form
10-K filed March 9, 1995.
10.3# Amendments to TCSI Corporation 1991 Stock Incentive Plan,
dated December 8, 1995 and March 1, 1996, incorporated
herein by reference to Exhibit 10.3 of Form 10-K filed March
25, 1996.
10.4 Teknekron Communications Systems, Inc. Equity Sharing Plan
restated as of May 17, 1991, incorporated herein by
reference to Exhibit 4 of the Company's Registration
Statement No. 33-41808 on Form S-8 filed on July 19, 1991.
10.5 Amendment One to Teknekron Communications Systems, Inc.
Equity Sharing Plan dated January 4, 1993 incorporated
herein by reference to Exhibit 10.4 of Form 10-K filed March
26, 1993.
10.6 Amendment to Teknekron Communications Systems, Inc. Equity
Sharing Plan, dated March 3, 1995, changing the name of the
plan to TCSI Corporation Equity Sharing Plan, incorporated
herein by reference to Exhibit 10.5 of Form 10-K filed March
9, 1995.
10.7 Form of Indemnity Agreement between the Company and each of
its directors and officers incorporated herein by reference
to Exhibit 10.8 of the Company's Registration Statement No.
33-40872 on Form S-1 filed on May 29, 1991.
10.8 Form of specimen, TCSI Corporation Equity Sharing Plan
Non-Qualified Notice of Grant of Stock Options and Grant
Agreement and Annex I (attached thereto), dated March 3,
1995, incorporated herein by reference to Exhibit 10.10 of
Form 10-K filed March 9, 1995.
10.9 Form of specimen, Teknekron Communications Systems, Inc.
Equity Sharing Plan Amended Option Agreement, dated as of
January 4, 1993, incorporated herein by reference to Exhibit
10.14 of Form 10-K filed March 26, 1993.
10.10# Form of specimen, TCSI Corporation 1991 Stock Incentive Plan
Notice of Grant of Stock Options and Grant Agreement and
Annex I (attached thereto), dated March 3, 1995,
incorporated herein by reference to Exhibit 10.12 of Form
10-K filed March 9, 1995.
</TABLE>
- ---------------
# Plans in which executive officers participate.
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.11# Form of specimen, amendment to TCSI Corporation 1991 Stock
Incentive Plan, dated December 6, Filed 1996, changing
eligible participants, repricing and transferability of
options, and approval of herewith. material amendments,
incorporated herein by reference to Exhibit 10.13 of Form
10-K filed March 27, 1997.
10.12# Form of specimen, amendment to TCSI Corporation 1991 Stock
Incentive Plan, dated May 30, 1997, increasing the maximum
number of options which may be awarded in a fiscal year
incorporated herein by reference to Exhibit 10.30 of Form
10-Q filed November 13, 1997.
10.13 Lease between Mitsubishi Estate Housing Co. and the Company
dated December 27, 1993, concerning lease of the Company's
facilities at 15-1, Jinnan 1-Chome, Shibuya-ku, Tokyo,
Japan, incorporated by reference to Exhibit 10.12 of Form
10-K filed March 28, 1994.
10.14 Description of ongoing Incentive Bonus Program and form of
standard letter of agreement entered into between the
Company and Ram A. Banin, Ph.D., incorporated herein by
reference to Exhibit 10.2 of Form 10-K filed March 9, 1995.
10.15 Lease between Browning-Ferris Industries of California, Inc.
and the Company, dated December 16, 1994, concerning the
lease of the Company's facilities located at 150 Almaden
Blvd., Suite 850, San Jose, California, incorporated herein
by reference to Exhibit 10.15 of Form 10-K filed March 9,
1995.
10.16 Lease between Browning-Ferris Industries of California, Inc.
and the Company, dated December 16, 1994, concerning the
lease of the Company's facilities located at 150 Almaden
Blvd., Suite 800 and 900, San Jose, California, incorporated
herein by reference to Exhibit 10.16 of Form 10-K filed
March 9, 1995.
10.17 Lease between JMB/San Jose Associates and the Company, dated
January 31, 1996, concerning lease of the Company's
facilities located at 150 Almaden Blvd., Fifth Floor, San
Jose, California, incorporated herein by reference to
Exhibit 10.21 of Form 10-K filed March 25, 1996.
10.18 TCSI 1994 Board of Directors Option Plan, dated as of
December 2, 1994, incorporated herein by reference to
Exhibit 4 of the Company's Registration Statement No.
33-98842 on Form S-8 filed on October 27, 1995.
10.19 Amendment to TCSI 1994 Board of Directors Option Agreement,
dated December 6, 1996, changing eligibility of outside
directors to receive equity securities under an employee
benefit plan, transferability of options, and approval of
material amendments, incorporated herein by reference to
Exhibit 10.20 of Form 10-K filed March 27, 1997.
10.20 Form of specimen, TCSI 1994 Board of Directors Option
Agreement, dated as of December 2, 1994, incorporated herein
by reference to Exhibit 10.18 of Form 10-K filed March 9,
1995.
10.21 Lease between Cow Holdings Limited and the Company, dated
July 25, 1996, concerning lease of Company's facilities
located at 8605 Westwood Center Dr., Vienna, Virginia,
incorporated herein by reference to Exhibit 10.23 of Form
10-K filed March 27, 1997.
10.22* Amendment to lease between White Pearl Investment Company
(former landlord: Cow Holdings Limited) and the Company,
dated December 19, 1997, changing the landlord and
terminating the lease effective December 19, 1997.
</TABLE>
- ---------------
# Plans in which executive officers participate.
* Filed herewith.
32
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------- --------------------
<C> <S>
10.23 Sublease between Computer Associates International, Inc. and
the Company, dated July 12, 1996, concerning the lease of
Company's facilities located at 1080 Marina Village Parkway,
Alameda, California, incorporated herein by reference to
Exhibit 10.24 of Form 10-K filed March 27, 1997.
10.24 Lease between Tricoho, Ltd. and the Company, dated July 22,
1996, concerning lease of Company's facilities located at
15851 Dallas Parkway, Suite 367, Dallas, Texas, incorporated
herein by reference to Exhibit 10.25 of Form 10-K filed
March 27, 1997.
10.25* Sublease between Innovative Managed Care Systems, Inc. and
the Company, dated March 7, 1997, concerning the sublease of
the Company's facilities located at 15851 Dallas Parkway,
Suite 367, Dallas, Texas.
10.26# Form of specimen, TCSI Employee Stock Purchase Plan, dated
January 19, 1997 incorporated herein by reference to Exhibit
10.26 of Form 10-K filed March 27, 1997.
10.27#* Amendment to TCSI Employee Stock Purchase Plan, dated
December 5, 1997, amending the maximum number of shares an
employee may purchase in an offering.
10.28 Arrangements with Executive Officer, dated May 1, 1992 and
Amendment to Employment Agreement, dated June 11, 1997
incorporated herein by reference to Exhibit 10.27 of Form
10-Q filed August 14, 1997.
10.29 Arrangements with Executive Officer, Employment Agreement,
dated December 20, 1993 incorporated herein by reference to
Exhibit 10.28 of Form 10-Q filed August 14, 1997.
10.30 Arrangements with Executive Officer, Termination Agreement,
dated July 31, 1997 incorporated herein by reference to
Exhibit 10.29 of Form 10-Q filed August 14, 1997.
10.31* Lease between Kenburgh Land and Properties Limited and the
Company, dated February 14, 1997, concerning the lease of
the Company's facilities located at First Floor Suffolk
House, Fordham Road, Newmarket, United Kingdom.
23.1* Consent of Independent Auditors
</TABLE>
- ---------------
# Plans in which executive officers participate.
* Filed herewith.
33
<PAGE> 36
(b) Reports on Form 8-K in the fourth quarter of 1997:
(i) Press Release dated December 15, 1997, "NEC and TCSI Announce New
Venture; NEC and TCSI Open Facility to Develop Telecom Network
Management Solutions"
(ii) Press Release dated December 11, 1997, "Italtel and TCSI Expand
Partnership in European Marketplace; Significant New Order Received
for TCSI's SolutionCore from Italy's Largest Equipment Supplier"
(iii) Press Release dated December 9, 1997, "TCSI Announces New Chief
Financial Officer"
(iv) Press Release dated December 9, 1997, "TCSI Hires New Vice President
of Product Development"
(v) Press Release dated October 28, 1997, "TCSI's Flagship Product Breaks
New Ground; TCSI Keeps Delivering Enhancements to SolutionCore, the
Most Advanced Widely Deployed Network Management Platform"
(vi) Press Release dated October 15, 1997, "TCSI Corporation Reports Third
Quarter Results"
(vii) Press Release dated October 15, 1997, "TCSI Unveils Flow-Through
Provisioning Capability in its Broadband SolutionSuite; Leading
Telecom Software Company Adds New Level of Automation to Broadband
Product Portfolio"
(viii) Press Release dated October 2, 1997, "TCSI Teams With Unidata, Inc.
to Provide Advanced Telecom Software Solutions; TCSI's SolutionCore
First to Offer Relational Database and Object-Oriented Database
Support"
34
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C>
TCSI Corporation
(Registrant)
March 11, 1998 /s/ RAM A. BANIN
--------------------------------------------------------
Ram A. Banin, Ph.D., Chief Executive Officer
(Principal Executive Officer)
March 11, 1998 /s/ ARTHUR H. WILDER
--------------------------------------------------------
Arthur H. Wilder, Chief Financial Officer, Secretary,
and Treasurer
(Principal Accounting Officer)
</TABLE>
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C>
March 11, 1998 /s/ JOHN C. BOLGER
--------------------------------------------------------
John C. Bolger, Chairman of the Board of Directors
March 11, 1998 /s/ RAM A. BANIN
--------------------------------------------------------
Ram A. Banin, Director
March 11, 1998 /s/ NORMAN E. FRIEDMANN
--------------------------------------------------------
Norman E. Friedmann, Ph.D., Director
March 11, 1998 /s/ WILLIAM A. HASLER
--------------------------------------------------------
William A. Hasler, Director
March 11, 1998 /s/ DAVID G. MESSERSCHMITT
--------------------------------------------------------
David G. Messerschmitt, Ph.D., Director
March 11, 1998 /s/ HARVEY E. WAGNER
--------------------------------------------------------
Harvey E. Wagner, Director
</TABLE>
35
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
TCSI Corporation
We have audited the accompanying consolidated balance sheets of TCSI
Corporation as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TCSI
Corporation at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
ERNST & YOUNG LLP
San Francisco, California
January 27, 1998
F-1
<PAGE> 39
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $33,566 $30,880
Investments in marketable securities...................... 20,301 14,352
Receivables............................................... 11,803 13,480
Other receivables......................................... 682 2,042
Deferred income taxes..................................... 2,164 2,178
Other current assets...................................... 925 2,308
------- -------
Total current assets.............................. 69,441 65,240
Furniture, equipment, and leasehold improvements, net....... 10,165 9,234
Non-current investments in marketable securities............ 1,600 7,375
Non-current deferred income taxes........................... 2,297 5,000
Other non-current assets.................................... 728 1,284
------- -------
Total assets...................................... $84,231 $88,133
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accruals....................... $ 2,410 $ 7,263
Accrued compensation and related costs.................... 2,880 4,705
Deferred revenue.......................................... 3,640 958
Income taxes.............................................. 1,153 1,597
------- -------
Total current liabilities......................... 10,083 14,523
------- -------
Commitments (Note 9)
Shareholders' equity:
Preferred shares, $0.01 par value; 5,000 shares
authorized; none outstanding........................... -- --
Common shares, $0.10 par value; 75,000 shares authorized;
22,136 shares issued and outstanding -- 1997
(21,219 -- 1996)....................................... 2,214 2,122
Additional paid-in capital................................ 49,133 45,939
Accumulated foreign currency translation adjustments...... (234) --
Unrealized gains on investments in marketable
securities............................................. 108 --
Retained earnings......................................... 22,927 25,549
------- -------
Total shareholders' equity........................ 74,148 73,610
------- -------
Total liabilities and shareholders' equity........ $84,231 $88,133
======= =======
</TABLE>
See accompanying notes.
F-2
<PAGE> 40
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues:
Services.................................................. $33,970 $42,733 $43,790
Software licensing fees................................... 5,608 10,230 11,572
------- ------- -------
Total services and licensing fees................. 39,578 52,963 55,362
Equipment, non-telecom.................................... -- 7,270 --
------- ------- -------
Total revenues.................................... 39,578 60,233 55,362
------- ------- -------
Costs, expenses, and special items:
Services.................................................. 21,071 28,773 24,945
Equipment, non-telecom.................................... -- 6,810 --
Product development....................................... 5,932 6,642 --
Selling, general, and administrative...................... 18,563 25,010 19,498
Non-recurring special items, net.......................... 1,088 (4,587) --
------- ------- -------
Total costs, expenses, and special items.......... 46,654 62,648 44,443
------- ------- -------
Income (loss) from operations............................... (7,076) (2,415) 10,919
Gain on sale of investment in common stock.................. -- 585 --
Interest income............................................. 3,104 2,276 982
------- ------- -------
Income (loss) before income taxes........................... (3,972) 446 11,901
Provision for (benefit from) income taxes................... (1,350) 152 3,831
------- ------- -------
Net income (loss)........................................... $(2,622) $ 294 $ 8,070
======= ======= =======
Earnings (loss) per share (EPS) -- Basic.................... $ (0.12) $ 0.01 $ 0.45
======= ======= =======
Shares used in calculation of EPS -- Basic.................. 21,638 20,515 18,069
======= ======= =======
Earnings (loss) per share (EPS) -- Diluted.................. $ (0.12) $ 0.01 $ 0.42
======= ======= =======
Shares used in calculation of EPS -- Diluted................ 21,638 21,542 19,224
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 41
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SHARES ACCUMULATED UNREALIZED
---------------- FOREIGN GAINS ON
NUMBER ADDITIONAL CURRENCY INVESTMENTS TOTAL
OF PAID-IN TRANSLATION IN MARKETABLE RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENTS SECURITIES EARNINGS EQUITY
------- ------ ---------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994.... 17,696 $1,770 $ 4,837 $ -- $ -- $17,185 $23,792
Net income..................... -- -- -- -- -- 8,070 8,070
Proceeds from exercise of
options...................... 996 99 3,979 -- -- -- 4,078
Tax benefits from exercise of
options...................... -- -- 2,096 -- -- -- 2,096
Repurchase of common shares.... (90) (9) (651) -- -- -- (660)
------ ------ ------- ----- ---- ------- -------
Balances at December 31, 1995.... 18,602 1,860 10,261 -- -- 25,255 37,376
Net income..................... -- -- -- -- -- 294 294
Proceeds from exercise of
options...................... 1,117 112 3,586 -- -- -- 3,698
Tax benefits from exercise of
options...................... -- -- 2,570 -- -- -- 2,570
Deferred tax benefits from
exercise of options.......... -- -- 3,827 -- -- -- 3,827
Issuance of common shares, net
of offering costs -- March
1996......................... 1,500 150 25,695 -- -- -- 25,845
------ ------ ------- ----- ---- ------- -------
Balances at December 31, 1996.... 21,219 2,122 45,939 -- -- 25,549 73,610
Net loss....................... -- -- -- -- -- (2,622) (2,622)
Proceeds from exercise of
options...................... 829 83 2,692 -- -- -- 2,775
Proceeds from employee stock
purchase plan................ 88 9 502 -- -- -- 511
Unrealized gains on investments -- -- -- -- 108 -- 108
Foreign currency translation
adjustments.................. -- -- -- (234) -- -- (234)
------ ------ ------- ----- ---- ------- -------
Balances at December 31,1997..... 22,136 $2,214 $49,133 $(234) $108 $22,927 $74,148
====== ====== ======= ===== ==== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 42
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $(2,622) $ 294 $ 8,070
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 4,244 4,240 1,682
Deferred income taxes..................................... (1,110) (157) (385)
Changes in:
Receivables............................................ 1,677 4,140 (9,145)
Other current assets................................... 2,205 497 (2,279)
Accounts payable and other accruals.................... (2,282) 687 820
Accrued compensation and related costs................. (1,825) (118) 1,127
Deferred revenue....................................... 2,682 (162) (145)
Income taxes........................................... 3,383 (2,561) (80)
------- -------- -------
Net cash provided by (used in) operating
activities...................................... 6,352 6,860 (335)
------- -------- -------
INVESTING ACTIVITIES
Capital expenditures........................................ (7,208) (7,548) (5,373)
Purchase of marketable securities........................... (21,566) (35,907) (3,743)
Maturity and sale of marketable securities.................. 21,500 19,261 17,194
Decrease (increase) in other non-current assets............. 556 (845) 9
------- -------- -------
Net cash provided by (used in) investing
activities...................................... (6,718) (25,039) 8,087
------- -------- -------
FINANCING ACTIVITIES
Issuance of common shares................................... -- 25,845 --
Proceeds from exercise of options........................... 2,775 3,698 4,078
Proceeds from employee stock purchase plan.................. 511 -- --
Tax benefits from exercise of options....................... -- 2,570 2,096
Repurchase of common shares................................. -- -- (660)
------- -------- -------
Net cash provided by financing activities......... 3,286 32,113 5,514
------- -------- -------
Effect of foreign currency translation on cash and cash
equivalents............................................... (234) -- --
------- -------- -------
Net increase in cash and cash equivalents................... 2,686 13,934 13,266
Cash and cash equivalents at beginning of year.............. 30,880 16,946 3,680
------- -------- -------
Cash and cash equivalents at end of year.................... $33,566 $ 30,880 $16,946
======= ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (refund received) for income taxes, net........... $(3,624) $ 353 $ 2,200
======= ======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 43
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
TCSI Corporation provides integrated software products and services for the
global telecommunications industry.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and a wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Revenues
The Company provides its software to customers under contracts which
generally include both software licensing fees and systems solutions services.
Revenue for services is generally recognized on a percentage-of-completion basis
as work is performed. Differences between invoiced amounts and revenue
recognized are reflected as unbilled receivables. The Company recognizes revenue
from software licensing fees only after delivery and installation of software
products and if there are no remaining significant post-installation
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 Company's revenue recognition
policy is in accordance with the provisions of the American Institute of
Certified Public Accountant's ("AICPA") Statement of Position 91-1, "Software
Revenue Recognition" ("SOP 91-1").
In October 1997, the AICPA issued Statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP 97-2"). The Company will be required to adopt this
standard in its first quarter of 1998 and restatement of prior financial
statements is prohibited. SOP 97-2 supersedes SOP 91-1, and addresses software
revenue recognition matters primarily from a conceptual level and does not
include specific implementation guidance. Detailed implementation guidelines
have not yet been issued. The Company believes that the implementation
guidelines could result in changes to the Company's revenue recognition policies
and procedures, which could have a material adverse effect on the Company's
revenues and operating results.
Stock Based Compensation
During 1996, the Company implemented the provisions of Financial Accounting
Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based
Compensation". The Company grants stock options for a fixed number of shares to
employees 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
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and, accordingly, recognizes no compensation expense for the
stock option grants.
Common Shares
In April 1996, the Board increased the authorized common shares from 37.5
million to 75.0 million and changed the par value from $0.0067 to $0.15 per
share. In May 1996, the Board approved a three-for-two stock split of the
Company's common shares and concurrently the par value was changed from $0.15 to
$0.10 per share. All share and per share information has been adjusted to
reflect these matters.
F-6
<PAGE> 44
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Per Share Information
As a result of FASB No. 128 "Earnings Per Share" which was issued in
February 1997, earnings (loss) per share is computed using two different
methods, basic and diluted earnings (loss) per share. Basic earnings (loss) per
share is computed using only the weighted average number of common shares
outstanding. Diluted earnings (loss) 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.
