TCSI Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-19377
<TABLE>
<CAPTION>
TCSI Corporation
(Exact name of Registrant as specified in its charter)
<S> <C>
NEVADA 68-0140975
- -------------------------------------------------------- -------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)
1080 Marina Village Parkway, Alameda, CA 94501
- -------------------------------------------------------- -------------------------------------------------------
(Address of principal executive offices) (Zip code)
</TABLE>
Telephone number (510) 749-8500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
As of May 13, 1998, there were 22,324,648 shares of common stock of the
Registrant outstanding.
<PAGE>
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Information
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)........................3
Consolidated Balance Sheets at March 31, 1998 (Unaudited)
and December 31, 1997............................................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997 (Unaudited)........................5
Notes to Consolidated Financial Information (Unaudited)...............6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................11
Part II. Other Information
Item 1. Legal Proceedings...............................................26
Item 6. Exhibits and Reports on Form 8-K................................27
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Information
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except earnings (loss) per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------------
1998 1997
--------------------- ---------------------
<S> <C> <C>
Revenues:
Services $ 8,131 $ 7,803
Software licensing fees 2,874 2,031
--------------------- ---------------------
Total revenues 11,005 9,834
Costs and expenses:
Services 4,558 5,143
Product development 2,543 1,452
Selling, general, and administrative 3,810 4,838
--------------------- ---------------------
Income (loss) from operations 94 (1,599)
Interest income 766 749
--------------------- ---------------------
Income (loss) before income taxes 860 (850)
Provision for (benefit from) income taxes 344 (289)
--------------------- ---------------------
Net income (loss) $ 516 $ (561)
===================== =====================
Earnings (loss) per share (EPS) - Basic $ 0.02 $ (0.03)
===================== =====================
Shares used in calculation of EPS - Basic 22,219 21,343
===================== =====================
Earnings (loss) per share (EPS) - Diluted $ 0.02 $ (0.03)
===================== =====================
Shares used in calculation of EPS - Diluted 22,991 21,343
===================== =====================
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31, 1997
1998
----------------- -----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 39,279 $ 33,566
Investments in marketable securities 16,928 20,301
Receivables 7,089 11,803
Other receivables 976 682
Deferred income taxes 2,164 2,164
Other current assets 846 925
----------------- -----------------
Total current assets 67,282 69,441
Furniture, equipment, and leasehold 9,687 10,165
improvements, net
Non-current investments in marketable 5,225 1,600
securities
Non-current deferred income taxes 2,430 2,297
Other non-current assets 728 728
----------------- -----------------
Total assets $ 85,352 $ 84,231
================= =================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and other accruals $ 1,611 $ 2,410
Accrued compensation and related costs 2,739 2,880
Deferred revenue 4,458 3,640
Income taxes 1,306 1,153
----------------- -----------------
Total current liabilities. 10,114 10,083
----------------- -----------------
Shareholders' equity:
Preferred shares, $0.01 par value; 5,000
shares authorized; none -- --
Outstanding
Common shares, $0.10 par value; 75,000
shares authorized; 22,273 shares issued
and outstanding - 1998 (22,136 - 1997) 2,228 2,214
Issued and outstanding-- 1997 (21,219--
1996)
Additional paid-in capital........ 49,795 49,133
Accumulated other comprehensive loss (228) (126)
Retained earnings 23,443 22,927
----------------- -----------------
Total shareholders' equity 75,238 74,148
----------------- -----------------
Total liabilities and
shareholders' equity $ 85,352 $ 84,231
================= =================
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months Ended March 31,
1998 1997
------------------ -----------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 516 $ (561)
Adjustments to reconcile net income (loss) to net cash provided by
operations:
Depreciation and amortization 1,089 963
Changes in:
Receivables 4,714 4,665
Other current assets (217) (187)
Accounts payable and other accruals (739) (2,079)
Accrued compensation and related costs (141) (899)
Deferred revenue 818 --
Income taxes 20 (435)
------------------ -----------------
Net cash provided by operating activities 6,060 1,467
------------------ -----------------
Investment Activities
Capital expenditures (670) (3,399)
Purchase of marketable securities (8,243) (2,084)
Maturity and sale of marketable securities 7,890 5,900
Decrease in other non-current assets -- 480
------------------ -----------------
Net cash provided by (used in) investing activities (1,023) 897
------------------ -----------------
Financing Activities
Proceeds from exercise of options and from stock purchased under the
employee stock purchase plan 676 657
------------------ -----------------
Net cash provided by financing activities 676 657
------------------ -----------------
Effect of foreign currency exchange rate changes on cash and cash
equivalents -- (35)
------------------ -----------------
Net increase in cash and cash equivalents 5,713 2,986
Cash and cash equivalents at beginning of period 33,566 30,880
================== =================
Cash and cash equivalents at end of period $ 39,279 $ 33,866
================== =================
Supplemental Disclosures of Cash Flow Information
Cash paid for income taxes, net $ 326 $ 146
================== =================
</TABLE>
The accompanying notes are an integral part of this financial information.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial information has
been prepared by TCSI Corporation ("TCSI" or the "Company") in accordance
with generally accepted accounting principles for interim financial
statements and pursuant to the rules of the Securities and Exchange
Commission for Form 10-Q. Accordingly, certain information and footnotes
required by generally accepted accounting principles for complete financial
statements have been omitted. It is the opinion of management that all
adjustments considered necessary for a fair presentation have been
included, and that all such adjustments are of a normal and recurring
nature. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for any future periods. For
further information, refer to the audited financial statements and
footnotes included in the Company's 1997 Annual Report on Form 10-K.
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.
2. Cash, Cash Equivalents, and Marketable Securities
The Company accounts for its marketable securities under Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of investments and debt securities at the time
of purchase and reevaluates such designation as of each balance sheet date.
Investments are classified as held-to-maturity when the Company has the
intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. Investments not classified as such
are classified as available-for-sale. Available-for-sale securities are
stated at fair value, with the unrealized gains and losses, net of tax,
reported in a separate component of shareholder's equity. Realized and
unrealized gains and losses from investments have been insignificant to the
results of operations and financial position of the Company.
3. Receivables and Credit Risk
Receivable balances are primarily from large, credit-worthy
customers in the telecommunications industry and are unsecured. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company does not anticipate any significant default
from a customer's inability to make a payment for products and/or services
received. Reserves are maintained for potential credit losses.
<PAGE>
Receivables balances are as follows:
(In thousands) March 31, 1998 December 31, 1997
----------------- -----------------
Billed receivables $ 6,345 $ 10,366
Unbilled receivables 1,144 1,837
Reserve for doubtful accounts (400) (400)
----------------- -----------------
$ 7,089 $ 11,803
================= =================
4. Furniture, Equipment, and Leasehold Improvements
Furniture, equipment, and leasehold improvements are stated at
cost. Depreciation is provided for furniture and equipment in amounts
sufficient to relate the cost of depreciable assets to operations over
their estimated service lives of five years and three years, respectively,
utilizing the straight-line method. Amortization is provided for leasehold
improvements in amounts sufficient to relate the cost over the shorter of
the term of the related office lease or ten years utilizing the
straight-line method.
Furniture, equipment, and leasehold improvements balances are as
follows:
<TABLE>
<CAPTION>
(In thousands) March 31, 1998 December 31, 1997
----------------- ----------------
<S> <C> <C>
Computer and lab equipment $ 15,278 $ 14,814
Furniture and fixtures 3,667 3,613
Leasehold improvements 6,753 6,660
----------------- ----------------
25,698 25,087
Less accumulated depreciation and amortization (16,011) (14,922)
----------------- ----------------
$ 9,687 $ 10,165
================= ================
</TABLE>
5. Income Taxes
The effective tax rate used in the calculation of the income tax
benefit for the periods ended March 31, 1998 and 1997 was 40 percent and 34
percent, respectively. In determining its effective tax rate for the
quarter, the Company used its estimated effective tax rate for the year. To
the extent there are differences between planned and actual net income, the
components thereof, or changes in the tax laws effecting the Company, the
effective tax rate could change.
<PAGE>
At March 31, 1998, the Company had approximately $4.6 million of
deferred tax assets. Included in this balance is approximately $0.7 million
associated with stock options. In the event these stock option related
deferred tax assets are not entirely realized, the unrealized balance would
be reversed to shareholders' equity. Realization of the remaining deferred
tax assets is dependent upon the Company generating sufficient taxable
income in future years to obtain the benefit from the reversal of temporary
differences and from tax credit carry forwards. At March 31, 1998, there
was no valuation 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.
6. Stock Based Compensation
The Company grants stock options for a fixed number of shares to
employees, consultants, and directors with an exercise price equal to the
fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and, accordingly, recognizes no compensation
expense for the stock option grants.