The potential shares resulting from the assumed exercise of the employee stock
options are not included in the diluted earnings (loss) per share calculation in
1997 as their effect is anti-dilutive. All net income (loss) per share amounts
presented have been stated to conform to FAS 128 requirements, where
appropriate.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss) -- numerator for basic and
diluted earnings (loss) per share........ $(2,622) $ 294 $ 8,070
======= ======= =======
Denominator:
Denominator for basic earnings (loss) per
share -- weighted-average shares......... 21,638 20,515 18,069
Effect of dilutive securities:
Employee stock options................... -- 1,027 1,155
------- ------- -------
Denominator for diluted earnings (loss) per
share -- adjusted weighted average shares... 21,638 21,542 19,224
======= ======= =======
Basic earnings (loss) per share............... $ (0.12) $ 0.01 $ 0.45
======= ======= =======
Diluted earnings (loss) per share............. $ (0.12) $ 0.01 $ 0.42
======= ======= =======
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in 1998. FAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. FAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. Adoption of these statements is expected to have no impact on
the Company's consolidated financial position, results of operations or cash
flows.
Reclassifications
Certain 1996 and 1995 balances have been reclassified to conform to current
year presentation.
F-7
<PAGE> 45
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The Company accounts for its marketable securities under Statement of FASB
Statement 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, determined by quoted market prices, with
the unrealized gains and losses, net of tax, included in shareholders' equity.
Realized and unrealized gains and losses from investments have been
insignificant to the results of operations and financial position of the
Company. Total cash and cash equivalents and investments in marketable
securities at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash in banks............................................ $ 6,968 $ 5,827
Held-to-maturity securities:
Obligations of states and political subdivisions....... 11,800 6,800
Debt securities of U.S. companies...................... 13,844 14,483
U.S. Treasury securities and obligations of U.S.
government agencies................................. -- 2,000
------- -------
25,644 23,283
------- -------
Available-for-sale securities:
Obligations of states and political subdivisions....... -- 1,900
Debt securities of U.S. companies...................... 17,663 18,121
U.S. Treasury securities and obligations of U.S.
government agencies................................. 5,084 3,476
Unrealized gains....................................... 108 --
------- -------
22,855 23,497
------- -------
$55,467 $52,607
======= =======
</TABLE>
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. All of the Company's
securities have stated maturities of two years or less. The Company's cash flows
relating to the purchases and maturities of its marketable securities for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Purchase of marketable securities:
Investments held-to-maturity.................... $14,129 $18,795 $ 3,743
Investments available-for-sale.................. 7,437 17,112 --
------- ------- -------
$21,566 $35,907 $ 3,743
======= ======= =======
Maturity and sale of marketable securities:
Investments held-to-maturity.................... $17,600 $10,540 $17,194
Investments available-for-sale:
Maturities................................... -- 1,950 --
Sales........................................ 3,900 6,771 --
------- ------- -------
$21,500 $19,261 $17,194
======= ======= =======
</TABLE>
F-8
<PAGE> 46
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Reserves are maintained for potential credit losses.
Receivables at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Billed receivables....................................... $10,366 $10,433
Unbilled receivables..................................... 1,837 3,447
Reserve for doubtful accounts............................ (400) (400)
------- -------
$11,803 $13,480
======= =======
</TABLE>
4. MAJOR CUSTOMERS AND REVENUES BY GEOGRAPHIC AREA
For the year ended December 31, 1997, the Company had one customer that
represented 27 percent of revenues and two customers that each represented
approximately 11 percent of revenues (1996-two customers, each representing 16
percent of revenues; 1995-one customer, representing 14 percent of revenues). No
other customers represented more than 10 percent of revenues in these periods.
Revenues for the years ended December 31 were derived from customers based
in the following geographic areas:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
North America................................. $ 8,555 $36,032 $37,724
Asia Pacific.................................. 21,474 17,206 12,389
Europe........................................ 9,549 6,995 5,249
------- ------- -------
$39,578 $60,233 $55,362
======= ======= =======
</TABLE>
5. 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 improvement balances at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computer and office equipment.......................... $ 14,814 $ 12,856
Furniture and fixtures................................. 3,613 3,307
Leasehold improvements................................. 6,660 4,194
-------- --------
25,087 20,357
Less accumulated depreciation and amortization......... (14,922) (11,123)
-------- --------
$ 10,165 $ 9,234
======== ========
</TABLE>
In 1996, leasehold improvements were reduced by $1,400 as a result of
allowances due from the Company's landlords. In addition, this balance contains
$2,200 for accrued expenditures that were not yet paid as of December 31, 1996.
These amounts are non-cash transactions and, accordingly, are not included in
the Company's Consolidated Statement of Cash Flows for 1996. In 1997, the
Company received all allowances due from its landlords and paid all amounts owed
for accrued expenses at the end of 1996.
F-9
<PAGE> 47
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE PROFIT SHARING/401(K) PLAN AND STOCK OPTION PLANS
Profit Sharing/401(k)
Eligible employees can contribute amounts to the Company's Profit
Sharing/401(k) Plan (the Plan) via payroll withholding subject to certain
limitations. The Company matches contributions by plan participants based upon a
percentage of the participant's contribution determined by the Board of
Directors for each plan year. Total charges to income under the Plan in 1997
were $725 (1996 -- $637; 1995 -- $616).
Equity Sharing Plan
The Equity Sharing Plan (Equity Plan) authorizes up to 2.6 million common
shares for the granting of options to employees and consultants. The Equity Plan
provides for issuance of incentive options at an exercise price of not less than
100 percent of fair value at the time of grant. As provided by the Equity Plan,
all ungranted options expired March 1, 1996; accordingly, no shares are
available for grant at December 31, 1997.
Information regarding the Equity Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE OPTION SHARES
-------------- -------------
<S> <C> <C>
Outstanding at December 31, 1994.................. $ 3.91 1,851
Granted......................................... 8.51 30
Exercised....................................... 4.87 (712)
Options canceled and available for re-grant..... 3.99 (110)
-----
Outstanding at December 31, 1995.................. 3.34 1,059
Granted......................................... 13.06 134
Exercised....................................... 3.78 (588)
Options canceled and available for re-grant..... 6.18 (77)
-----
Outstanding at December 31, 1996.................. 5.05 528
Exercised....................................... 2.41 (354)
Options canceled................................ 12.49 (137)
-----
Outstanding at December 31, 1997.................. $ 2.97 37
=====
Exercisable at December 31, 1997.................. $ 2.97 37
=====
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ------------------------
WEIGHTED
AVERAGE
REMAINING
RANGE OF CONTRACTUAL WEIGHTED WEIGHTED
EXERCISE LIFE AVERAGE AVERAGE
PRICES NUMBER (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
-------- ------ ----------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$2.17 - 3.90..................... 37 1.0 $2.97 37 $2.97
-- --
37 37
== ==
</TABLE>
The weighted average grant date fair value of options granted during 1996
and 1995 was $13.86 and $5.57 per share, respectively.
1991 Stock Incentive Plan
The 1991 Stock Incentive Plan (Stock Plan) authorizes up to 3.0 million
common shares for the granting of options or restricted shares to employees,
directors, and consultants. The Stock Plan provides for issuance of incentive
options at an exercise price per share of not less than 100 percent of fair
value at the time of the
F-10
<PAGE> 48
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
grant. The Stock Plan also provides for issuance of nonstatutory options and
restricted stock awards at any price as determined by the 1991 Stock Incentive
Plan Committee. Options granted under the Stock Plan generally have a term of up
to six years from the date of the grant and are exercisable to the extent
vested. The option term and vesting schedule is established by the 1991 Stock
Incentive Plan Committee at the date of grant. No grants of restricted stock
have been issued under the Stock Plan.
In 1996, the Company's shareholders approved an amendment to the Stock Plan
which increased the number of common shares reserved for option grants to 7.5
million. Beginning January 1, 1997, the number of options eligible to be granted
under the Stock Plan automatically increases by 0.75 million each year.
Information regarding the 1991 Stock Incentive Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE OPTION SHARES
-------------- --------------
<S> <C> <C>
Outstanding at December 31, 1994.................. $ 3.46 1,688
Granted......................................... 8.35 1,226
Exercised....................................... 2.85 (284)
Options canceled and available for re-grant..... 4.98 (188)
------
Outstanding at December 31, 1995.................. 5.73 2,442
Granted......................................... 16.47 970
Exercised....................................... 3.48 (529)
Options canceled and available for re-grant..... 10.06 (439)
------
Outstanding at December 31, 1996.................. 9.61 2,444
Granted......................................... 6.04 3,330
Exercised....................................... 4.15 (475)
Options canceled and available for re-grant..... 11.55 (1,807)
------
Outstanding at December 31, 1997.................. $ 5.99 3,492
======
Exercisable at December 31, 1997.................. $ 5.09 442
======
Options available for grant at December 31, 3,454
1997............................................
======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICE NUMBER LIFE (YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ------ ------------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$ 2.17 - 5.00................... 283 1.3 $ 3.43 279 $ 3.43
5.01 - 10.00................... 3,202 5.2 6.19 160 7.81
10.01 - 15.00................... 4 4.2 11.15 2 11.81
15.01 - 22.58................... 3 4.6 20.46 1 20.47
----- ---
3,492 442
===== ===
</TABLE>
The weighted average grant date fair value of options granted during 1997,
1996, and 1995 was $3.70, $11.14, and $5.63 per share, respectively.
F-11
<PAGE> 49
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1994 Outside Directors Stock Option Plan
In 1995, the Company's shareholders approved the 1994 Outside Directors
Stock Option Plan (Directors Plan) which authorizes up to 300,000 common shares
for options to non-employee directors. Each eligible director is granted options
to purchase approximately 31,500 shares upon appointment or election to the
Board of Directors. Each year, current directors are granted options to purchase
an additional six thousand shares. Options vest monthly over a three-year
period. At December 31, 1997, the weighted average contractual life of options
outstanding is 3.4 years and the range of exercise prices is $6.26 to $10.75.
Information regarding the Director's Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE OPTION SHARES
-------------- -------------
<S> <C> <C>
Outstanding at December 31, 1994.............. $ 6.40 56
Granted..................................... 10.75 30
---
Outstanding at December 31, 1995.............. 7.93 86
Granted..................................... 8.75 30
---
Outstanding at December 31, 1996.............. 8.14 116
Granted..................................... 6.26 24
Options cancelled and available for
re-grant................................. 7.32 (44)
---
Outstanding at December 31, 1997.............. $ 8.04 96
===
Exercisable at December 31, 1997.............. $ 8.24 48
===
</TABLE>
The weighted average grant date fair value of options granted during 1997,
1996, and 1995 was $3.78, $5.40, and $6.92 per share, respectively.
Stock-Based Compensation and Pro-forma Information
Under provisions of FASB No. 123, the Company is required to disclose the
fair value, as defined, of options granted to employees and related compensation
expense. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model. A weighted-average expected life of
the option of 4 years and no dividend yield was assumed.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company is also required to present pro-forma information as if
provisions of FASB Statement No. 123 had been implemented as of January 1, 1995.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effect of
adjustments made to obtain pro-forma income (loss) and earnings (loss) per share
is not expected to be indicative of the
F-12
<PAGE> 50
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
effect on future periods' pro-forma results. The Company's pro forma information
for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Net income (loss).............................. $(6,508) $(2,968) $7,019
======= ======= ======
Earnings (loss) per share -- Basic............. $ (0.30) $ (0.14) $ 0.39
======= ======= ======
Earnings (loss) per share -- Diluted........... $ (0.30) $ (0.14) $ 0.38
======= ======= ======
Expected volatility............................ 0.957 0.978 0.978
======= ======= ======
Risk-free interest rate........................ 6.38% 6.60% 6.60%
======= ======= ======
</TABLE>
Employee Stock Purchase Plan
In December 1996, the Company's Board of Directors (Board) approved the
Employee Stock Purchase Plan (Purchase Plan) under section 423 of the Internal
Revenue Code and reserved 500,000 shares of Company common stock for issuance
under this plan. The number of shares available under the Purchase Plan will
increase annually by the lesser of 100,000 shares, one percent of the Company's
outstanding shares, or an amount determined by the Board. All employees, as
defined by the Purchase Plan, may contribute up to 15 percent of their
compensation to purchase shares of the Company's common stock at the lesser of
85 percent of the fair market value at the beginning or end of each six month
offering period. The offering periods commence each February and August. During
the year ended December 31, 1997, 87,504 shares of common stock were issued
under the Purchase Plan.
Option Repricing
In January 1997, the Company's Board of Directors approved the repricing of
1.1 million options granted under the 1991 Stock Incentive Plan. All employees
were given the opportunity to exchange their current options for new options
with an exercise price of $6.63 per share (fair value of the related common
shares as of January 28, 1997). These options generally vest 50 percent in
January 1998 and 25 percent each in January 1999 and January 2000. These options
are included in the appropriate option activity schedule as cancellations and
subsequent grants.
F-13
<PAGE> 51
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31 are as follows using the
liability method:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current deferred tax assets:
Revenue differences related to timing.................... $1,555 $1,212
Other accrued items...................................... 320 966
------ ------
Net current deferred tax asset............................. 1,875 2,178
Net operating loss carry forward........................... 1,532 --
Benefit of operating loss carry forward relating to stock
option exercises......................................... -- 3,827
Benefit of credit carry forward............................ 852 852
Depreciation............................................... 202 321
------ ------
Net deferred tax asset..................................... $4,461 $7,178
====== ======
</TABLE>
The current and deferred provisions (benefit) for income taxes for the
years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- ------
<S> <C> <C> <C>
Current:
Federal........................................ $ (656) $(640) $2,759
State.......................................... -- 97 1,019
Foreign........................................ 416 852 438
------- ----- ------
(240) 309 4,216
------- ----- ------
Deferred:
Federal........................................ (994) (136) (336)
State.......................................... (116) (21) (49)
------- ----- ------
(1,110) (157) (385)
------- ----- ------
$(1,350) $ 152 $3,831
======= ===== ======
</TABLE>
Deferred income tax asset balances also increased in 1996 and decreased in
1997 as a result of deferred taxes related to stock option exercises. These
amounts are not reflected in the deferred provisions as they are charged
directly to additional paid-in capital.
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal income tax rate for the years ended December
31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................. (34)% 34% 34%
State taxes, net of federal............................ (3) 5 5
Tax exempt interest.................................... (5) (10) (2)
Foreign taxes.......................................... 7 -- --
Other items............................................ 1 5 (5)
---- --- --
Income tax provision (benefit)......................... (34)% 34% 32%
==== === ==
</TABLE>
F-14
<PAGE> 52
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, the Company had a net operating loss carry forward
for federal income tax purposes of approximately $4,346 and a foreign tax credit
carry forward of approximately $850 which expire in the years 2012 and 2001,
respectively.
Realization of the Company's deferred tax assets is dependent upon the
Company generating sufficient taxable income in future years in appropriate
jurisdictions to obtain the benefit from the reversal of temporary differences
and from tax credit carry forwards. At December 31, 1997, 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 asset. However, the amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced.
8. FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of each foreign
operation is the local currency. The effects of translation rate changes related
to long term assets and liabilities located outside the United States are
included as a component of stockholders' equity. Foreign currency transaction
gains and losses are included in the Consolidated Statements of Operations.
Through 1997, such transaction gains and losses have not been significant.
9. COMMITMENTS
The Company is obligated under operating lease agreements for its
facilities with noncancelable lease terms in excess of one year. Certain of
these leases contain renewal options and require that the Company pay for taxes,
insurance, and maintenance expenses. Rent expense on these leases during the
year ended December 31, 1997 was $2,198 (1996-$2,270; 1995-$1,591). Future
minimum lease payments on noncancelable operating leases for the years ending
December 31 are as follows:
<TABLE>
<S> <C>
1998............................... $ 2,289
1999............................... 2,272
2000............................... 1,554
2001............................... 1,535
2002 and beyond.................... 4,410
-------
$12,060
=======
</TABLE>
10. 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-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. Plaintiffs
are scheduled to file a second amended complaint on or about April 6, 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
F-15
<PAGE> 53
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 filed a motion to dismiss the Copperstone Federal Action.
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 licensing
of its embedded software product lines 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
commence proceedings to obtain the release of the $1,000,000 escrow fund, which
was classified with cash and cash equivalents in the accompanying balance
sheets.
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 operation or cash flows in a particular period.
11. NON-RECURRING SPECIAL ITEMS
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. Related to this same agreement, in the third quarter of
1996, the Company recorded a charge of approximately $3.3 million to cover the
costs related to the termination of this agreement. The customer paid the
Company approximately $5.3 million to terminate the agreement.
As part of the Company's strategy to focus on its core telecom operations,
in November 1996, the Company licensed its embedded wireless technology and
related product lines to Atmel Corporation (Atmel) in exchange for Atmel common
stock valued at $10.0 million. In the fourth quarter of 1996, the Company
recorded a gain on this licensing of its technology, net of transaction costs
and project commitments, totaling $7.9 million.
In December 1996, the Company sold the Atmel stock at a price of $32.42 per
share which resulted in the Company recording a gain on the sale of its
investment in common stock totaling approximately $600. Revenue from services
and software licensing fees related to wireless products employing this
technology amounted to approximately $7,400 and $11,600 for 1996 and 1995,
respectively.
F-16
<PAGE> 54
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. UNAUDITED QUARTERLY FINANCIAL DATA
Selected unaudited quarterly financial data for 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Services............................ $ 7,803 $ 9,055 $ 9,239 $ 7,873
Software licensing fees............. 2,031 449 518 2,610
------- ------- -------- -------
Total revenues.............. 9,834... 9,504 9,757 10,483
Costs, expenses, and special items:
Services............................ 5,143 5,139 5,617 5,172
Product development................. 1,452 1,361 1,408 1,711
Selling, general, and
administrative................... 4,568 4,306 4,287 5,402
Non-recurring special items, net.... 270 818 -- --
------- ------- -------- -------
Total costs, expenses, and
special items............. 11,433 11,624 11,312 12,285
------- ------- -------- -------
Loss from operations.................. (1,599) (2,120) (1,555) (1,802)
Interest income....................... 749 729 808 818
------- ------- -------- -------
Loss before income taxes.............. (850) (1,391) (747) (984)
Benefit from income taxes............. (289) (472) (254) (335)
------- ------- -------- -------
Net loss.............................. $ (561) $ (919) $ (493) $ (649)
======= ======= ======== =======
Loss per share (EPS) -- Basic......... $ (0.03) $ 0.04 $ (0.02) $ (0.03)
======= ======= ======== =======
Shares used in calculation of
EPS -- Basic........................ 21,343 21,327 21,730 22,015
======= ======= ======== =======
Loss per share (EPS) -- Diluted....... $ (0.03) $ (0.04) $ (0.02) $ (0.03)
======= ======= ======== =======
Shares used in calculation of EPS --
Diluted............................. 21,343 21,327 21,730 22,015
======= ======= ======== =======
</TABLE>
F-17
<PAGE> 55
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996 QUARTER ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Services............................ $12,583 $12,962 $ 8,835 $ 8,353
Software licensing fees............. 3,116 4,438 950 1,726
------- ------- -------- -------
Total services and licensing fees..... 15,699 17,400 9,785 10,079
Equipment........................... 2,839 4,431 -- --
------- ------- -------- -------
Total revenues.............. 18,538 21,831 9,785 10,079
------- ------- -------- -------
Costs, expenses, and special items:
Services............................ 6,128 6,824 8,666 7,155
Equipment........................... 2,654 4,156 -- --
Product development................. 1,004 1,487 2,078 2,073
Selling, general, and
administrative................... 5,283 5,899 5,993 7,835
Non-recurring special items, net.... -- -- 3,334 (7,921)
------- ------- -------- -------
Total costs, expenses, and
special items............. 15,069 18,366 20,071 9,142
------- ------- -------- -------
Income (loss) from operations......... 3,469 3,465 (10,286) 937
Gain on sale of investment in common
stock............................... -- -- -- 585
Interest income....................... 282 664 719 611
------- ------- -------- -------
Income (loss) before income taxes..... 3,751 4,129 (9,567) 2,133
Provision for (benefit from) income
taxes............................... 1,200 1,321 (3,061) 692
------- ------- -------- -------
Net income (loss)..................... $ 2,551 $ 2,808 $ (6,506) $ 1,441
======= ======= ======== =======
Earnings (loss) per share
(EPS) -- Basic...................... $ 0.13 $ 0.13 $ (0.31) $ 0.07
======= ======= ======== =======
Shares used in calculation of
EPS -- Basic........................ 18,981 20,839 21,027 21,198
======= ======= ======== =======
Earnings (loss) per share (EPS) --
Diluted............................. $ 0.13 $ 0.13 $ (0.31) $ 0.07
======= ======= ======== =======
Shares used in calculation of EPS --
Diluted............................. 20,348 22,191 21,027 21,736
======= ======= ======== =======
</TABLE>
F-18
<PAGE> 56
TCSI CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGE TO
BALANCES AT COSTS BALANCES AT
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for uncollectible accounts......... $400 $ 263 $ (263) $400
---- ------ ------- ----
$400 $ 263 $ (263) $400
==== ====== ======= ====
Year ended December 31, 1996:
Allowance for uncollectible accounts......... $400 $1,248 $(1,248) $400
---- ------ ------- ----
$400 $1,248 $(1,248) $400
==== ====== ======= ====
Year ended December 31, 1995:
Allowance for uncollectible accounts......... $150 $ 250 $ -- $400
---- ------ ------- ----
$150 $ 250 $ -- $400
==== ====== ======= ====
</TABLE>
S-1
<PAGE> 57
3060-10K-98
<PAGE> 1
EXHIBIT 10.22
FIRST AMENDMENT TO
DEED OF LEASE
THIS FIRST AMENDMENT TO DEED OF LEASE (hereinafter, the "First
Amendment") made as of the Nineteenth (19th) day of December, 1997, by and
between WHITE PEARL INVESTMENT COMPANY ("Landlord"), a Delaware corporation
having an office at c/o Rim Pacific Management, 8605 Westwood Center Drive,
Suite 206, Vienna, Virginia 22182, and TCSI CORPORATION ("Tenant"), a Nevada
corporation having an office at 8605 Westwood Center Drive, Suite 500, Vienna,
Virginia, 22182.
RECITALS
A. COW HOLDINGS LIMITED, a Delaware corporation (hereinafter, "Former
Landlord") and Tenant entered into that certain Deed of Lease dated July 25,
1996, (hereinafter, the "Lease") for certain office space containing
approximately eleven thousand eight hundred forty-three (11,843) square feet of
office space situated on the fifth (5th) floor (the "Premises") of the building
located at 8603-8605 Westwood Center Drive, Vienna, Virginia (the "Building,"
the Building and the land on which the same is situate being herein referred to
as the "Property").
B. Landlord has succeeded to Former Landlord's interest in the
Property.
C. Landlord and Tenant desire to provide for an early termination of
the Lease.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals. The foregoing recitals are true and correct and are herein
incorporated by this reference.
2. Definitions. Section 2 of the Lease is hereby amended as follows:
(a) by redefining the term "Expiration Date" in Section 2b to read
as follows:
"December 19, 1997, unless otherwise sooner terminated in accordance
with the provisions of this Lease.";
(b) by redefining the term "Landlord's Mailing Address" in Section
2(d) to read as follows:
"White Pearl Investment Company
15520 Rockfield Boulevard
Suite G
Irvine, California 92618
Attention: Asset Manager
with a copy to:
Rim Pacific Management
8605 Westwood Center Drive
Suite 206,
Vienna, Virginia 22182
Attention: Building Manager."
3. First Oportunity to Lease Additional Space. Section 42 of the Lease
is hereby deleted in its entirety.
4. No Further Alterations to or Subleasing or Assignment of the
Premises. Tenant acknowledges and agrees that, from and after Tenant's
execution of this First Amendment, Tenant shall have no right to perform, or
cause to be performed, any alterations in the Premises, nor shall Tenant have
any right to sublease, or to permit the use or occupancy by any person other
than Tenant and Tenant's employees of, all or any portion of the Premises. In
additon, from and after the Tenant's execution of this First Amendment, in the
event of any fire or other casualty, or condemnation, of all or any
<PAGE> 2
portion of the Premises, (i) Landlord shall have no obligation to repair or
restore any portion of the Premises, (ii) Landlord may, in Landlord's sole
discretion, elect to terminate the Lease with respect to the Premises.
5. Surrender of Premises. Notwithstanding anything contained in this
First Amendment or in any other provision of the Lease to the contrary, Tenant
hereby agrees to surrender possession of the Premises, including, but not
limited to, all improvements thereto (excluding trade fixtures and equipment
which Tenant is entitled to remove pursuant to the Terms of the Lease, Tenant
hereby specifically acknowledging and agreeing that Tenant has no right to
remove any supplemental heating, ventilation or air conditioning equipment
installed in or upon, or serving, the Premises), no later than five o'clock
(5:00) p.m. eastern standard time on the Expiration Date as amended hereby
(i.e,; December 19, 1997) in accordance with all terms and conditions of the
Lease, free and clear of all tenancies and occupancies, "broom clean" and
otherwise in the condition required under the Lease, THE TENANT HEREBY WAIVING
ANY AND ALL NOTICES TO QUIT PROVIDED FOR IN THE LEASE OR PURSUANT TO CURRENT OR
FUTURE LAW. On or before the Expiration Date (as amended hereby), Tenant shall
also (a) return to the Landlord all keys, all parking passes or other access
devices (if any) then in the possession, custody or subject to the control of
the Tenant, and (b) remove all personal property of the Tenant and any
alterations or leasehold improvements which the Tenant is required to remove
from the Premises. Sections 17 and 18 of the Lease shall apply to Tenant's
surrender of the Premises as if December 19, 1997 was the original Expiration
Date of the Lease. If Tenant fails to surrender the Premises as required hereby
on or before December 19, 1997, Tenant's failure to surrender the Premises shall
be considered an Event of Default under the Lease, and Landlord may pursue any
remedy available to it under the terms of the Lease or at law or in equity.
Without limiting the preceding sentence, Tenant hereby agrees that, if Tenant
fails to surrender possession of the Premises in accordance with this Section 5
on or before December 19, 1997, (a) the Tenant shall pay to the Landlord as
damages for the Tenant's holdover a monthly sum (pro-rated on a daily basis for
any partial month of holdover) equal to two hundred percent (200%) of the Base
Rent in effect immediately prior to the Expiration Date, and (b) the Tenant
shall defend, indemnify and hold the Landlord harmless from and against any and
all claims, costs, damages, expenses, fees, liabilities or suits asserted
against or incurred by the Landlord as a direct or indirect result of such
holdover. If Tenant fails for any reason to surrender possession of the Premises
in accordance with the provisions of this Section 5 on or before 5:00 p.m. on
December 27, 1997, then, in addition to Landlord's remedies as set forth in the
preceding sentence, the Surrender Fee set forth in this First Amendment shall be
retained by Landlord as additional liquidated damages, and, at Landlord's
option, this First Amendment may be declared null and void ab initio. Tenant
specifically acknowledges and agrees that no provision of the Lease (including,
but not limited to Section 34 thereof) or applicable law shall be deemed to
extend the dates set forth in this Section 5, or to excuse or relieve Tenant
from liability as set forth herein with respect to the failure to timely
surrender the Premises as required pursuant to this Section 5. The Tenant hereby
represents and warrants to the Landlord that the Tenant has not brought, stored
or used any hazardous or toxic substances, materials or wastes in or upon the
Premises, nor has the Tenant suffered any other person or entity to do any of
the same.
6. Brokerage. Tenant warrants and represents that no broker or agent
other than Shuler Realty Group and KLNB, Inc. was instrumental in consummating
this First Amendment and that no conversations or prior negotiations were had by
Tenant with any other broker or agent concerning this First Amendment. Tenant
agrees to defend, indemnify and hold Landlord harmless from and against any and
all costs (including, but not limited to, court costs, investigation costs, and
reasonable attorneys' fees), damages, claims, fees, expenses, liabilities or
suits arising by reason of a breach by Tenant of the aforesaid representation
and warranty, or by reason of any claim, demand or suit for commissions or other
compensation with respect to this First Amendment claimed by any broker or agent
(including, but not limited to Shuler Realty Group and KLNB, Inc.) which may
arise out of any agreement or dealings or alleged agreement or dealings between
Tenant and any such agent or broker.
7. Interpretation. Except as otherwise defined herein, all defined
terms and phrases herein shall have the same meaning as set forth in the Lease.
In the event of any conflict between the Lease and this First Amendment, the
terms of this First Amendment shall control.
-2-
<PAGE> 3
8. Confirmation. Except as otherwise expressly modified by the terms of
this First Amendment, the Lease and each and every provision thereof shall
remain unchanged and in full force and effect. Nothing herein contained shall be
deemed to waive Tenant's obligation to pay any sums due Landlord from Tenant as
of the date hereof. Tenant acknowledges that Landlord is not in default in the
performance of any of its obligations under the Lease and that Tenant has no
claims or set-offs of any kind against Landlord. The Tenant acknowledges and
agrees that the Tenant shall have no right to collect or share in any rents in
respect of any occupancy of all or any portion of the Leased Premises by any
party after the Termination Date.
9. Binding Effect. All of the covenants contained in this First
Amendment, including, but not limited to, all covenants of the Lease as modified
hereby, shall be binding upon and shall inure to the benefit of the parties
hereto and their respective permitted successors and assigns.
10. Effectiveness. This First Amendment shall not be effective and
binding unless and until that date on which the Landlord and a replacement
tenant acceptable to the Landlord (in the Landlord's sole discretion) shall
execute and deliver a lease acceptable to the Landlord (in the Landlord's sole
discretion) for the Premises (a "Replacement Lease").
11. Surrender Fee. As additional consideration for Landlord's agreement
to enter into this First Amendment, Tenant shall pay to Landlord, upon delivery
of the executed First Amendment, a non-refundable "Surrender Fee" of Forty
Thousand Dollars ($40,000.00).
12. Authority. Tenant and each person signing this First Amendment on
behalf of Tenant hereby covenants and warrants that Tenant has full right and
authority to enter into and to perform this First Amendment according to the
terms hereof, and that each person signing this First Amendment on behalf of
Tenant has been authorized to do so by all requisite corporate action.
13. Further Assurances. The Tenant agrees to execute and deliver such
further assurances of the Tenant's surrender of possession of the Premises, and
the termination of the Lease, as may be necessary or desirable, in the
Landlord's reasonable discretion, in connection with the leasing, financing,
refinancing or sale of the Leased Premises or the Building in which the same is
located, or for any other purpose.
14. Survival. The terms of this First Amendment, as well as all
indemnifications of the Landlord contained in the Lease, shall survive the
termination of the Lease; provided that, nothing in this paragraph 14 shall be
deemed to amend the terms of the Lease as set forth therein.
[signatures appear on the following page]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have set their hands and affixed
their respective seals the day and year first above written.
LANDLORD:
WHITE PEARL INVESTMENT COMPANY, a
Delaware corporation
[Corporate Seal]
By: /s/ Jonathan J. Feucht
----------------------------------------
Name: Jonathan J. Feucht
----------------------------------
Title: Assistant Secretary
---------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
TENANT:
TCSI CORPORATION, a Nevada corporation
By: /s/ Arthur H. Wilder
-------------------------------------
Name: Arthur H. Wilder
----------------------------------
Title: Vice President
---------------------------------
L.S.
[Corporate Seal]
By: /s/ Ram Banin
----------------------------------
Name: Ram Banin
-------------------------------
Title: President
--------------------------------
-4-
<PAGE> 1
EXHIBIT 10.25
SUBLEASE
THIS SUBLEASE (the "Sublease") is entered into as of the date set forth
in Section 1.1(e) below, by and between the Sublandlord and the Subtenant set
forth below.
W I T N E S S E T H
1. SUBLEASE SUMMARY AND DEFINITIONS.
1.1. The Sublease provisions and definitions set forth in this Section
1.1 in summary form are solely to facilitate convenient reference by the
parties. If there is any conflict between this Section and any other provisions
of this Sublease, the latter shall control.
(a) SUBLANDLORD'S NAME TCSI CORPORATION
AND ADDRESS: 1080 Marina Village Parkway
Alameda, California 94501
Attention: Hatch Graham
(b) SUBLANDLORD'S STATE
OF INCORPORATION: NEVADA
(c) SUBTENANT'S NAME INNOVATIVE MANAGED CARE SYSTEMS, INC.
AND ADDRESS: 14875 Landmark Boulevard, Suite 110
Dallas, Texas 75240
Attention: A. J. ROSMARIN
(d) SUBTENANT'S STATE
OF INCORPORATION: Texas
(e) SUBLEASE DATE: March 7th, 1997
(f) OVERLANDLORD'S TRICOHO, LTD.
NAME AND ADDRESS: 2200 Ross Avenue, Suite 3700
Dallas, Texas 75201
Attention: JON ALTSCHULER
(g) OVERLEASE: Lease, dated July 22nd, 1996, between
Overlandlord and Sublandlord (hereinafter
referred to as the "Overlease").
(h) PREMISES: Suite No. 250-6
Greenhill Park Garden Offices
14135 Midway Road
Dallas, Texas 75244
(the "Premises")
-1-
<PAGE> 2
(i) SUBLEASE
COMMENCEMENT
DATE: Apri1 15, 1997
(j) SUBLEASE
EXPIRATION
DATE: July 31, 2001
(k) BASE MONTHLY RENT:
<TABLE>
<CAPTION>
Term Months Base Monthly Rent
- ----------- -----------------
<S> <C>
April 15 - April 30, 1997 $ 5,500.00
(montly rent
prorated)
May 1, 1997 - May 31, 1998 $11,000.00
June 1, 1998 - June 30, 1999 $12,000.00
July 1, 1998 - July 31, 2000 $13,000.00
August 1, 2000 - July 31, 2001 $14,000.00
</TABLE>
(l) PREPAID BASE RENT: $5,500.00 (to be paid upon execution,
for period April 15 - April
30, 1997)
(m) OPERATING EXPENSES/
TAXES: To be paid pursuant to Article 12, herein.
(n) SECURITY DEPOSIT: See Article 14, herein.
(o) ALTERATIONS: "As Is." (See Article 6, herein)
(p) BROKERS: MYERS COMMERCIAL (commission to be paid pursuant
to agreement among Broker, Sublandlord and
Overlandlord)
(q) GUARANTORS: A. J. ROSMARIN, GARY COHEN and
HARRIETT FLOWERS
2. SUBLEASE GRANT.
2.1. By lease (hereinafter referred to as the "Overlease") described
above, the Overlandlord leased to Sublandlord the Premises in accordance with
the terms of the Overlease. A copy of the Overlease (from which certain terms
that do not relate to Subtenant's obligations hereunder may have been deleted)
is annexed hereto as Exhibit "A."
-2-
<PAGE> 3
2.2. In consideration of the obligation of Subtenant to pay rent as
herein provided and in consideration of the other terms, covenants and
conditions hereof, Sublandlord hereby leases to Subtenant and Subtenant hereby
leases from Sublandlord, upon and subject to the provisions of this Sublease and
the Overlease, the Premises.
3. SUBLEASE TERM.
3.1. Subject to the other provisions hereof, this Sublease shall
continue in full force and effect for a term beginning on the Sublease
Commencement Date and ending on the Sublease Expiration Date as defined above.
Such term is herein called the "Sublease Term."
4. RENT.
4.1. Subtenant, in consideration of this Sublease, agrees to pay to
Sublandlord as rent (the "Base Rent") the amounts set forth in Section 1.1,
hereof. Base Rent is payable in advance and without demand, at Sublandlord's
office (or such other location as Sublandlord shall designate) by check, in
equal monthly installments on the first (1st) day of each month during the
Sublease Term without any set-off, off-set, abatement or reduction whatsoever.
Subtenant's failure to receive an invoice from Sublandlord for the rent shall
not relieve Subtenant from its obligation of timely payment hereunder. The
Prepaid Base Rent shall be paid upon Subtenant's execution of this Sublease.
4.2. As used in this Sublease, "Rent" shall mean the Base Rent, the
Operating Expense reimbursements pursuant to Sections 1.1 and Article 12, and
all other monetary obligations provided for in this Sublease to be paid by
Subtenant, all of which constitute rental in consideration for this Sublease.
4.3. In the event the rent is not paid within five (5) days of the date
when due as aforesaid, interest shall accrue thereon at the maximum rate
permitted by law. In addition, if the rent is not paid by the tenth (10th) day
of any given month, Subtenant shall pay as a penalty to Sublandlord an
additional amount equal to five percent (5%) of the rent that is due, but not
less than one Hundred Dollars ($100.00).
5. TERMS OF THE OVERLEASE.
5.1 Except as herein otherwise expressly provided, all of the terms,
covenants, conditions and provisions in the Overlease are hereby incorporated
in, and made a part of, this Sublease, and such rights and obligations as are
contained in the Overlease are hereby imposed upon the respective parties
hereto; the Sublandlord herein being substituted for the Landlord in the
-3-
<PAGE> 4
Overlease, and the Subtenant herein being substituted for the Tenant named in
the Overlease; provided, however, that in the event of any conflict between the
terms of this Sublease and the terms of the Overlease as they shall affect the
Sublandlord-Subtenant relationship, the terms of this Sublease shall be
controlling; and, provided further, that the Sublandlord herein shall not be
liable for any defaults by Overlandlord. Neither Sublandlord nor Subtenant shall
take any action that shall cause there to occur a default under the terms of the
Overlease, nor shall either fail to take any action the failure of which shall
cause there to occur such default. If the Overlease shall be terminated for any
reason during the term hereof other than the default of Sublandlord, then and in
that event this Sublease shall thereupon automatically terminate and Sublandlord
shall have no liability to Subtenant by reason thereof. Upon the termination of
this Sublease, whether by forfeiture, lapse of time or otherwise, or upon the
termination of Subtenant's right to possession, Subtenant will at once surrender
and deliver up the Premises in good condition and repair, reasonable wear and
tear excepted. Sublandlord and Subtenant shall promptly deliver to the other any
and all notices received from the Overlandlord or its agents that affect the
other's rights or obligations under the Overlease or this Sublease.
Notwithstanding the foregoing, the following sections of the Overlease are not
incorporated herein: all Basic Lease Information items except "Premiums,"
"Rent," "Permitted Uses," "Tenant's Proportionate Share," and "Initial Liability
Insurance Amount;" Sections 2, 3, 25(d) as it refers to the Staubach Company
(the parties substitute MYERS COMMERCIAL); Addendum Section 14; Exhibit "F" and
Exhibit "G."
5.2. This Sublease is subject to, and subtenant accepts this Sublease
subject to, any amendments and supplements to the Overlease hereafter made
between Overlandlord and Sublandlord, provided that any such amendment or
supplement to the Overlease will not prevent or adversely affect the use by
Subtenant of the Premises in accordance with the terms of this Sublease,
increase the obligations of Subtenant or decrease its rights under the Sublease,
or in any other way materially adversely affect Subtenant.
5.3 This Sublease is subject and subordinate to the Overlease and to
all ground or underlying leases and to all mortgages that may now or hereafter
affect such leases or the real property of which the Premises are a part, and
all renewals, modifications, replacements and extensions of any of the
foregoing. This Section 5.3 shall be self-operative, and no further instrument
of subordination shall be required. To confirm such subordination, Subtenant
shall execute promptly any certificate that Sublandlord may reasonably request;
provided, however, that the provisions of such certificate shall not materially
and adversely affect Subtenant's use and enjoyment of the Premises, nor
materially increase the obligations of Subtenant or decrease its rights under
the Sublease.
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<PAGE> 5
6. CONDITION OF PREMISES.
6.1. Subtenant has examined the Premises, is aware of the physical
condition thereof, and agrees to take the same "as is" (unless otherwise
provided in Article 13, herein), with the understanding that there shall be no
obligation on the part of Sublandlord to incur any expense whatsoever in
connection with the preparation of the Premises for Subtenant's occupancy
thereof. Any work performed by Subtenant shall be in accordance with the terms
of the Overlease and Article 13, herein.