7. Per Share Information
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 restated 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>
Three Months Ended March 31,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Numerator:
Net income (loss) - numerator for basic and
diluted earnings (loss) per share $ 516 $ (561)
================ ================
Denominator:
Denominator for basic earnings (loss) per
share -- weighted-average shares 22,219 21,343
Effect of dilutive securities:
Employee stock options 772 --
---------------- ----------------
Denominator for diluted earnings (loss) per
share -- adjusted weighted average shares 22,991 21,343
================ ================
Basic earnings (loss) per share $ 0.02 $ (0.03)
================ ================
Diluted earnings (loss) per share $ 0.02 $ (0.03)
================ ================
</TABLE>
<PAGE>
8. Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement 130, Reporting Comprehensive Income. Statement
130 establishes new rules for the reporting and display of comprehensive
income (loss) and its components; however, the adoption of the Statement
had no impact on the Company's net income (loss) or stockholder's equity.
Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities and changes in the accumulated foreign
currency translation adjustments, which, prior to adoption of Statement
130, were reported separately in stockholder's equity, to be included in
other comprehensive loss. Prior year financial statements have been
reclassified as necessary to conform to the requirements of Statement 130.
During the first three months of 1998 and 1997 total comprehensive
income (loss) amounted to $414,000 and $(610,000), respectively.
The following table sets forth the computation of comprehensive
income for the three months ended March 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Shares Paid-in Comprehensive Retained
Income (loss) Capital Loss Earnings Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1997 $ -- $ 2,214 $ 49,133 $ (126) $ 22,927 $ 74,148
Comprehensive income (loss)
Net income 516 -- -- -- 516 516
Other comprehensive losses:
Unrealized loss on
securities (102) -- -- (102) -- (102)
=================
Comprehensive income $ 414 -- -- -- -- --
=================
Common stock issued under
employee stock options and
purchase plan 14 662 -- -- 676
======================================================================
Balances, March 31, 1998 $ 2,228 $ 49,795 $ (228) $ 23,443 $ 75,238
======================================================================
</TABLE>
9. Litigation
On November 4, 1996, a purported class action complaint was filed
in the Superior Court of the State of California, Alameda County, by Albert
J. Copperstone and Joseph Siciliano against the Company, certain of its
officers and directors, and certain underwriters (the "Copperstone State
Action"). The complaint in the Copperstone State Action alleges that during
a purported class period of October 11, 1995 - 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 June 5, 1998.
On November 20, 1996, a purported derivative action complaint was
filed in the Superior Court of the State of California, Alameda County, by
Mike Tinkler against the Company's Board of Directors (the "Tinkler
Derivative Action"). The complaint in the Tinkler Derivative Action also
<PAGE>
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. Defendants
will file a demurrer.
On September 24, 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by Copperstone and Siciliano against the Company and certain of
its officers and directors (the "Copperstone Federal Action"). The
Copperstone Federal Action contains virtually identical factual allegations
as the Copperstone State Action, and alleges violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The
plaintiffs in the Copperstone Federal Action also seek damages of an
unspecified amount. On January 14, 1998, defendants moved to dismiss the
Copperstone Federal Action. On April 20, 1998 the Court ordered that
plaintiffs seek class certification prior to adjudicating defendants'
motion to dismiss.
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.
On April 24, 1998, a former employee served TCSI Corporation with
a complaint filed in Alameda County Superior Court alleging wrongful
termination. The former employee seeks relief for pay, compensatory
damages, punitive damages, and attorneys' fees. TCSI Corporation is
preparing a response.
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information contained herein, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. The forward-looking statements
contained herein are subject to certain factors that could cause actual results
to differ materially from those reflected in the forward-looking statements.
Such factors include, but are not limited to, those discussed below and in the
Company's Form 10-K for the fiscal year ended December 31, 1997.
Overview
TCSI Corporation provides integrated software products and
services for the global telecommunications industry. Since its inception in
1983, a significant portion of the Company's revenues have been earned from
telecom service providers and equipment manufacturers. Since 1993, the
Company's telecom growth has been led by sales of SolutionCore(TM) and
related products and services. Prior to 1997, the Company also earned
revenue from licensing embedded software contained in wireless products and
from the development of system solutions for customers in the insurance,
healthcare, and transportation industries. During the second half of 1996,
the Company divested its non-telecom product lines by licensing its
embedded software product lines and terminating its final
transportation-related development agreement. As a result, in 1997, the
Company focused almost entirely on offering software solutions to the
telecom industry.