7. USE OF PREMISES.
7.1. Subtenant agrees that the Premises shall be occupied only as
executive, administrative and general offices for Subtenant's business.
8. CONSENT OF OVERLANDLORD.
8.1. This Sublease is conditioned upon the consent thereto by
Overlandlord, which consent shall be evidenced by Overlandlord's signature
appended hereto or a separate consent in the form utilized by Overlandlord for
such purposes. Subtenant shall be solely responsible for any fees or charges
imposed by Overlandlord in connection with the obtaining of such consent.
Provided Overlandlord's consent does not materially affect the terms of this
Sublease, Subtenant shall immediately execute any documents reasonably requested
by Overlandlord in order to obtain Overlandlord's approval; provided, however,
that the provisions of such documents shall not materially and adversely affect
Subtenant's use and enjoyment of the Premises, nor materially increase the
obligations of Subtenant or decrease its rights under the sublease; and, in the
event such documents are not signed and returned by Subtenant within five (5}
days of receipt, Subtenant hereby appoints Sublandlord as its attorney-in-fact
and authorizes Sublandlord to execute same on Subtenant's behalf.
8.2. Sublandlord makes no representation with respect to obtaining
Overlandlord's approval of this Sublease and, in the event that Overlandlord
notifies Sublandlord that Overlandlord will not give such approval, Sublandlord
will so notify Subtenant and, upon receipt of such notification by Sublandlord
of the disapproval by Overlandlord, this Sublease shall be deemed to be null and
void and without force or effect, and Sublandlord and Subtenant shall have no
further obligations or liabilities to the other with respect to this Sublease.
8.3 Except as otherwise specifically provided herein, wherever in this
Sublease Subtenant is required to obtain Sublandlord's consent or approval,
Subtenant understands that Sublandlord may be required to first obtain the
consent or approval of Overlandlord. If Overlandlord should refuse such
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<PAGE> 6
consent or approval, Sublandlord shall be released of any obligation to grant
its consent or approval, whether or not Overlandlord's refusal, in Subtenant's
opinion, is arbitrary or unreasonable.
9. DEFAULT
9.1. Subtenant acknowledges that the services to be rendered to the
Premises are to be rendered by Overlandlord. Anything in this Sublease to the
contrary notwithstanding, if there exists a breach by Sublandlord of any of its
obligations under this Sublease and, concurrently, a corresponding breach by
Overlandlord under the Overlease of its obligations under the Overlease exists,
then, and in such event, Subtenant's sole remedy against Sublandlord in the
event of any breach of obligations under this Sublease shall be the right to
pursue a claim in the name of Sublandlord against Overlandlord, and Sublandlord
agrees that it will, at Subtenant's expense, cooperate with Subtenant in the
pursuit of such claim.
9.2. Anything contained in any provisions of this Sublease to the
contrary notwithstanding, Subtenant agrees, with respect to the Premises, to
comply with and remedy any default claimed by Overlandlord and caused by
Subtenant, within the period allowed to Sublandlord as tenant under the
Overlease, even if such time period is shorter than the period otherwise allowed
in the Overlease, due to the fact that notice of default from Sublandlord to
Subtenant is given after the corresponding notice of default from Overlandlord.
Sublandlord agrees to forward to Subtenant, upon receipt thereof by Sublandlord,
a copy of each notice of default received by Sublandlord in its capacity as
tenant under the Overlease. Subtenant agrees to forward to Sublandlord, upon
receipt thereof, copies of any notices received by Subtenant with respect to the
Premises from Overlandlord or from any governmental authorities.
9.3. If and whenever there shall occur any event of default of this
Sublease, Sublandlord may, at Sublandlord's option, in addition to any other
remedy or right given under the Overlease or by law or equity, do any one or
more of the following:
(a) Terminate this Sublease, in which event Subtenant shall
immediately surrender possession of the Premises to Sublandlord;
(b) Terminate Subtenant's right to possession of the Premises
under this Sublease without terminating the Sublease itself, by written
notice to Subtenant, in which event Subtenant shall immediately
surrender possession of the Premises to Sublandlord;
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<PAGE> 7
(c) Enter upon the Premises by force if necessary without
being liable for prosection or any claim for damages therefor, and do
whatever Subtenant is obligated to do under the terms of this Sublease,
and Subtenant agrees to reimburse Sublandlord on demand for any direct
or indirect expenses that Sublandlord or Overlandlord may incur in thus
effecting compliance with Subtenant's obligations under this Sublease,
and Subtenant further agrees that Sublandlord shall not be liable for
any damages resulting to Subtenant from such action.
9.4. It is hereby expressly stipulated by Sublandlord and Subtenant
that except termination of this Sublease, any of the above listed actions,
including, without limitation, termination of Subtenant's right to possession,
and reentry by Sublandlord, will not affect the obligations of Subtenant for the
unexpired Sublease Term, including the obligations to pay unaccrued monthly
rentals and other charges provided in this Sublease for the remaining portion of
the Sublease Term. Sublandlord is entitled to the same remedies as Overlandlord
has under the Overlease in addition to the above.
10. SUBLANDLORD REPRESENTATION.
10.1. Sublandlord represents (a) that it is the holder of the interest
of the tenant under the Overlease, and (b) that the Overlease is in full force
and effect and no default exists under the Overlease.
11. BROKERS.
11.1. Each party hereto covenants, represents and warrants to the other
that except as set forth in Section 1.1, above, it has had no dealings or
communications with any broker or agent in connection with the consummation of
this Sublease, and each party covenants and agrees to pay, hold harmless and
indemnify the other from and against any and all cost, expense (including
reasonably attorneys' fees) or liability for any compensation, commissions or
charges claimed by any other broker or agent with respect to this Sublease or
the negotiation thereof.
12. OPERATING EXPENSES/TAXES.
12.1 Subtenant's Expense Stop, as such term is defined in Exhibit "C"
of the Overlease, is 1997 Base Year. Subtenant shall also pay to Sublandlord
(or, at Overlandlord's written direction, directly to Overlandlord for the
account of Sublandlord) all of the costs for electrical service as set forth in
Section 4 of the overlease.
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<PAGE> 8
13. ALTERATIONS.
13.1. In the event Subtenant is permitted to perform alterations in the
Premises hereunder, Subtenant may make no changes, alterations, additions,
improvements or decorations in, to or about the Premises without submitting
detailed plans and construction schedules to Sublandlord and receiving
Sublandlord's prior written consent to such plans. Subtenant shall make no
changes, alterations, additions, improvements or decorations that would result
in Overlandlord charging Sublandlord for the cost of same, including any removal
costs associated therewith, and Subtenant shall comply with all laws and
regulations relating to such construction, including, but not limited to,
receipt of certificates of occupancy, permits and ADA requirements, and shall be
responsible for all costs associated therewith. Sublandlord may impose
reasonable guidelines as may be necessary to protect its occupancy and rights
provided in the Overlease, including placing reasonable restrictions on times
when certain types of work may be performed in order to prevent undue intrusion
and noise to Sublandlord or other tenants in the Leased Premises.
14. GUARANTEES; SECURITY DEPOSIT.
14.1. As a condition to the effectiveness of this sublease, A. J.
ROSMARIN, GARY COHEN and HARRIETT FLOWERS shall execute and deliver,
respectively, the Guarantees appearing as Exhibits "B," "C," and "D" hereto.
14.2. On or before May 1, 1998, Subtenant shall deposit with
Sublandlord, as security for the faithful performance and observance by
Subtenant of the terms, provisions, covenants and conditions of this Sublease, a
security deposit in the sum of Twenty-Eight Thousand Dollars ($28,000.00) (the
"Security Deposit"). In the event that Sublandlord applies any portion of the
security in respect of a default by Subtenant, Subtenant shall forthwith restore
the amount so applied so that at all times the amount of the Security Deposit
shall be not less than the security required to be maintained from time to time.
Sublandlord may apply the whole or any part of the Security Deposit to the
extent required for the payment of any sum as to which Subtenant is in default,
or for any sum that Sublandlord may expend or may be required to expend by
reason of Subtenant's default.
14.3. So long as Subtenant is then not in default under the terms of
this Sublease, Sublandlord shall: (i) on June 1, 2001, apply the sum of Fourteen
Thousand Dollars (S14.000.00) from the Security Deposit to the payment of the
Base Rent due on such date: and (ii) on July l, 2001, apply the sum of Nine
Thousand Dollars ($9,000.00) to the partial payment of the Base Rent due on such
date (it being acknowledged that the balance of the Security Deposit of Five
Thousand Dollars (S5.000.00) shall be
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<PAGE> 9
retained by Sublandlord as security for the continued performance of Subtenant's
obligations hereunder, and further acknowledged that on or before July 1, 2001,
Subtenant shall pay to Sublandlord the sum of Five Thousand Dollars [$5,000.00]
as the balance of the Base Rent payable for the month of July, 2001). In the
event that Subtenant shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this Sublease, that portion of the
Security Deposit not used or applied as provided herein shall be returned to
Subtenant within thirty (30) days after the Sublease Expiration Date.
15. QUIET ENJOYMENT.
15.1. So lonq as Subtenant pays all of the rent and additional rent due
under this Sublease and performs all of Subtenant's other obligations hereunder,
Subtenant shall peacefully and quietly, have, hold and enjoy the Premises,
subject, however, to the terms, provisions and obligations of this Sublease and
the Overlease.
15.2. In the event subtenant does not completely vacate the Premises by
the Sublease Expiration Date or earlier termination of this Sublease, Subtenant
shall indemnify and hold harmless Sublandlord in respect of any and all holdover
charges or penalties imposes under the Overlease upon Sublandlord in respect of
the Premises and in respect of any and all costs, liabilities or expenses
(including attorney's fees) suffered by Sublandlord in respect of same, as and
when such costs, liabilites or expenses are incurred. In this regard, Subtenant
shall, if requested by Sublandlord, in Sublandlord's sole discretion, defend
Sublandlord against any action or proceeding brought against Sublandlord that
arises out of said holdover.
16. PARKING; CANCELLATION OPTION.
16.1. Overlandlord, Sublandlord and Subtenant agree that Subtenant
shall have the parking privileges currently held by Sublandlord pursuant to
Exhibit "G" of the Overlease, and that by virtue of this Sublease, Subtenant's
parking privileges shall not be reduced as otherwiee described in the final
sentence of said Exhibit "G."
16.2. So long as Subtenant is not in default under the terms of this
sublease, Sublandlord agrees that it shall not during the Sublease Term exercise
its right to cancel the Overlease as set forth in Exhibit "E" of the Overlease.
17. NO WAIVER.
17.1. The failure of Sublandlord to seek redress for violation of, or
to insist upon the strict performance of, any
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<PAGE> 10
covenant or condition of this Sublease or of any of the Rules and Regulations
set forth or hereafter adopted by Sublandlord, shall not prevent a subsequent
act that would have originally constituted a violation from having all the force
and effect of an original violation. The receipt by Sublandlord of rent with
knowledge of the breach of any covenant of this Sublease shall not be deemed a
waiver of such breach and no provision of this Sublease shall be deemed to have
been waived by Sublandlord unless such waiver be in writing, signed by
Sublandlord. No payment by Subtenant or receipt by Sublandlord of a lesser
amount than the monthly rent herein stipulated shall be deemed to be other than
on account of the earliest stipulated Base Rent, additional rent or other
charge, nor shall any endorsement or statement on any check or any letter
accompanying any check or payment as rent be deemed an accord and satisfaction,
and Sublandlord may accept such check or payment without prejudice to
Sublandlord's right to recover the balance of such Base Rent, additional rent or
other charge, or pursue any other remedy in this Sublease provided. No act or
thing done by Sublandlord or Sublandlord's agents during the term hereby demised
shall be deemed an acceptance of a surrender of the demised premises, and no
agreement to accept such surrender shall be valid unless in writing, signed by
Sublandlord. No employee of Sublandlord or Sublandlord's agent shall have any
power to accept the keys of the demised premises prior to the termination of the
Sublease, and the delivery of keys to any such agent or employee shall not
operate as a termination of the Sublease or a surrender of the demises premises.
18. NOTICES.
18.1. Any notice, demand or communication which, under the terms of
this Sublease or under any statute or municipal regulation, must or may be given
or made by the parties hereto shall be in writing and given or made by mailing
the same by registered or certified mail, return receipt requested, to the
address and person designated in Sections l.l(a) and (c), herein.
Either party, however, may designate such new or other address to which
such notices, demands or communications thereafter shall be given, made or
mailed by notice (given in the manner prescribed herein). Any such notice,
demand or communication shall be deemed given or served, as the case may be, on
the date of the posting thereof. In the event Subtenant's address is not set
forth above, notice to Subtenant shall be deemed sufficient if sent to the
Premises.
19. MISCELLANEOUS
19.1 Where applicable, Subtenant shall be responsible for all
additional costs incurred as a result of this Sublease, including, but not
limited to, security cards, keys and parking cards.
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l9.2. This Sublease may not be changed orally, but only by an agreement
in writing signed by the party against whom enforcement of any waiver, change,
modification or discharged is sought.
19.3. This Sublease shall not be binding upon Sublandlord unless and
until it is signed by Sublandlord and delivered to Subtenant. This Section 19.3
shall be not deemed to modify the provisions of section 8, hereof.
19.4. This Sublease constitutes the entire agreement between the
parties, and all representations and understandings have been merged herein.
19.5. This Sublease shall inure to the benefit of all of the parties
hereto, their successors and (subject to the provisions hereof) their assigns.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
on the day and year first above written.
INNOVATIVE MANAGED CARE
SYSTEMS, INC., Subtenant
By /s/ A.J. ROSMARIN
-------------------------------------
A.J. Rosmarin
TCSI CORPORATION, Sublandlord
By: /s/ Paul Farmer
-------------------------------------
Paul Farmer
Chief Financial Officer
ACKNOWLEDGED AND AGREED
TRICOHO, LTD,
Overlandlord
By:
--------------------------------
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<PAGE> 1
EXHIBIT 10.27
TCSI CORPORATION
EXHIBIT 10.27
AMENDMENT TO EMPLOYEE STOCK PURCHASE PLAN
(December 5, 1997)
WHEREAS: The shareholders of this Corporation and this Board of
Directors, approved the Employee Stock Purchase Plan ("ESPP") on May 7, 1997.
WHEREAS: This Board of Directors believes that it would be in the best
interest of this Corporation to amend the maximum number of shares an employee
may purchase in an offering. As set forth in Section 7(a) of the ESPP.
NOW, THEREFORE: That Section 7(a) of the ESPP be amended as follows:
"On each Offering Date with respect to which a participant's payroll
authorization is effective, each participant in the Plan shall automatically be
granted an option to purchase (at the option price as provided in Section 7(b)
hereof) up to the lessor of (i) 40,000 shares or (ii) the number of whole shares
of the Company's Common Stock as may be purchased with contributions of $10,625,
subject to the limitations set forth in Sections 3(b) and 12 hereof. The fair
market value of a share of the Company's Common Stock shall be determined as
provided in Section 7(c) hereof."
<PAGE> 1
EXHIBIT 10.31
Dated 14th February 1997
(1) KENBURGH LAND & PROPERTIES LIMITED
AND
(2) TCSI CORPORATION
- ---------------------------------------
LEASE
relating to First Floor Suffolk House,
Fordham Road, Newmarket
- ---------------------------------------
Term commences : 14th February 1997
Length of Term : 10 Years
Review : 5 Years
Term determines : 13.2 2007 (or 13.2 2002 at Tenant's Qualified
Option)
<PAGE> 2
INDEX
<TABLE>
<S> <C>
Particulars 1
Definitions 2
Interpretation 6
Demise 8
The Tenant's Covenants 9
Rent 9
Outgoings and VAT 9
Electricity gas and other services consumed 10
Repair cleaning decoration etc 10
Waste and alterations 11
Aerials signs and advertisements 13
Statutory obligations 13
Access of Landlord and notice to repair 14
Alienation 15
Nuisance etc and residential restrictions 19
Landlord's costs 19
The Planning Acts 20
Plans documents and information 22
Indemnities 22
Reletting boards 23
Encroachments 23
Yield up 23
Interest on arrears 24
Statutory notices etc 24
Keyholders 25
Sale of reversion etc 25
Defective premises 25
New guarantor 25
Landlord's rights 26
The User Covenants and the Service Charge 26
The Landlord's Covenants 26
Quiet enjoyment 26
Observe and perform obligations 27
Other Leases 27
Insurance 27
Warranty re convictions 27
Landlord to insure 27
Details of the Insurance 28
Payment of Insurance Rent 29
Suspension of Rent 29
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
Reinstatement and termination if prevented 30
Tenant's insurance covenants 33
The Guarantor's Covenants 35
Provisos 35
Re-entry 35
Party walls 37
Covenants relating to adjoining premises 37
Disputes with adjoining occupiers 37
Effect of waiver 38
Rights easements etc. 38
Accidents 38
Perpetuity period 38
Exclusion of use warranty 39
Entire understanding 39
Representations 39
Licences etc under hand 39
Tenant's property 39
Compensation on vacating 40
Service of notices 40
Stamp Duty Certificate 41
Break Clause 41
THE FIRST SCHEDULE 43
The Premises 43
THE SECOND SCHEDULE 44
Appurtenant Rights 44
THE THIRD SCHEDULE 45
Exceptions and Reservations 45
THE FOURTH SCHEDULE 47
Rent and Rent Review 47
THE FIFTH SCHEDULE 53
User Covenants 53
THE SIXTH SCHEDULE 54
The Guarantor's Covenants 54
THE SEVENTH SCHEDULE 56
Service Charge 56
</TABLE>
<PAGE> 4
THIS LEASE is made the 14th day of February 1997.
BETWEEN:
(1) KENBURGH LAND & PROPERTIES LIMITED whose registered office is at 7 High
Street, Bishops Stortford, Hertfordshire (Company Number 13532) ("the
Landlord")
(2) TCSI CORPORATION registered in England and Wales as a branch of an
overseas company (Company Number FC019158 and Branch Number BRN03395
whose registered office is at 9 Lower Brook Street, Ipswich, Suffolk in
England and Wales ("the Tenant")
1. Particulars
"BUILDING" ALL THAT land and buildings known Suffolk House
Fordham Road Newmarket shown for the purpose of
identification only edged with a thick black line
on the Plan
"CONTRACTUAL TERM" 10 years commencing on 14th day of February 1997
"DECORATING YEARS" 2002 and the last year of the Contractual Term
"INITIAL RENT" For the period commencing on the first day of the
Contractual Term and ending on 13th of June
1997 a peppercorn and thereafter (subject to the
provisions for the review of the rent) pound
sterling 39,500.00 (Thirty Nine Thousand Five
Hundred Pounds) per year
<PAGE> 5
"SERVICE CHARGE" The service charge payable in accordance with the
Seventh Schedule
"INTEREST RATE" 4% per year above the base lending rate of Lloyds
Bank PLC or such other bank as the Landlord may
from time to time nominate in writing
"PERMITTED USER" Offices or such use that falls within Class B1 of
the schedule to the Town and Country Planning (Use
Classes) Order 1987 (to which the provisions of
clause 3.14 shall not apply) as the Landlord shall
from time to time approve such approval not to be
unreasonably withheld or delayed
"PREMISES" The First Floor of the Building more particularly
defined in the First Schedule
"RENT COMMENCEMENT DATE" The date of commencement of the Contractual Term
"RENT PAYMENT DATES" 29th September, 25th December, 25th March and 24th
June
"REVIEW DATE" 14th February 2002
2. DEFINITIONS
2.1 For all purposes of this lease the terms defined in clauses 1 and 2
and the Seventh Schedule have the meanings specified
2
<PAGE> 6
2.2 'the Accountant' means any suitably professionally qualified person
or firm appointed by the Landlord (including an employee of the
Landlord or a Group Company) to perform any of the functions of the
Accountant under the lease
2.3 'Adjoining Property' means any neighbouring or adjoining land or
premises (excluding the remainder of the Building) in which the
Landlord or a Group Company has a freehold or leasehold interest or
in which during the Term the Landlord or a Group Company shall have
acquired a freehold or leasehold interest
2.4 'Common Parts' means the pedestrian ways forecourts car parks
landscaped areas entrance halls landings lifts lift shafts staircases
passages and any other areas in the Building which are from time to
time during the Term provided by the Landlord for common use and
enjoyment by the tenants and occupiers of the building and all
persons expressly or by implication authorised by them
2.5 'Group Company' means a company that is a member of the same group as
the Landlord within (or the Tenant for the purposes of clauses 5.9.10
and 9.17) the meaning of Section 42 of the 1954 Act
2.6 'the Guarantor's Covenants' mean the covenants set out in the Sixth
Schedule and which are entered into by the Guarantor with the
Landlord and without the need for express assignment with all its
successors in title
2.7 'the Insurance Rent' means:
2.7.1 the proportion reasonably attributable to the Premises
(based upon the ratio which the net lettable floor area
of the Premises bears to the net lettable floor area of
the building) of the sums which the Landlord shall from
time to time properly pay by way of premium (such
proportion to be determined from time to time by the
Surveyor acting as an expert and not as an arbitrator):
3
<PAGE> 7
2.7.1.1 for insuring the Building (including insuring
for two years loss of Rent)
2.7.1.2 and for insuring in such amount and on such
terms as the Landlord shall consider
appropriate against all liability of the
Landlord to third parties arising out of or in
connection with any matter including or
relating to the Building
2.7.2 all of any increased premium payable by reason of any act
or omission of the Tenant
2.8 'Insured Risks' means fire lightning explosion aircraft (including
articles dropped from aircraft) riot civil commotion malicious
persons earthquake storm tempest flood bursting and overflowing of
water pipes tanks and other apparatus and impact by road vehicles and
such other risks as the Landlord from time to time in its absolute
discretion may think fit to insure against
2.9 'Interest means interest during the period from the date on which the
payment is due to the date of payment both before and after any
judgment at the Interest Rate then prevailing or should the base rate
referred to in the definition of Interest Rate cease to exist such
other rate of interest as is most closely comparable with the
Interest Rate to be agreed between the parties or in default of
agreement to be determined by the Accountant acting as an expert and
not as an arbitrator
2.10 'the 1954 Act' means the Landlord and Tenant Act 1954
2.11 'Other Buildings' means any building or buildings now or at any time
during the Term erected on the Adjoining Property
2.12 'Pipes' means all pipes sewers drains mains ducts conduits gutters
watercourses
4
<PAGE> 8
wires cables channels flues and all other conducting media and
includes any fixings louvres cowls and any other ancillary apparatus
2.13 'the Plan' means the plan annexed to this lease
2.14 'the Planning Acts' means the Town and Country Planning Act 1990 the
Planning (Listed Buildings and Conservation Areas) Act 1990 the
Planning (Hazardous Substances) Act 1990 and the Planning and
Compensation Act 1991
2.15 'Rent' means the Initial Rent and rent ascertained in Accordance with
the Fourth Schedule and such term includes neither the Service charge
nor the Insurance Rent but the term 'rents' includes Rent Service
Charge and the Insurance Rent
2.16 'Retained Parts' means all parts of the Building not let or
constructed or adapted for letting including (but without prejudice
to the generality of the above):
2.16.1 the Common Parts
2.16.2 any staff rooms and storage premises used in connection
with the provision of services for the Building
2.16.3 all Pipes equipment and apparatus on or serving the
Building (except such as are within and solely serve the
Premises or another part of the Building which is let or
constructed or adapted for letting)
2.16.4 all parts of the main structure walls foundations and
roofs of the Building (except such as are included in the
Premises or would be included in the premises demised by
the leases of all the other parts of the Building if let
upon the same terms as this lease)
5
<PAGE> 9
2.17 'Surveyor' means any suitably professionally qualified person or firm
appointed by or acting for the Landlord to perform any of the
functions of the Surveyor under this lease (including an employee of
the Landlord or a Group Company and including also the person or firm
appointed by the Landlord to collect the rents)
2.18 'the User Covenants' means the covenants set out in the Fifth
Schedule
3. INTERPRETATION
3.1 The expressions the 'Landlord' and the 'Tenant' wherever the
context so admits include the person for the time being entitled to
the reversion immediately expectant on the determination of the Term
and the Tenant's successors in title respectively and any reference
to a superior landlord includes the Landlord's immediate reversioner
(and any superior landlords) at any time
3.2 Where the Landlord the Tenant or the Guarantor for the time being are
two or more persons obligations expressed or implied to be made by or
with such party are deemed to be made by or with such persons jointly
and severally
3.3 Words importing one gender include all other genders and words
importing the singular include the plural and vice versa
3.4 The expression 'Guarantor' includes not only the person referred to
at (3) above (if any) but also any person who enters into covenants
with the Landlord in respect of obligations or liabilities arising
out of or in connection with this Lease and/or and dealing with the
Premises (in whole or part)
3.5 References to the 'Premises' in the absence of any provision to the
contrary include any part of the Premises
3.6 The expression the 'Term' includes the Contractual Term and any
period of
6
<PAGE> 10
holding-over or extension or continuance of the Contractual Term
whether by statue or common law
3.7 References to 'the last year of the Term' include the last year of
the Term if the Term shall determine otherwise than by effluxion of
time and references to 'the expiration of the Term' include such
other determination of the Term
3.8 References to any right of the Landlord to have access to the
Premises shall be construed as extending to any superior landlord and
any mortgagee of the Premises and to all persons authorised by the
Landlord and any superior landlord or mortgagee (including agents
professional advisers contractors workmen and others) where such
superior lease or mortgage grants such rights of access to the
superior landlord or mortgagee
3.9 Any covenant by the Tenant not to do an act or thing shall be deemed
to include an obligation not to permit or suffer such act or thing to
be done by another person where the Tenant is aware that such act or
thing is being done
3.10 Any provisions in this lease relating to the consent or approval of
the Landlord shall be construed as also requiring the consent or
approval of any mortgagee of the Premises and any superior landlord
where such consent or approval shall be required and the landlord
shall (after it has where required given its consent in principle
under the terms of this lease) use all reasonable endeavours to
obtain such consent or approval with all due expedition but nothing
in this lease shall be construed as implying that any obligation is
imposed upon any mortgagee or any superior landlord not unreasonably
to refuse any such consent or approval
3.11 References to 'consent of the Landlord' or words to similar effect
mean a consent in writing signed by or on behalf of the Landlord and
to 'approved' and 'authorised' or words to similar effect mean (as
the case may be) approved or authorised in writing by or on behalf of
the Landlord.
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3.12 The terms 'the parties' or 'party' mean the Landlord and/or the
Tenant but except where there is an express indication to the
contrary exclude the guarantor
3.13 'Development' has the meaning given by the Town and Country Planning
Act 1990 Section 55
3.14 Any references to a specific statue include any statutory extension
or modification amendment or re-enactment of such statute and any
regulations or orders made under such statue and any general
reference to 'statute' or 'statutes' includes any regulation or
orders made under such statue or statues
3.15 References in this lease to any clause sub-clause or Schedule without
further designation shall be construed as a reference to the clause
sub-clause or Schedule to this lease so numbered
3.16 The clause paragraph and Schedule headings and the table of contents
do no form part of this lease and shall not be taken into account in
its construction or interpretation
4. DEMISE
The Landlord demises to the Tenant the Premises TOGETHER with the rights
specified in the Second Schedule EXCEPTING AND RESERVING to the Landlord the
rights specified in the third Schedule TO HOLD the premises to the Tenant
for the contractual Term SUBJECT to all matters contained in or referred to
in the Landlord's freehold title number SK155551 and all rights easements
privileges restrictions covenants and stipulations of whatever nature
affecting the Premises YIELDING AND PAYING to the Landlord
4.1 The Rent payable together with any Value Added Tax thereon (if
applicable) without any deduction (except where lawfully made
pursuant to statute) by
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equal quarterly payments in advance on the Rent Payment Dates in
every year and proportionately for any period of less than a year the
first such payment being a proportionate sum in respect of the period
from and including the Rent Commencement Date to and including the
day before the Rent Payment Date next after the Rent Commencement
Date to be paid on the date of this lease and
4.2 By way of further rent the Insurance Rent payable on demand in
accordance with clause 7 and the Service Charge payable in accordance
with the Seventh Schedule and any Value Added Tax payable hereunder
5. THE TENANT'S COVENANTS
The Tenant covenants with the Landlord:
5.1 RENT:
5.1.1 to pay the rents on the days and in the manner set out in this lease
and not to exercise or seek to exercise any right or claim to
withhold rent or any right or claim to legal or equitable set-off
5.1.2 if so required in writing by the Landlord to make such payments by
banker's order or credit transfer to any bank and account that the
Landlord may from time to time nominate
5.2 OUTGOINGS AND VAT:
To pay and to indemnify the Landlord against:
5.2.1 all rates taxes assessments duties charges impositions and outgoings
which are now or during the Term shall be charged assessed or imposed
upon the Premises or upon the owner or occupier of them
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excluding any payable by the Landlord occasioned by receipt of the
rents or by any disposition of dealing with or ownership of any
interest reversionary to the interest created by this lease and if
the Landlord shall suffer any loss of rating relief which may be
applicable to empty premises after the end of the Term by reason of
such relief being allowed to the Tenant in respect of any period
before the end of the Term to make good such loss to the Landlord,
and
5.2.2 VAT (or any tax of a similar nature that may be substituted for it or
levied in addition to it) chargeable in respect of any payment made
by the Tenant under any of the terms of or in connection with this
lease or in respect of any payment made by the Landlord where the
Tenant agrees in this lease to reimburse the Landlord for such
payment
5.3 ELECTRICITY GAS AND OTHER SERVICES CONSUMED:
To pay to the suppliers and to indemnify the Landlord against all charges
for electricity gas and other services consumed or used at or in relation to
the Premises (including meter rents)
5.4 REPAIR CLEANING DECORATION ETC:
5.4.1 To repair the Premises and keep them in repair excepting damage
caused by an Insured Risk or damage arising out of any inherent
defect in the Building other than where the insurance money is
irrecoverable in consequence of any act or default of the Tenant or
anyone at the Premises expressly or by implication with the Tenant's
authority
5.4.2 To replace from time to time the Landlord's fixtures and fittings in
the Premises which may be or become beyond repair at any time during
or at the expiration of the Term
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5.4.3 To clean the Premises and keep them in a clean condition and to clean
both sides of the doors and door frames and the inside of the windows
and window frames in the Premises as often as is reasonably necessary
but in any event (and without prejudice to the generality of the
foregoing) at least once in every three months
5.4.4 Not to cause the Common Parts or any other land roads or pavements
adjoining the Building to be untidy or in a dirty condition and in
particular (but without prejudice to the generality of the above) not
to deposit on them refuse or other materials
5.4.5 In each of the Decorating Years to redecorate the Premises in a good
and workmanlike manner and with appropriate materials of good quality
to the reasonable satisfaction of the Surveyor any change of tints
colours and patterns of such decoration to be approved by the
Landlord such approval not to be unreasonably withheld or delayed
provided that the covenants relating to the last year of the
Contractual Term shall not apply where the Tenant shall have
performed the obligation in question less than 18 months prior to the
expiry of the Contractual Term
5.5 WASTE AND ALTERATIONS
5.5.1 Not to:
5.5.1.1 commit any waste
5.5.1.2 make any addition to the Premises
5.5.1.3 unite the Premises with any adjoining premises
5.5.1.4 make any alteration to the Premises save as permitted by
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the following provisions of this clause
5.5.2 Not to make internal non-structural alterations to the Premises
without:
5.5.2.1 obtaining and complying with all necessary consents of any
competent authority and paying all charges of any such
authority in respect of such consents
5.5.5.2 making an application to the Landlord supported by drawings
and where appropriate a specification in duplicate prepared
by an architect (who shall supervise the work throughout to
completion)
5.5.2.3 paying the fees of the Landlord any superior landlord any
mortgagee and their respective professional advisers and
5.5.2.4 entering into such covenants as the Landlord may reasonably
require as to the execution and reinstatement of the
alterations and in the case of any works of a substantial
nature the Landlord may require prior to the commencement
of such works the provision by the Tenant of adequate
security in the form of a deposit of money or the provision
of a bond as assurance to the Landlord that any works which
may from time to time be permitted by the Landlord shall be
fully completed
PROVIDED THAT the Landlord's consent shall not be required to the
erection and removal of internal demountable partitioning PROVIDED
THAT such partitioning complies with the obligations contained in
clauses 5.7.3 and 5.12.1 of this Lease
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5.5.3 Unless otherwise directed in writing by the Landlord to remove any
additional buildings additions alterations or improvements made to
the Premises at the expiration of the Term and to make good any part
or parts of the Premises which may be damaged by such removal
5.5.4 Not to make connection with the Pipes that serve the Premises
otherwise than in accordance with plans and specifications approved
by the Landlord such approval not to be unreasonably withheld or
delayed subject to the Tenant's having previously obtained consent to
make such connection from the competent statutory authority or
undertaker
5.6 AERIALS SIGNS AND ADVERTISEMENTS
5.6.1 Not to erect any pole mast or wire (whether in connection with
telegraphic telephonic radio or television communication or
otherwise) upon the Premises
5.6.2 Not to affix to or exhibit on the outside of the Premises or to or
through any window of the Premises nor display anywhere on the
Premises any placard sign notice fascia board or advertisement except
any sign permitted by virtue of any consent given by the Landlord
pursuant to a covenant contained in this lease
5.7 STATUTORY OBLIGATIONS
5.7.1 At the Tenant's own expense to execute all works and provide and
maintain all arrangements upon or in respect of the premises or the
use to which the Premises are being put that are required in order to
comply with the requirements of any statute (already or in the future
to be passed) or any government department, local authority other
public or competent authority or court of competent jurisdiction
regardless of whether such requirements are imposed on the lessor the
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lessee or the occupier
5.7.2 Not to do in or near the Premises any act or thing by reason of which
the Landlord may under any statute incur have imposed upon it or
become liable to pay any penalty damages compensation costs charges
or expenses
5.7.3 Without prejudice to the generality of the above to comply in all
respects with the provisions of any statues and any other obligations
imposed by law or by any byelaws applicable to the Premises or in
regard to carrying on the trade or business for the time being
carried on the Premises
5.8 ACCESS OF LANDLORD AND NOTICE TO REPAIR
5.8.1 To permit the Landlord at reasonable times and (except in cases of
emergency) upon prior reasonable notice in writing:
5.8.1.1 to enter upon the Premises for the purpose of ascertaining
that the covenants and conditions of this lease have been
observed and performed
5.8.1.2 to view (and to open up floors and other parts of the
premises where such opening-up is essential in order to
view) the state of repair and condition of the Premises
and
5.8.1.3 to give to the Tenant (or leave upon the Premises) a
notice specifying any repairs cleaning maintenance or
painting that the Tenant has failed to execute in breach
of the terms of this lease and to request the tenant as
soon as reasonably practicable (except in the case of
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emergency when the Tenant shall execute the same
immediately) to execute the same including the making good
of such opening-up (if any)
PROVIDED THAT any such opening-up shall be made good by and at the
cost of the Landlord where such opening-up reveals no breaches of the
terms of this lease
PROVIDED ALWAYS THAT in exercising the rights hereunder the Landlord
shall use reasonable endeavours to ensure that there is as little
disruption and interference to the Tenant's business as is reasonably
possible
5.8.2 If within two months of the service of such a notice the Tenant shall
not have commenced and be proceeding diligently with the execution of
the work referred to in the notice or shall fail to complete the work
within three months to permit the Landlord to enter the Premises to
execute such work as may be necessary to comply with the notice and
to pay to the Landlord the cost of so doing and all expenses incurred
by the Landlord (including legal costs and surveyors fees) on written
demand
5.9 ALIENATION
5.9.1 Not to hold on trust for another or (save pursuant to a transaction
permitted by and effected in accordance with the provisions of this
lease) part with the possession of the whole or any part of the
Premises or permit another to occupy the whole or any part of the
Premises
5.9.2 Not to assign underlet or charge part only of the Premises except as
permitted clause 5.9.4
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5.9.3 Not to assign underlet or charge the whole of the Premises without
the prior consent of the Landlord such consent not to be unreasonably
withheld or delayed on condition that in the case of an assignment
the Tenant enters into an authorised guarantee agreement in the form
provided for in the sixth Schedule in respect of the assignee's
liabilities pursuant to the Landlord and Tenant 9covenants) Act 1995
section 16, the condition being imposed for the purpose of the
Landlord and Tenant Act 1927 section 19(1A)
5.9.4 Not to underlet part of the Premises other than one part thereof
comprising not more than 40% of the area of the Premises by one
underletting subject to the consent of the Landlord (such consent not
to be unreasonably withheld or delayed) and subject to such
underletting being granted so as to exclude the security provisions
of the 1954 Act by way of an order granted pursuant to s.38 of the
1954 Act
5.9.5 Prior to any permitted assignment to procure that the assignee enters
into direct covenants with the Landlord to perform and observe all
the Tenant's covenants and all other provisions during the residue of
the Term
5.9.6 On a permitted assignment to a limited company and if the Landlord
shall so reasonably require to procure that at least two directors of
the company or some other guarantor or guarantors acceptable to the
Landlord enter into direct covenants with the Landlord in the form of
the Guarantor's Covenants
5.9.7 That each and every permitted underlease shall be granted without any
fine or premium at a rent not less than the then open market rental
value of the Premises or that part of the Premises to be underlet or
the Rent (apportioned if only part of the Premises are underlet) then
being paid (whichever shall be the greater) such rent being payable
in
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advance on the days on which Rent is payable under this lease and
shall contain provisions approved by the Landlord:
5.9.7.1 for the upwards only review of the rent reserved by such
underlease on the basis and on the date on which the Rent
is to be reviewed in this lease
5.9.7.2 prohibiting the undertenant from doing or allowing any act
or thing in relation to the underlet premises inconsistent
with or in breach of the provisions of this lease
5.9.7.3 for re-entry by the underlandlord on breach of any
covenant by the undertenant
5.9.7.4 imposing an absolute prohibition against all dispositions
of or other dealings whatever with the Premises other than
an assignment of the whole
5.9.7.5 prohibiting any assignment of the whole without the prior
consent of the Landlord under this lease (such consent not
to be unreasonably withheld or delayed) and providing that
on any assignment the assigning undertenant enters into an
authorised guarantee agreement with the underlandlord in
respect of the liabilities of the assignee
5.9.7.6 prohibiting the undertenant form permitting another to
occupy the whole or any part of the Premises (otherwise
than as permitted in this clause 5.9)
5.9.7.7 imposing in relation to any permitted assignment the
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same obligations for registration with the Landlord as are
contained in this lease in relation to dispositions by the
Tenant
5.9.8 That on the occasion of the grant of any underlease and on any
assignment of any underlease the Tenant procures that the undertenant
enters into a covenant directly with the Landlord to observe and
perform the covenants in this Lease (other than the covenant to pay
rent) (so far as applicable in the case of an underletting of part to
the underlet part)
5.9.9 To enforce the performance and observance by every such undertenant
of the provisions of the underlease and not at any time either
expressly or by implication to waive any breach of the covenants or
conditions on the part of any undertenant or assignee of any
underlease nor (without the consent of the Landlord such consent not
to be unreasonably withheld or delayed) to vary the terms or accept a
surrender of any permitted underlease
5.9.10 Notwithstanding clause 5.9.1 the Tenant may share the occupation of
the whole or any part of the Premises with a Group Company so long as
such company remains a Group Company and otherwise than in a manner
that transfers or creates a legal estate and provided that the Tenant
gives the Landlord notice forthwith of the commencement or
termination of any sharing
5.9.11 Within 10 days of any assignment charge underlease or sub-underlease
or any transmission or other devolution relating to the Premises to
produce for registration with the Landlord's solicitor two certified
copies of such deed or document and to pay the Landlord's solicitors
reasonable charges for the registration of every such document
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5.10 NUISANCE ETC AND RESIDENTIAL RESTRICTIONS
5.10.1 Not to do nor allow to remain upon the Premises anything which may
be or become or cause a nuisance annoyance disturbance inconvenience
injury or damage to the Landlord or its tenants or the owners or
occupiers of adjacent or neighbouring premises
5.10.2 Not to use the Premises for a sale by auction or for any dangerous
noxious noisy or offensive trade business manufacture or occupation
nor for any illegal or immoral act or purpose
5.10.3 Not to use the premises as sleeping accommodation or for residential
purposes nor keep or allow any animal reptile or bird anywhere on
the Premises
5.11 LANDLORD'S COSTS
To pay to the Landlord all costs fees charges disbursements and expenses
(including without prejudice to the generality of the above those payable
to counsel solicitors surveyors and bailiffs) properly and reasonably
incurred by the Landlord in relation to or incidental to:
5.11.1 every application made by the Tenant for a consent or licence of
this lease whether such consent or licence is granted or refused or
proffered subject to any lawful qualification or condition or
whether the application is withdrawn
5.11.2 the preparation and service of a notice under the Law of Property
Act 1925 Section 146 or incurred in proceedings under Sections 146
or 147 of that Act notwithstanding that forfeiture is avoided
otherwise than by relief granted by the court
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5.11.3 any breach by the Tenant of any covenant contained in this lease
whether for the payment of rents or otherwise whatsoever
5.11.4 any steps (the Landlord acting reasonably) taken in contemplation of
or in connection with the preparation and service of a Schedule of
dilapidations during or within 4 months after the expiration of the
Term but if after the expiration of the Term only in respect of
wants of repair occurring during the Term
5.12 THE PLANNING ACTS
5.12.1 Not to commit any breach of planning control (such term to be
construed as it is used in the Planning Acts) and to comply with the
provisions and requirements of the Planning Acts that affect the
Premises whether as to the Permitted User or otherwise and to
indemnify (both during or following the expiration of the Term) and
keep the Landlord indemnified against all liability whatsoever
including costs and expenses in respect of any contravention
5.12.2 At the expense of the Tenant to obtain all planning permissions and
to serve all such notices as may be required for the carrying out of
any operations or user on the Premises which may constitute
Development provided that no application for planning permission
shall be made without the previous consent of the Landlord such
consent not to be unreasonably withheld or delayed in any case where
the application for and implementation of such planning permission
will not create or give rise to any tax or other fiscal liability
for the Landlord or where the Tenant indemnifies the Landlord
against such liability
5.12.3 Subject only to any statutory direction to the contrary to pay and
satisfy any charge or levy that may subsequently be imposed under
the Planning Acts in respect of the carrying out or maintenance of
any such
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operations or the commencement or continuance of any such user
5.12.4 Notwithstanding any consent which may be granted by the Landlord
under this lease not to carry out or make any alteration or addition
to the Premises or any change of use until:
5.12.4.1 all necessary notices under the Planning Acts have been
served and copies produced to the Landlord
5.12.4.2 all necessary permissions under the Planning Acts have
been obtained and produced to the Landlord and
5.12.4.3 the Landlord has acknowledged that every necessary
planning permission is acceptable to it such
acknowledgement not to be unreasonably withheld the
Landlord being entitled to refuse to acknowledge its
acceptance of a planning permission on the grounds that
any condition contained in it or anything omitted from it
or the period referred to in it would or might be
prejudicial to the Landlord's interest in the Premises the
building or any Adjoining Property whether during or
following the expiration of the Term
5.12.5 Unless the Landlord shall otherwise direct to carry out and complete
before the expiration of the Term:
5.12.5.1 any works stipulated to be carried out to the Premises by
a date subsequent to such expiration as a condition of any
planning permission granted for any Development begun
before the expiration of the Term and
5.12.5.2 any Development begun upon the Premises in respect of
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which the Landlord shall or may be or become liable for
any charge or levy under the Planning Acts
5.12.6 In any case where a planning permission is granted subject to
conditions and if the Landlord reasonably so requires to provide
security for the compliance with such conditions and not to
implement the planning permission until security has been provided
5.13 PLANS DOCUMENTS AND INFORMATION
5.13.1 To produce to the Landlord or the Surveyor all plans documents and
other evidence as the Landlord may reasonably require in order to
satisfy itself that the provisions of this lease have been complied
with
5.13.2 To furnish to the Landlord the Surveyor or any person acting as the
third party determining the Rent in default of agreement between the
parties under any provision for rent review contained in this lease
such information as may reasonably be requested in writing in
relation to any pending or intended step under the 1954 Act or the
implementation of any provisions for rent review
5.14 INDEMNITIES
To be responsible for and to keep the Landlord fully indemnified against
all damage damages losses costs expenses actions demands proceedings
claims and liabilities made against or suffered or incurred by the
Landlord arising directly or indirectly out of:
5.14.1 any act omission or negligence of the Tenant or any persons at the
Premises expressly or impliedly with the Tenant's authority or
5.14.2 any breach or non-observance by the Tenant of the covenants
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conditions or other provisions of this lease or any of the matters
to which this demise is subject
5.15 RELETTING BOARDS
To permit the Landlord at any time during the last 6 months of the
Contractual Term and at any time thereafter unless the Tenant shall have
made a valid court application under Section 24 of the 1954 Act or
otherwise be entitled in law to remain in occupation or to a new tenancy
of the Premises to enter upon the Premises and affix and retain anywhere
upon the exterior of the Premises a notice for reletting the Premise and
during such period to permit persons with the written authority of the
Landlord or its agent at reasonable times of the day to view the Premises
5.16 ENCROACHMENTS
5.16.1 Not to stop up darken or obstruct any windows or light belonging
to the Premises save temporarily during the course of repair
5.16.2 To take all reasonable steps to prevent any new window light
opening doorway path passage pipe or other encroachment or
easement being made or acquired in against out of or upon the
Premises and to notify the Landlord immediately upon becoming
aware of the same if any such encroachment or easement shall be
made or acquired (or attempted to be made or acquired) and at the
request of the Landlord to adopt such means as shall be reasonably
required to prevent such encroachment or the acquisition of any
such easement
5.17 YIELD UP
At the expiration of the Term:
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5.17.1 to yield up the Premises in repair and in accordance with the
terms of this lease
5.17.2 to give up all keys of the Premises to the Landlord and
5.17.3 to remove all signs erected by the Tenant in upon or near the
Premises or the Building and immediately to make good any damage
caused by such removal
5.18 INTEREST ON ARREARS
5.18.1 If the Tenant shall fail to pay the rents or any other sum due
under this lease within 14 days of the date due (whether formally
demanded or not in the case Rent) the Tenant shall pay to the
Landlord Interest on the rents or other sum from the date when
they were due to the date on which they are paid and such Interest
shall be deemed to be rents due to the Landlord
5.18.2 Nothing in the preceding clause shall entitle the Tenant to
withhold or delay any payment of the rents or any other sum due
under this lease after the date upon which they fall due or in any
way prejudice affect or derogate from the rights of the Landlord
in relation to such non-payment including (but without prejudice
to the generality of the above) under the provision for re-entry
contained in this lease
5.19 STATUTORY NOTICES ETC
To give full particulars to the Landlord of any notice direction order or
proposal for the Premises made given or issued to the Tenant by any local
or public authority within 7 days of receipt and if so required by the
Landlord to produce it to the Landlord and without delay to take all
necessary steps to comply with the notice direction or order and at the
request and cost of the
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Landlord to make or join with the Landlord in making such objection or
representation against or in respect of any notice direction order or
proposal as the Landlord shall deem expedient and where the Tenant
reasonably considers that any such objections or representations are in
its best interests or those of any undertenant
5.20 KEYHOLDERS
To ensure that at all times the Landlord has and the local Police force
has written notice of the name home address and home telephone number of
at least 2 keyholders of the Premises
5.21 SALE OF REVERSION ETC
To permit upon reasonable notice at reasonable times of the day during
the Term prospective purchasers of or agents instructed in connection
with the sale of the Landlord's reversion or of any other interest
superior to the Term to view the Premises without interruption provided
they are authorised in writing by the Landlord or its agents
5.22 DEFECTIVE PREMISES
Immediately upon becoming aware of the same (or when the Tenant ought
reasonably to have become aware of the same) to give notice to the
Landlord of any defect in the Premises which might give rise to an
obligation on the Landlord to do or refrain from doing any act or thing
in order to comply with the provisions of this lease or the duty of care
imposed on the Landlord pursuant to the Defective Premises Act 1972 or
otherwise and at all times to display all notices which the Landlord may
from time to time require to be displayed at the Premises
5.23 NEW GUARANTOR
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Within 14 days of the death during the Term of any personal guarantor or
of such person becoming bankrupt or having a receiving order made against
him or having a receiver appointed under the Mental Health Act 1983 or
being a company passing a resolution to wind up or entering into
liquidation or having a receiver appointed to give notice of this to the
Landlord and if so required by the Landlord by notice to the Tenant given
within 60 days to procure some other person acceptable to the Landlord
such acceptance not to be unreasonably withheld to execute a guarantee in
respect of the Tenant's obligations contained in this lease in the form
of the Guarantor's Covenants
5.24 LANDLORD'S RIGHTS
To permit the Landlord at all times during the Term to exercise without
interruption or interference any of the rights granted to it by virtue of
the provisions of this lease
5.25 THE USER COVENANTS AND THE SERVICE CHARGE
5.25.1 to observe and perform the User Covenants
5.25.2 to observe and perform its obligations contained in the Seventh
Schedule
6. THE LANDLORD'S COVENANTS
The Landlord covenants with the Tenant:
6.1 QUITE ENJOYMENT
To permit the Tenant peaceably and quietly to hold and enjoy the Premises
without any interruption or disturbance from or by the Landlord or any
person
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claiming under or in trust for the Landlord
6.2 OBSERVE AND PERFORM OBLIGATIONS
To observe and perform its obligations contained in the Seventh Schedule
and that the Landlord shall make up from its own monies any portion of
the gross Annual Expenditure which would be fairly paid by an occupier of
any part of the building intended to be let but for such part being void
or unlet
6.3 OTHER LEASES
To use its reasonable endeavours to enforce the covenants on the part of
the tenants contained in other leases of the Building
7. INSURANCE
7.1 Warranty re convictions
The Tenant warrants that prior to the execution of this lease it has
disclosed to the Landlord in writing any conviction judgement or finding
of any court or tribunal relating to the Tenant (or any director other
officer or major shareholder of the Tenant) of such a nature as to be
likely to affect the decision of any insurer or underwriter to grant or
to continue insurance of any of the Insured Risks
7.2 LANDLORD TO INSURE
The Landlord covenants with the Tenant:
7.2.1 to insure the building unless such insurance shall be vitiated by
any act of the tenant or by anyone at the Premises expressly or by
implication with the Tenant's authority
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7.2.2 to produce to the Tenant within a reasonable period of time
following demand by the Tenant a copy of the policy and the last
premium renewal receipt or other good evidence and detail of the
terms of the policy
7.2.3 to notify the Tenant of any change in the risks covered by the
policy from time to time
7.2.4 to use its reasonable endeavours to procure either that the
interest of the Tenant and any undertenant and its or their
mortgagees are noted or endorsed on the policy or that the
insurers issue a waiver of subrogation rights as regards the
Tenant any undertenant and its or their mortgagees
7.2.5 not to do anything that causes the policy to become void or
voidable whether wholly or in part
7.3 DETAILS OF THE INSURANCE
Insurance shall be effected:
7.3.1 in such reputable insurance office or with such underwriters and
through such agency as the Landlord may from time to time decide
7.3.2 for the following sums:
7.3.2.1 such sum as the Landlord shall from time to time be
advised by the surveyor as being the full cost of
rebuilding and reinstatement including architects'
surveyors' and other professional fees payable upon any
applications for planning permission or other permits or
consents that may be required in relation to the
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rebuilding or reinstatement of the Building the cost of
debris removal demolition site clearance any works that
may be required by statue and incidental expenses and
7.3.2.2 the loss of Rent and Service Charge payable under this
lease from time to time (having regard to any review of
Rent which may become due under this lease) for two
years or such longer period as the Landlord may from
time to time reasonably deem to be necessary for the
purposes of the planning and carrying out the rebuilding
or reinstatement
7.3.3 against damage or destruction by the Insured Risks to the extent
that such insurance may ordinarily be arranged for properties
such as the Building with an insurer of repute and subject to
such excesses exclusions or limitations as the insurer may
require
7.4 PAYMENT OF INSURANCE RENT
The Tenant shall pay the Insurance Rent on the date of this lease for
the period from and including the Rent Commencement Date to the day
before the next policy renewal date and subsequently the Tenant shall
pay the Insurance Rent on demand and (if so demanded) in advance but not
more than 2 months in advance of the policy renewal date
7.5 SUSPENSION OF RENT
7.5.1 if and whenever during the Term:
7.5.1.1 the Building or any part of the Building or its
essential accesses or services are damaged or destroyed
by any of the Insured Risks (except one against which
insurance
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may not ordinarily be arranged with an insurer of repute
for properties such as the Premises unless the Landlord
has in fact insured against that risk) so that the
Premises or any part of them are unfit for occupation or
use or inaccessible and
7.5.1.2 to the extent that payment of the insurance money is not
refused in whole or in part by reason of any act or
default of the Tenant or anyone at the Premises
expressly or by implication with the Tenant's authority
the provisions of clause 7.5.2 shall have effect
7.5.2 When the circumstances contemplated in clause 7.5.1 arise the
Rent and Service Charge or a fair proportion of the Rent and
Service Charge according to the nature and the extent of the
damage sustained shall cease to be payable until the Building or
the affected part shall have been rebuilt or reinstated so that
the Premises are made fit for occupation or use or for a period
equal to the period for which the Landlord has insured against
loss of Rent and Service Charge whichever period is the shorter
(the amount of such proportion and the period during which the
Rent shall cease to be payable to be determined in the event of
dispute by the Surveyor acting as an expert and not as an
arbitrator)
7.6 REINSTATEMENT AND TERMINATION IF PREVENTED
7.6.1 If and whenever during the Term:
7.6.1.1 the Building or any part thereof or its essential
accesses or services are damaged or destroyed by any of
the Insured Risks (except one against which insurance
may
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not ordinarily be arranged with an insurer of repute for
properties such as the Premises unless the Landlord has
in fact insured against that risk) and
7.6.1.2 the payment of the insurance money is not refused in
whole or in part by reason of any act or default of the
Tenant or anyone at the Premises expressly or by
implication with the Tenant's authority
the Landlord shall use all reasonable endeavours to obtain all
planning permissions or other permits and consents that may be
required under the Planning Acts or other statutes (if any) to
enable the Landlord to rebuild and reinstate ("the Permissions")
7.6.2 Subject to the provisions of clauses 7.6.3 and 7.6.4 the
Landlord shall as soon as the Permissions have been obtained or
immediately where no Permissions are required apply all money
received in respect of such insurance (except sums in respect of
loss of Rent) in rebuilding or reinstating the Building
including essential accesses and services so destroyed or
damaged making up any difference between the cost of rebuilding
and reinstating and the money received out of the Landlord's own
money
7.6.3 For the purposes of this clause the expression 'Supervening
Events' means:
7.6.3.1 the Landlord has failed despite using all reasonable
endeavours to obtain the Permissions
7.6.3.2 any of the Permissions have been granted subject to a
lawful condition with which in all the circumstances it
would be unreasonable to expect the Landlord to comply
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7.6.3.3 some defect or deficiency in the site upon which the
rebuilding or reinstatement is to take place would mean that
the same could only be undertaken at a cost that would be
unreasonable in all the circumstances
7.6.3.4 the Landlord is unable to obtain access to the site for the
purposes of rebuilding or reinstating
7.6.3.5 the rebuilding or reinstating is prevented by war act of God
Government action strike lock-out or
7.6.3.6 any other circumstances beyond the control of the Landlord
7.6.4. The Landlord shall not be liable to rebuild or reinstate the Premises
or the Retained Parts if and for so long as such rebuilding or
reinstating is prevented by Supervening Events
7.6.5 If upon the expiry of a period of 2 years commencing on the date of
the damage or destruction the Building including essential accesses
and services have not been rebuilt or reinstated so that the Premises
are fit for the Tenant's occupation and use either party may by notice
served at any time within 6 months of the expiry of such period invoke
the provisions of clause 7.6.6
7.6.6 Upon service of a notice in accordance with clause 7.6.5:
7.6.6.1 the Term will absolutely cease but without prejudice to any
rights or remedies that may have accrued to either party
against the other
7.6.6.2 all money received in respect of the insurance effected
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by the Landlord pursuant to this clause shall
belong to the Landlord
7.6.6.3. refund a fair proportion of the Rent Service
Charge and the Insurance Rent paid in respect
of the Premises from the date of the damage or
destruction
7.7 TENANT'S INSURANCE COVENANTS
The Tenant covenants with the Landlord:
7.7.1 to comply with all the requirements and recommendations of the
insurers
7.7.2 not to do or omit anything that could cause any policy of
insurance on or in relation to the Premises to become void or
voidable wholly or in part nor (unless the Tenant shall have
previously notified the Landlord and have agreed to pay the
increased premium) anything by which additional insurance
premiums may become payable
7.7.3 to keep the Premises supplied with such fire fighting equipment
as the insurers and the fire authority may require and to
maintain such equipment to their satisfaction and in efficient
working order and at least once in every 12 months to cause any
sprinkler system and other fire fighting equipment to be
inspected by a competent person
7.7.4. not to store or bring onto the Premises any article substance or
liquid of a specially combustible inflammable or explosive
nature and to comply with the requirements and recommendations
of the fire authority and the insurers as to fire precautions
relating to the Premises
7.7.5 not to obstruct the access to any fire equipment or the means of
escape
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from the Premises nor to lock any fire door while the Premises
are occupied
7.7.6 to give notice to the Landlord immediately upon becoming aware
of the happening of any event which might affect any insurance
policy on or relating to the Premises or upon the happening of
any event against which the Landlord may have insured under this
lease
7.7.7 immediately to inform the Landlord in writing of any conviction
judgement or finding of any court or tribunal relating to the
Tenant (or any director other officer or major shareholder of
the Tenant) of such a nature as to be likely to affect the
decision of any insurer or underwriter to grant or to continue
any such insurance
7.7.8 if at any time the Tenant shall be entitled to the benefit of
any insurance on the Premises (which is not effected or
maintained in pursuance of any obligation contained in this
lease) to apply all money received by virtue of such insurance
in making good the loss or damage in respect of which such money
shall have been received
7.7.9 if and whenever during the Term the Premises or any part of them
are damaged or destroyed by an Insured Risk and the insurance
money under the policy of insurance effected by the Landlord
pursuant to its obligations contained is this lease is by reason
of any act or default of the Tenant or anyone at the Premises
expressly or by implication with the Tenant's authority wholly
or partially irrecoverable immediately in every such case (at
the option of the Landlord) either:
7.7.9.1 to rebuild and reinstate at its own expense the Premises
or the part destroyed or damaged to the reasonable
satisfaction and under the supervision of the surveyor
the Tenant being allowed towards the expenses of so
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doing upon such rebuilding and reinstatement being
completed the amount (if any) actually received by the
Landlord in respect of such destruction or damage under
any such insurance policy or
7.7.9.2 to pay to the Landlord on demand with Interest the
amount of such insurance money so irrecoverable in which
even the provisions of clauses 7.5 and 7.6 shall apply
7.7.10 if and whenever during the Term the Premises or any part of them
are damaged or destroyed by an Insured Risk and the policy of
insurance shall be subject to an excess in respect thereof to
pay to the Landlord on demand the amount or the proportion
reasonably attributable to the Premises of the excess (such
proportion to be determined by the Surveyor acting as an expert
and not as an arbitrator)
7.7.11 to insure and at all times keep insured the Premises against all
third party public and occupiers liability risks of the Tenant
in such sum as the Landlord shall from time to time reasonably
require
8. THE GUARANTOR'S COVENANTS
The Guarantor covenants with the Landlord to observe and perform the
Guarantor's Covenants so that the Guarantor is liable whilst the Lease
remains vested in the Tenant and during any extended period whilst the
Tenant is bound by the Tenant Covenants herein.
9. PROVISOS
9.1 Re-entry
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If and whenever during the Term:
9.1.1 the rents (or any of them or any part of them) under this lease
are outstanding for 10 days after becoming due whether formally
demanded or not or
9.1.2 there is a breach by the Tenant of the Guarantor of any covenant
or other term of this lease or any document expressed to be
supplemental to this lease or
9.1.3 an individual Tenant:
9.1.3.1 becomes bankrupt or
9.1.3.2 has an interim receiver of its property appointed or
9.1.3.3 has a bankruptcy order made in respect of it
9.1.4 a company Tenant:
9.1.4.1 enters into liquidation whether compulsory or voluntary
(but not if the liquidation is for amalgamation or
reconstruction of a solvent company) or
9.1.4.2 has a receiver appointed
9.1.4.3 has an administration order made in respect of it or
9.1.4.4 has any person become entitled to exercise the powers
conferred on an administrative receiver in respect of it
or
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9.1.4.5 ceases to exist or is struck off the register of
companies.
9.1.5 the Tenant enters into an arrangement for the benefit of its
creditors or
9.1.6. the Tenant has any distress or execution levied on its goods
the Landlord may re-enter the Premises (or any part of them in the name
of the whole) at any time (and even if any previous right of re-entry
has been waived) and then the Term will absolutely cease but without
prejudice to any rights or remedies which may have accrued to the
Landlord against the Tenant or the Guarantor in respect of any breach of
covenant or other term of this lease (including the breach in respect of
which the reentry is made)
9.2 PARTY WALLS
The internal non-load bearing walls that divide the Premises from other
parts of the Building shall be deemed to be party walls within the
meaning of the Party Wall etc Act 1996 and shall be maintained at the
equally shared expense of the Tenant and the other respective estate
owners.
9.3 COVENANTS RELATING TO ADJOINING PREMISES
Nothing contained in or implied by this lease shall give the Tenant the
benefit of or the right to enforce or to prevent the release or
modification of any covenant agreement or condition entered into by any
tenant of the Landlord in respect of any other part of the Building or
the Adjoining Property.
9.4 DISPUTES WITH ADJOINING OCCUPIERS
If any dispute arises between the Tenant and the tenants or occupiers of
other parts of the Building or the Adjoining Property as to any easement
right or privilege in connection with the use of the Premises and any
other part of the
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Building or Adjoining Property or as to any boundary structures
separating the Premises from any other property it shall be decided by
the Landlord or in such manner as the Landlord shall direct
9.5 EFFECT OF WAIVER
Each of the Tenants covenants shall remain in full force both at law and
in equity notwithstanding that the Landlord shall have waived or
released temporarily any such covenant or waived or released temporarily
or permanently revocably or irrevocably and similar covenant or
covenants affecting any other part of the Building or the Adjoining
Property
9. RIGHTS EASEMENTS ETC.
The operation of the Law of Property Act 1925 Section 62 shall be
excluded from this lease and the only rights granted to the Tenant are
those expressly set out in this lease and the Tenant shall not by virtue
of this lease be deemed to have acquired or be entitled to and the
Tenant shall not during the Term acquire or become entitled by any means
whatever to any easement from or over or affecting any other part of the
Building or the Adjoining Property
9.7 ACCIDENTS
The Landlord shall not be responsible to the Tenant or to anyone at the
Premises or the Building expressly or by implication with the Tenant's
authority for any accident happening or injury suffered or for any
damage to or loss of any chattel sustained in the Premises or the
Building except where such injury damage or loss is caused as a result
of a breach of any of the Landlord's covenants herein contained.
9.8 PERPETUITY PERIOD
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The perpetuity period applicable to this lease shall be 80 years from
the commencement of the Contractual Term and whenever in this lease
either party is granted a future interest there shall be deemed to be
included in respect of every such grant a provision requiring that
future interest to vest within the stated period and for it to be void
for remoteness if it shall not have so vested.
9.9 EXCLUSION OF USE WARRANTY
Nothing in this lease or in any consent granted by the Landlord under
this lease shall imply or warrant that the Premises may lawfully be used
under the Planning Acts for the purpose authorised in this lease (or any
purpose subsequently authorised)
9.10 ENTIRE UNDERSTANDING
This lease embodies the entire understanding of the parties relating to
the Premises and to all the matters dealt with by any of the provisions
of this lease
9.11 REPRESENTATIONS
The tenant acknowledges that this lease has not been entered into in
reliance wholly or partly on any statement or representation made by or
on behalf of the Landlord
9.12 LICENCES ETC UNDER HAND
Whilst the Landlord is a limited company or other corporation all
licences consents approvals and notices required to be given by the
Landlord shall be sufficiently given if given under the hand of a
director the secretary or other duly authorised officer of the Landlord
9.13 TENANT'S PROPERTY
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If after the Tenant has vacated the Premises on the expiry of the Term
any property of the Tenant remains in or on the Premises and the Tenant
fails to remove it within 7 days after being requested in writing by the
Landlord to do so or if the Landlord is unable to make such a request to
the Tenant within 7 days from the first attempt so made by the Landlord:
9.13.1 the Landlord may as the agent of the Tenant sell such property
and the Tenant will indemnify the Landlord against any liability
incurred by it to any third party whose property shall have been
sold by the Landlord in the mistaken belief held in good faith
(which shall be presumed unless the contrary be proved) that
such property belonged to the Tenant
9.13.2 if the Landlord having made reasonable efforts is unable to
locate the Tenant the Landlord shall be entitled to retain such
proceeds of sale absolutely unless the Tenant shall claim them
within 6 months of the date upon which the Tenant vacated the
Premises and
9.13.3 the Tenant shall indemnify the Landlord against any damage
occasioned to the Premises and any actions claims proceedings
costs expenses and demands made against the Landlord caused by
or related to the presence of the property in or on the Premises
9.14 Compensation on vacating
Any statutory right of the Tenant to claim compensation from the
landlord on vacating the Premises is excluded to the extent that
the law allows
9.15 SERVICE OF NOTICES
The provisions of the Law of Property Act 1925 Section 196 as amended by
the Recorded Delivery Service Act 1962 shall apply to the giving and
service
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of all notices and documents under or in connection with this lease
except that Section 196 shall be deemed to be amended as follows:
9.15.1 the final words of Section 196(4)"...and that service.... be
delivered" shall be deleted and there shall be substituted
"...and that service shall be deemed to be made on the third
Working Day after the registered letter has been posted 'Working
Day' meaning any day from Monday to Friday (inclusive) other
than Christmas Day Good Friday and any statutory bank or public
holiday"
9.15.2 any notice or document shall also be sufficiently served on a
party if served on solicitors who have acted for that party in
relation to this lease or the Premises at any time within the
year preceding the service of the notice or document
9.15.3 any notice or document shall also be sufficiently served if sent
by telex telephonic facsimile transmission or any other means of
electronic transmission to the party to be served (or its
solicitors where clause 9.15.2 applies) and that service shall
be deemed to be made on the day of transmission if transmitted
before 4pm on a Working Day but otherwise on the next following
Working Day (as defined above) and in this clause "party"
includes the Guarantor
9.16 STAMP DUTY CERTIFICATE
The parties certify that there is no Agreement for Lease to which this
Lease give effect
9.17 BREAK CLAUSE
If the Tenant (meaning in this sub-clause TCSI Corporation to the intent
that this break right shall be personal to TCSI Corporation) wishes to
determine this
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lease on the expiry of the fifth year of the Contractual Term and shall:
9.17.1 Give to the Landlord not less than one year's and three days'
prior notice in writing; and
9.17.2 Not less than 28 days prior to the expiry of the fifth year of
the Contractual Term pay to the Landlord the sum of L39,500.00
(Thirty Nine Thousand Five Hundred Pounds) plus VAT (if
applicable) (which for the avoidance of doubt is payable in
addition to and not instead of Rent); and
9.17.3 Up to the time of such determination pay the rents and
substantially perform and observe the obligations and covenants
contained in this lease
then upon the expiry of such notice the Contractual Term shall
immediately cease and determine but without prejudice to the respective
rights of either party in respect of any antecedent claim or breach of
covenant
IN WITNESS of which this deed has been executed (but not delivered until) the
day and year first above written
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THE FIRST SCHEDULE
THE PREMISES
ALL THAT part of the Building for the purpose of identification only edged red
on the Plan and including:
1. The inner surface of and the paint paper and other decorative finishes
and the plaster applied to the interior of the external walls of the
Building but not any other part of the external walls.
2. The floor finishes so that the lower limit of the Premises includes such
finishes but does not extend to anything below them
3. The ceiling finishes so that the upper limit of the Premises includes
such finishes but does not extend to anything above them but including
the entirety of all suspended ceilings and the void above them
4. The entirety of any non load-bearing internal walls wholly within the
Premises
5. The inner half severed medially of the internal non load-bearing walls
dividing the Premises from other parts of the Building
6. The doors and windows and the doors and window frames
7. All additions and improvements to the Premises
8. All the Landlord's fixtures and fittings and fixtures of every kind
which shall from time to time be in or upon the Premises whether
originally affixed or fastened to or upon the Premises or otherwise
except any such fixture installed by the Tenant that can be removed from
the Premises without defacing the same
9. Any Pipes wholly in or on the Premises that exclusively serve the
Premises
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THE SECOND SCHEDULE
APPURTENANT RIGHTS
Rights granted to the Tenant (in common with the Landlord and all others
entitled and only in so far as the Landlord is entitled to grant)
1. PIPES
The right to the free passage and running (subject to temporary
interruption for repair alteration or replacement) of water sewage gas
electricity telephone and all other services or supplies to and from the
Premises in and through the Pipes that now (or at any time during the
Term) serve the Premises presently (or at any time during the Term) laid
in on under or over other parts of the Building and (if any) the
Adjoining Property
2. COMMON PARTS
The right for the Tenant and all persons expressly or by implication
authorised by the Tenant to use the Common Parts for all proper purposes
in connection with the use and enjoyment of the Premises
3. SUPPORT
The right of support and protection for the benefit of the Premises as
is now enjoyed from all other parts of the Building
4. CAR PARKING
The right to the exclusive use of 16 car parking spaces in the car park
adjacent to the Building shown edged blue on the attached plan PROVIDED
THAT the Landlord may relocate the parking spaces numbered 45-47
inclusive to elsewhere within the car
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park
THE THIRD SCHEDULE
EXCEPTIONS AND RESERVATIONS
Rights excepted and reserved from the demise in favour of the Landlord and all
others now entitled or who may become entitled
1. ACCESS
1.1 The right at any reasonable time during the Term upon prior
reasonable notice except in cases of emergency to enter (or in
cases of emergency to break and enter) the Premises:
1.1.1 to inspect the condition and state of repair of the
Premises
1.1.2 to inspect cleanse connect to lay repair remove replace
with others alter or execute any works whatever to or in
connection with the Pipes easements services or supplies
referred to in paragraphs 2 and 3 of this Schedule
1.1.3 to view the state and condition of and to carry out work
of any kind to the Building and any Other Buildings
where such viewing or work could not otherwise be
conveniently carried out
1.1.4 to carry out work or do anything whatever comprised
within the Landlord's obligations in this lease
1.1.5 to take schedules or inventories of fixtures and other
items to be yielded up on the expiry of the Term and
1.1.6 to exercise any of the rights granted to the Landlord
elsewhere in this
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lease
1.2 The right with the Surveyor and the third party determining the
Rent in default of agreement between the parties under any
provisions for rent review contained in this lease at reasonable
hours on reasonable prior notice to enter and inspect and
measure the Premises for all purposes connected with any pending
or intended step under the 1954 Act or the implementation of the
provisions for rent review
2. USE OF PIPES
The right to the free and uninterrupted passage and running of water
sewage gas electricity telephone and other services or supplies from and
to other parts of the Building or (if any) the Adjoining Property in and
through the Pipes which now are or may be during the Term in on under or
over the Premises
3. RIGHT TO CONSTRUCT PIPES
The right to construct and to maintain in on under or over the Premises
at any time during the Term any Pipes for the provision of services or
supplies to any other part of the Building or (if any) the Adjoining
Property
4. LIGHT
Full right and liberty at any time after the date of this lease:
4.1 to alter raise the height of or rebuild the Building (and such
expression here excluding the Premises) or any of the Other
Buildings
4.2 to erect buildings on the Adjoining Property of any height in
such manner as it shall think fit notwithstanding the fact that
the same may obstruct affect or interfere with the amenity of or
the access to the Premises or the passage of
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light and air to the Premises PROVIDED THAT the same shall not
materially affect or interfere with the amenity of or access to
the Premises or the passage of light or air to the Premises
5. SCAFFOLDING
The right to erect scaffolding for any purpose connected with or related
to the Building (and (if any) the Other Buildings) notwithstanding that
such scaffolding may temporarily restrict the access to or use and
enjoyment of the Premises
6. SUPPORT
The right of light air support protection shelter and all other
easements and rights now or after the date of this lease belonging to or
enjoyed by other parts of the Building
THE FOURTH SCHEDULE
RENT AND RENT REVIEW
1. DEFINITIONS
1.1 The terms defined in this paragraph shall for all purposes of
this Schedule have the meanings specified
1.2 'Review Period' means the period between the Review Date
(inclusive) and the expiry of the Contractual Term (inclusive)
1.3 'the Assumptions' means the following assumptions at the Review
Date:
1.3.1 that no work has been carried out on the Premises by the
Tenant it's subtenants or their predecessors in title
during the Term which has diminished the rental value of
the Premises
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1.3.2 that if the Premises have been destroyed or damaged they
have been fully restored
1.3.3 that the covenants contained in this Lease on the part
of the Landlord (other than material breaches of
covenant notified to the Landlord or the Landlord's
agents) and the Tenant have been fully performed and
observed
1.3.4 that the Premises are available to let in the open
market at the Review Date by a willing landlord to a
willing tenant by one lease without a premium being paid
by either party and with vacant possession
1.3.5 that the Premises are ready for and fitted out and
equipped for immediate occupation and use for the
purpose or purposes required by the willing tenant and
that all the services required for such occupation and
use are connected to the Premises
1.3.6 that the lease referred to in paragraph 1.3.4 contains
the same terms as this Lease except the amount of the
Initial Rent and any rent free period allowed to the
Tenant for fitting out the Premises for its occupation
and use at the commencement of the Term but including
the provisions for rent review on the Review Date and
except as set out in paragraph 1.3.7
1.3.7 that the term of the lease referred to in paragraph
1.3.4 is equal in length to the Contractual Term (with a
rent review every five years) and that such term begins
on the Review Date and that the rent shall commence to
be payable from that date and that the years during
which the tenant covenants to decorate the Premises are
at similar intervals after the beginning of the term of
such lease as those specified in this Lease
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1.4 'the Disregarded Matters' means:
1.4.1 any effect on rent of the fact that the Tenant his
subtenants or their respective predecessors in title
have been in occupation of the Premises or any part
thereof
1.4.2 any goodwill attached to the Premises by reason of the
carrying on at the Premises of the business of the
Tenant his subtenants or their predecessors in title in
their respective businesses
1.4.3 any increase in rental value of the Premises
attributable to the existence at the Review Date of any
improvement to the Premises carried out with consent
where required otherwise than in pursuance of an
obligation to the Landlord or his predecessors in title
either:
1.4.3.1 by the Tenant his subtenants or their respective
predecessors in title or by any lawful occupiers
during the Term or during any period of
occupation prior to the Term arising out of an
agreement to grant
1.4.3.2 by any tenant or subtenant of the Premises or by
any lawful occupiers before the commencement of
the Term so long as the Landlord or his
predecessors in title have not since the
improvement was carried out had vacant
possession of the relevant part of the Premises
1.5 'the President' means the President for the time being of the
Royal Institution of Chartered Surveyors the duly appointed
deputy of the President or any person authorised by the
President to make appointments on his behalf
1.6 'the Expert' means an independent valuer appointed by agreement
between the parties or in the absence of agreement within 14
days of one party giving
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notice to the other of his nomination or nominations nominated
by the President on the application of either party made not
earlier than 6 months before the relevant Review Date or at any
time afterwards.
2. ASCERTAINING THE RENT
2.1 The Rent during the Review Period shall be a rent equal to the
greater of:
2.1.1 The Rent payable immediately prior to the Review Date or
if payment of Rent has been suspended pursuant to the
proviso to that effect contained in this Lease the Rent
which would have been payable had there been no such
suspension and
2.1.2 Such amount as may be ascertained in accordance with
this Schedule
2.2 Such revised Rent for the Review Period may be agreed in writing
at any time between parties or (in the absence of agreement)
will be determined not earlier than the Review Date by the
Expert
2.3 The revised Rent to be determined by the Expert shall be such as
he shall decide (acting as an expert and not as an arbitrator)
to be the rent at which the Premises might reasonably be
expected to be let on the open market at the Review Date making
the Assumptions but disregarding the matters detailed in
paragraph 1.4 of this Schedule and defined as "Disregarded
Matters"
2.4
2.4.1 The Expert will afford each of the parties an
opportunity to make written representations to him but
will not be in any way limited or fettered by such
representations and will be entitled to rely on his own
judgement an option
2.4.2 If the Expert dies or refuses to act or becomes
incapable of acting or
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if he fails to publish his determination within 3 months
of the date upon which he accepted the appointment
either party may apply to the President to discharge the
Expert and appoint another in his place
2.5 Whenever the Rent shall have been ascertained in accordance with
this Schedule memoranda to this effect shall be signed by or on
behalf of the parties and annexed to this Lease and its
counterpart and the parties shall bear their own costs in this
respect.
3. EXPERT'S FEES
3.1 The fees and expenses of the Expert including the cost of his
appointment shall be borne equally by the parties who shall
otherwise bear their own costs
3.2 If one party shall upon publication of the Expert's
determination pay all the Expert's fees and expenses such party
shall be entitled to recover (in default of payment within 21
days of a demand to that effect in the case of the Landlord as
Rent in arrears or in the case of the Tenant by deduction from
Rent) half of them from the other party
4. ARRANGEMENTS PENDING ASCERTAINMENT OF REVISED RENT
If the revised Rent payable during any Review Period has not been
ascertained by the relevant Review Date Rent shall continue to be
payable at the rate previously payable such payments being on account of
the Rent for the that Review Period
5. PAYMENT OF REVISED RENT
5.1 If the revised Rent shall be Ascertained on or before the Review
Date and that date is not a Rent Payment Date the Tenant shall
on the Review Date pay to the Landlord the amount by which one
rental period's Rent at the rate payable on the immediately
preceding Rent Payment Date is less than one rental
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<PAGE> 55
period's Rent at the Rate of the revised Rent apportioned on a
daily basis from and including the Review Date to the day before
the next following quarter day
5.2 If the revised Rent payable during the successive Review Period
has not been ascertained by the Review Date then within 10 days
after the date when the same has been agreed between the parties
or the date upon which the Expert's determination shall be
received by or otherwise made known to the Tenant the Tenant
shall pay to the Landlord:
5.2.1 any shortfall between the Rent which would have been
paid on the Review Date and on any subsequent Rent
Payment Dates had the revised rent been ascertained on
or before the Review Date and the payments made by the
Tenant on account and
5.2.2 interest at 3% below the Interest Rate prevailing on the
day upon which the shortfall is paid in respect of each
instalment of Rent due on or after the Review Date on
the amount by which the instalment of revised Rent which
would have been paid on the Review Date or such Rent
Payment Date exceeds the amount paid on account and such
interest shall be payable for the period from the date
upon which the instalment was due up to the date of
payment of the shortfall
6. ARRANGEMENTS WHEN INCREASING RENT PREVENTED ETC
6.1 If at the Review Date there shall be in force a statute which
shall prevent restrict or modify the Landlord's right to review
the Rent in accordance with this Lease and/or to recover any
increase in the Rent the Landlord shall when such restriction or
modification is removed relaxed or modified be entitled (but
without prejudice to his rights (if any) to recover any Rent the
payment of which has only been deferred by law) on giving not
less than one month's nor more than 3 months' notice in writing
to the Tenant at any time within 6 months (time being of the
essence of the contract) of the restriction or
52
<PAGE> 56
modification being removed relaxed or modified to invoke the
provisions of paragraph 6.2
6.2 Upon the service of a notice pursuant to paragraph 6.1 the
Landlord shall be entitled:
6.2.1 to proceed with any review of the Rent which may have
been prevented or further to review the Rent in respect
of any review where the Landlord's right was restricted
or modified and the date of expiry of such notice shall
be deemed for the purposes of this Lease to be a Review
Date (provided that without prejudice to the operation
of this paragraph nothing in this paragraph shall be
construed as varying any subsequent Review Dates)
6.2.2 to recover any increase in Rent with effect from the
earliest date permitted by law
THE FIFTH SCHEDULE
USER COVENANTS
1. USE
Not to use the Premises otherwise than for the Permitted Use
2. TAKE PRECAUTIONS
2.1 To take all necessary precautions against frost damage to the
Pipes exclusively serving the Premises
2.2 To take all necessary care and precautions to avoid water damage
to any other part of the Building by reason of bursting or
overflowing of any pipe or water apparatus in the Premises
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<PAGE> 57
3. UNLOADING
Not to load or unload any goods or materials onto or from vehicles and
convey the same from and into the Building and the Premises except
through the entrances designated as "Service Entrances" on the Plan and
by means of any lift designated for such purposes
4. REGULATIONS
To comply with all reasonable regulations made by the Landlord from time
to time for the management of the Building and notified to the Tenant in
writing provided that nothing in the regulations shall purport to amend
the terms of this lease and in the event of any inconsistency between
the terms of this lease and the regulations the terms of this lease
shall prevail
THE SIXTH SCHEDULE
THE GUARANTOR'S COVENANTS
1. TO PAY OBSERVE AND PERFORM
That during the Term the Tenant shall punctually pay the rents and
observe and perform the covenants and other terms of this lease and if
at any time during the Term the Tenant shall make any default in payment
of the rents or in observing or performing any of the covenants or other
terms of this lease the Guarantor will pay the rents and observe or
perform the covenants or terms in respect of which the Tenant shall be
in default and make good to the Landlord on demand and indemnify the
Landlord against all losses damages costs and expenses arising or
incurred by the Landlord as a result of such non-payment non-performance
or non-observance notwithstanding:
1.1 any time or indulgence granted by the Landlord to the Tenant or
any neglect or forbearance of the Landlord in enforcing the
payment of the rents or the
54
<PAGE> 58
observance or performance of the covenants or other terms of
this lease or any refusal by the Landlord to accept rents
tendered by or on behalf of the Tenant at a time when the
Landlord was entitled (or would after the service of a notice
under the Law of Property Act 1925 Section 146 have been
entitled) to re-enter the Premises
1.2 that the terms of this lease may have been varied by agreement
between the parties provided such variation is not prejudicial
to the Guarantor
1.3 that the Tenant shall have surrendered part of the Premises
in which event the liability of the Guarantor under this lease
shall continue in respect of the part of the premises not so
surrendered after making any necessary apportionments under the
Law of Property Act 1925 Section 140 and
1.4 any other act or thing by which but for this provision the
Guarantor would have been released other than a variation of the
terms of this lease agreed between the parties that is
prejudicial to the Guarantor
2. TO TAKE LEASE FOLLOWING DISCLAIMER
That if at any time during the Term the Tenant (being an individual)
shall become bankrupt or (being a company) shall enter into liquidation
and the trustee in bankruptcy or liquidator shall disclaim this lease
the Guarantor shall if the Landlord shall by notice within 60 days after
such disclaimer so require take from the Landlord a lease of the
Premises for the residue of the Contractual Term which would have
remained had there been no disclaimer at the rent then being paid under
this lease and subject to the same covenants and terms as in this lease
(except that the Guarantor shall not be required to procure that any
other person is made a party to that lease as guarantor) such new lease
to take effect from the date of such disclaimer and in such case the
Guarantor shall pay the costs of such new lease and execute and deliver
to the Landlord a counterpart of it
55
<PAGE> 59
3. TO MAKE PAYMENTS FOLLOWING DISCLAIMER
That if this lease shall be disclaimed and for any reason the Landlord
does not require the Guarantor to accept a new lease of the Premises in
accordance with paragraph 2 above the Guarantor shall pay to the
Landlord on demand an amount equal to the difference between any money
received by the Landlord for the use or occupation of the Premises and
the rents in both cases for the period commencing with the date of such
disclaimer and ending on whichever is the earlier of the following
dates:
3.1 the date 6 months alter such disclaimer and
3.2 the date (if any) upon which the Premises are re let
THE SEVENTH SCHEDULE
SERVICE CHARGE
PART A
DEFINITIONS
1. "Services" means the services facilities and amenities specified in Part
C of this Schedule
2. "Computing Date" means 1st April in every year of the Term or such other
date as the Landlord may from time to time reasonably nominate and
"Computing Dates" shall be construed accordingly
3. "FINANCIAL YEAR" MEANS THE PERIOD:
3.1 from the commencement of the Term to and including the first
Computing Date and subsequently
3.2 between 2 consecutive Computing Dates (excluding the first
Computing Date
56
<PAGE> 60
from but including the second Computing Date in the period) and
"Financial Years" shall be construed accordingly.
4. "Gross Annual Expenditure" means in relation to any Financial Year the
aggregate of:
4.1 All costs expenses and outgoings whatever reasonably and
properly incurred by the Landlord during that Financial Year in
or incidentally to providing all or any of the Services and any
VAT payable.
4.2 All costs reasonably and properly incurred by the Landlord
during that Financial Year in relation to the matters specified
in Part D of this Schedule ("Additional Items") and any VAT
payable and
4.3 (when expenditure is incurred in relation to the Building and
other premises) the proportion of such expenditure that is
reasonably attributable to the Building to be determined from
time to time by the Surveyor (acting as an expert and not as an
arbitrator)
4.4 Such sums (if any) as the Landlord shall in its absolute
discretion consider appropriate to charge in that Financial Year
by way of provision for anticipated expenditure in any future
Financial Years in respect to any of the Services or the
Additional Items
but "Gross Annual Expenditure" shall not include (i) any expenditure in
respect of the maintenance or repair of any part of the Building or of
any thing in the Building whose maintenance or repair is the exclusive
responsibility of the Tenant or any other tenant in the Building (ii)
the cost of any works necessitated by inherent defects and (iii) the
cost of the erection completion and decoration (save for redecoration
during the term of this agreement).
5. "Annual Expenditure" means in relation to any Financial Year the Gross
Annual Expenditure for that Financial Year less the aggregate of:
57
<PAGE> 61
5.1 (if in the Financial Year in question or in any previous
Financial Year the Landlord has incurred any costs or expenses
in or incidentally to making good any loss or damage covered by
any policy of insurance maintained by the Landlord pursuant to
its obligations in this lease) all (if any) amounts recovered by
the Landlord in the Financial Year in question pursuant to such
policy of insurance and
5.2 (if in the Financial Year in question or in any previous
Financial Year the Landlord has incurred any costs or expenses
in or incidentally to providing any of the Services or in
relation to any of the Additional Items which are recoverable
(in whole or in part) from any person other than the Tenant or
any other tenant in the Building) all (if any) amounts recovered
by the Landlord in the Financial Year in question from any such
person
6. "Service Charge" means a fair and proper proportion reasonably
attributable to the Premises of the Annual Expenditure based upon the
ratio which the net lettable floor area for the time being of the
Premises bears to the net lettable floor area for the time being of the
Building.
PART B
PERFORMANCE OF THE SERVICES AND PAYMENT OF THE SERVICE CHARGE
7. PERFORMANCE OF THE SERVICES
Subject to the Tenant paying to the Landlord the Service Charge and
complying with the covenants and other terms of this lease the Landlord
shall perform the Services throughout the Term in a proper and efficient
manner and (where appropriate) using good and suitable materials
provided that the Landlord shall not be liable to the Tenant in respect
of:
7.1 any failure or interruption in any of the Services by reason of
necessary repair replacement maintenance of any installations or
apparatus or their damage or
58
<PAGE> 62
destruction or by reason of mechanical or other defect or
breakdown or frost or other inclement conditions or shortage of
fuel materials water or labour or any other cause beyond the
Landlord's control provided and to the extent that the Landlord
uses and continues to use its reasonable endeavors to restore
the Services in question
7.2 any act omission or negligence of any porter attendant or other
person undertaking the Services or any of them on behalf of the
Landlord
PROVIDED THAT this clause shall no be construed as relieving the a
Landlord from liability for breach by the Landlord of any covenants on
the part of the Landlord contained in this lease
8. PAYMENT OF THE SERVICE CHARGE
8.1 The Landlord shall within 4 months after each Computing Date
prepare and send to the Tenant an account showing the Gross
Annual Expenditure and the Annual Expenditure for the Financial
Year ending on that Computing Date and containing a fair
summary of the expenditure referred to in it and upon such
account being certified by the Accountant it shall be conclusive
evidence for the purposes of this lease of all matters of fact
referred to in the account except in the case of manifest error.
8.2 The Tenant shall pay for each Financial Year (or the apportioned
part thereof) a provisional sum calculated upon a proper
estimate by the Surveyor acting as an expert and not as an
arbitrator of what the Annual Expenditure is likely to be for
that Financial Year by 4 equal quarterly payments on the usual
quarter days (or fewer quarterly payments for a period less than
a calendar year). Each provisional quarterly payment will not
exceed TWO THOUSAND POUNDS (L2,000.00) but this will not prevent
the Landlord from recovering any excess Service Charge pursuant
to clause 8.3.1 below
59
<PAGE> 63
8.3 If the Service Charge for any Financial Year shall:
8.3.1 exceed the provisional sum for that Financial Year the
excess shall be due to the Landlord within 10 working
days of demand or
8.3.2 be less than such provisional sum the overpayment shall
be credited to the Tenant against the next quarterly
payment of the Rent and Service Charge except in respect
to the final year of the Term (howsoever determined)
when any such overpayment by the Tenant shall be repaid
to the Tenant within 21 days after the issue of the said
account and certificate.
9. VARIATIONS
The Landlord may withhold add to extend vary or make any alternation in
the rendering of the Services or any of them from time to time if the
Landlord at its absolute discretion deems it desirable to do provided
that the foregoing shall not result in the services being so extended
varied or altered so as materially to affect the Tenant's enjoyment and
occupation of the Premises.
PART C
THE SERVICES
10. MAINTAINING ETC. RETAINED PARTS
Maintaining repairing rebuilding renewing and reinstating (but only
rebuilding or renewing in so far as may be necessary for the purposes of
repair) and where appropriate treating washing down painting and
decorating (to such standard as the Landlord may from time to time
consider adequate) the Retained Parts
11. LIFT
60
<PAGE> 64
Providing a lift service by the operation of the lifts now installed in
the Building or by such substituted lifts as the Landlord in its
absolute discretion may from time to time decide to install and for such
hours and times as the Landlord should in its absolute discretion
determine.
12. MAINTAINING ETC APPARATUS PLANT MACHINERY ETC
Inspecting servicing maintaining repairing amending overhauling
replacing and insuring (save in so far as insured under other provisions
of this lease) all apparatus plant machinery and equipment within the
Retained Parts from time to time including (without prejudice to the
generality of the above) lifts lift shafts standby generators and
boilers and items relating to mechanical ventilation heating cooling
public address and closed circuit television
13. MAINTAINING ETC PIPES
Maintaining repairing cleansing emptying draining amending and renewing
all Pipes within the Retained Parts and all other Pipes on any Adjoining
Property which serve the Building
14. MAINTAINING ETC FIRE ALARMS ETC
Maintaining and renewing any fire alarms fire prevention and fire
fighting equipment and ancillary apparatus in the Retained Parts
15. CLEANING ETC RETAINED PARTS
Cleaning treating polishing and lighting the Retained Parts to a good
standard as the Landlord may from time to time consider adequate
16. HEATING ETC
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<PAGE> 65
Providing such mechanical ventilation heating and (if deemed desirable
by the Landlord) cooling for such parts of the Retained Parts and for
such hours and times of year as the Landlord shall in its absolute
discretion determine
17. ORNAMENTAL FEATURES GARDENS ETC
Providing and maintaining (at the Landlords absolute discretion) any
architectural or ornamental features or murals and any plants shrubs
trees or garden or grassed area in the Retained Parts and keeping the
same planted and free from weeds and the grass cut
18. FIXTURES FITTINGS ETC
Supplying providing purchasing hiring maintaining renewing replacing
repairing servicing overhauling and keeping in good and serviceable
order and condition all appurtenances fixtures and fittings bins
receptacles tools appliances materials equipment and other things which
the Landlord may deem desirable or necessary for the maintenance
appearance upkeep or cleanliness of the Building or any part of it
19. WINDOWS
Cleaning as frequently as the Landlord shall in its absolute discretion
consider adequate being no less than once every 3 months the exterior
and interior of all windows and window frames in the Retained Parts and
the exterior of the windows and window frames in the Premises and other
parts of the Building let or constructed or adapted for letting
20. REFUSE
Collecting and disposing of refuse from the Building and the provision
repair maintenance and renewal of plant and equipment for the collection
treatment packaging or disposal of the same
62
<PAGE> 66
21. OTHER SERVICES
Any other services relating to the Building or any part of the Building provided
by the Landlord from time to time and not expressly mentioned
PART D
THE ADDITIONAL ITEMS
22. FEES
22.1 The proper and reasonable fees and disbursements (and any VAT
payable on them) of:
22.1.1 The Surveyor the Accountant and any other individual
firm or company employed or retained by the Landlord for
(or in connection with) such surveying or accounting
functions or the management of the Building
22.1.2 The managing agents (whether or not the Surveyor) for or
in connection with:
22.1.2.1 The management of the Building
22.1.2.2 The collection of the rents and all other sums
due to the Landlord from the Tenant
22.1.2.3 The performance of the Services and any other
duties in and about the Building or any part of
it relating to (without prejudice to the
generality of the above) the general management
administration security maintenance protection
and cleanliness of the Building
22.1.3 Any individual firm or company valuing the Building for
the purposes
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<PAGE> 67
of assessing the full cost of rebuilding and
reinstatement
22.1.4 Any individual firm or company providing caretaking or
security arrangements and services to the Building
22.1.5 Any other individual firm or company employed or
retained by the Landlord to perform (or in connection
with) any of the Services or any of the functions or
duties referred to in this paragraph
22.2 The reasonable fees of the Landlord or Group Company for any of
the Services or the other functions and duties referred to in
paragraph 22.1 above that shall be undertaken by the Landlord or
a Group Company and not by a third party
23. STAFF ETC
The cost of employing (whether by the Landlord a Group Company the
managing agents or any other individual firm or company) such staff as
the Landlord may in its absolute discretion deem necessary for the
performance of the Services and other functions and duties referred to
in paragraph 22.1 above and all other incidental expenditure in relation
to such employment including but without prejudice to the generality of
the above
23.1 insurance pension and welfare contributions
23.2 transport facilities and benefits in kind
23.3 the provision of uniforms and working clothing and
23.4 the provision of vehicles tools appliances cleaning and other
materials fixtures fittings and other equipment for the proper
performance of their duties and a store for housing the same
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<PAGE> 68
24. CONTRACTS FOR SERVICES
The proper cost of entering into any contracts for the carrying out of
all or any of the Services and other functions and duties that the
Landlord may in its absolute discretion deem desirable or necessary
25. OUTGOINGS
All rates taxes assessments duties charges impositions and outgoings
which are now or during the Term shall be charged assessed or imposed on
the whole of the Building where there is no separate charge assessment
or imposition on or in respect of an individual unit
26. ELECTRICITY GAS ETC
The cost of the supply of electricity gas oil or other fuel for the
provision of the Services and for all purposes in connection with the
Retained Parts
27. ROAD ETC CHANGES
The amount which the Landlord shall be called upon to pay as a
contribution towards the expense of making repairing maintaining
rebuilding and cleansing any ways roads pavements or structures Pipes or
anything which may belong to or be used for the Building or any part of
it exclusively or in common which other neighbouring or adjoining
premises
28. REGULATIONS
The costs charges and expenses of preparing and supplying to the tenants
copies of any regulations made by the Landlord relating to the Building
or the use of it
29. STATUTORY ETC REQUIREMENTS
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<PAGE> 69
The cost of taking all steps deemed desirable or expedient by the
Landlord for complying with making representations against or otherwise
contesting the incidence of the provisions or any statute byelaw or
notice concerning town planning public health highways streets drainage
or other matters relating to or alleged to relate to the Building or any
part of it for which any tenant is not directly and exclusively liable
30. NUISANCE
The cost to the Landlord of abating a nuisance in respect of the
Building or any part of it in so far as the same is not the liability of
any individual tenant
31. INTEREST
Any interest and fees in respect of money borrowed to finance the
provision of the Services or the Additional Items
66
<PAGE> 70
[SEAL]
The Common Seal of the Landlord was hereunto affixed in the presence of
/signature/ Director
/signature/ Secretary/Director
67
<PAGE> 71
ANNEXURE 1 - PLAN SHOWING THE BUILDING
(DIAGRAM OF PROPERTY)
<PAGE> 72
ANNEXURE 2 - PLAN SHOWING THE PREMISES
(DIAGRAM OF PROPERTY)
<PAGE> 73
ANNEXURE 3 - PLAN SHOWING THE CAR PARKING SPACES
(DIAGRAM OF PROPERTY)
<PAGE> 1
EXHIBIT 23.1
TCSI CORPORATION
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8) pertaining to the 1991 Stock Incentive Plan (No. 33-57540 and
333-8353), as amended, Equity Sharing Plan (No. 33-41808), as amended, 1994
Board of Directors Stock Option Plan (No. 33-98842), as amended, and Employee
Stock Purchase Plan (No. 333-31705), and in the related Prospectuses, of TCSI
Corporation of our report dated January 27, 1998, with respect to the
consolidated financial statements and financial statement schedule of TCSI
Corporation included in this annual report (Form 10-K) for the year ended
December 31, 1997.
ERNST & YOUNG LLP
San Francisco, California
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT AS OF DECEMBER 31, 1997 OF TCSI CORPORATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,566
<SECURITIES> 21,901
<RECEIVABLES> 12,485
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 69,441
<PP&E> 10,165
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,231
<CURRENT-LIABILITIES> 10,083
<BONDS> 0
0
0
<COMMON> 2,214
<OTHER-SE> 71,934
<TOTAL-LIABILITY-AND-EQUITY> 84,231
<SALES> 0
<TOTAL-REVENUES> 39,578
<CGS> 0
<TOTAL-COSTS> 46,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,972)
<INCOME-TAX> (1,350)
<INCOME-CONTINUING> (2,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,622)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT AS OF DECEMBER 31, 1996 OF TCSI CORPORATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,880
<SECURITIES> 21,727
<RECEIVABLES> 15,522
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 65,240
<PP&E> 9,234
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,133
<CURRENT-LIABILITIES> 14,523
<BONDS> 0
0
0
<COMMON> 2,122
<OTHER-SE> 71,488
<TOTAL-LIABILITY-AND-EQUITY> 88,133
<SALES> 0
<TOTAL-REVENUES> 60,233
<CGS> 0
<TOTAL-COSTS> 62,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 446
<INCOME-TAX> 152
<INCOME-CONTINUING> 294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