The Company provides services to customers under level-of-effort
and fixed price contracts. Service revenues are generally recognized on the
percentage-of-completion method based on the percentage of contract costs
incurred in relation to total estimated contract costs. Changes to total
estimated contract costs, if any, are recognized in the period such changes
are determined. The scope and size of the Company's system solutions can be
large and complex, typically requiring delivery over several quarters. From
time-to-time, customers have established payment milestones, which can be
achieved only after completion of the related services. In limited cases,
some customers have disputed fees charged for services provided. Although
the Company 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.
<PAGE>
The licensing and implementation of the Company's software
products generally involves a significant commitment of resources by
prospective customers. As a result, the Company's sales process is subject
to delays associated with lengthy approval processes typically accompanying
such significant capital expenditures. Accordingly, the Company is
substantially dependent on its customers' decisions as to the timing and
level of expenditures and resource commitments. The variability in the
timing of such expenditures could cause material fluctuations in the
Company's business, operating results, and financial condition. In this
regard, the consistency of the Company's 1998 and 1997 quarterly results
have been adversely affected by delays in the purchase of software
licenses.
A substantial portion of the Company's revenues is derived from
the sale of the Company's software products and services to major telecom
service providers and equipment manufacturers. Due to the complex nature of
the advanced element, network, and service management systems being
developed, successful deployment of these systems can contain significant
technological risks. The Company has in the past relied and will in the
future rely on its development and implementation expertise.* Additionally,
development and 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.*
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.*
- ------------------------------------------------------------
* 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 16 for a
discussion of factors that could affect future performance.
<PAGE>
Results of Operations
Revenues. The Company generates revenues from the sale of its
software products and related services to the telecom industry. Total
Company revenues for the three months ended March 31, 1998 increased 12
percent to $11.0 million, while telecom revenues increased 18 percent from
$9.4 million to $11.0 million. NEC, Lucent, and Italtel were the largest
customers for the quarter, accounting for 39, 13, and 13 percent of
quarterly revenues, respectively. Sales to NEC during the quarter resulted
from work performed under five separate and distinct projects. License
revenue improved to $2.9 million, 26 percent of quarterly revenues. The
Company expects that runtime license revenue will continue to vary from
quarter to quarter. License revenues for the quarter were split almost
equally between development and runtime licenses. Italtel, Hughes,
Motorola, and Lucent accounted for 75 percent of TCSI's license revenues.*
Revenues from the Asia-Pacific and European regions increased to
$7.9 million for the three months ended March 31, 1998 compared to $6.8
million for the comparable 1997 period. The increase is attributable to
continued relationships with existing customers, resulting in revenues from
follow-on contracts. Revenues from the Americas for the three months ended
March 31, 1998 were consistent with revenues for the same period in 1997.
The Company expects the geographical mix of revenues to vary from period to
period as it responds to global buying habits and develops relationships
with new and existing partners and channels.*
To date, a portion of revenues has been concentrated among a
limited number of customers. For the three months ended March 31, 1998, the
concentration of revenue from the Company's five largest customers
increased to 77 percent from 61 percent for the same period in 1997. The
revenue from these customers represent many separate and distinct projects
that are geographically dispersed throughout the world. There can be no
assurance that such customers will continue to place orders with the
Company which equal or exceed the comparable levels for prior periods.* See
"Factors Affecting Operating Results and Market Price of Stock - Customer
Concentration."
Direct Costs of Services. The Company incurs direct costs in the
development and deployment of its 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, IS
support, and depreciation. Costs of services declined 11 percent to $4.6
million for the three months ended March 31, 1998 from $5.1 million for the
same period in 1997. As a percentage of service revenues, costs of services
were 56 percent for the three months ended March 31, 1998 compared to 66
percent for the same period in 1997. The cost of service percentage
declined due to increased service revenues and better utilization and
efficiency of resources which resulted in lower cost. The Company plans to
continue its efforts to control costs and expenses.*
- ------------------------------------------------------------
* 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 16 for a
discussion of factors that could affect future performance.
<PAGE>
Product Development. Product development includes employee
compensation, subcontractor fees, training costs, and other product
development costs, including an allocation for benefits, facilities, IS
support, and depreciation. For the three months ended March 31, 1998, the
Company invested $2.5 million or 23 percent of revenues on internally
funded product development in 1998 compared with $1.5 million or 15 percent
of revenues in 1997. In 1997, the funds were used primarily for the
development of the Company's SolutionCore(a) product, which included the
fifth release of Object Services Package (OSP) and new releases of related
development tools. The Company expects to continue to invest in
SolutionCore, as well as its new components-based applications,
SolutionSuites(a), throughout 1998.*
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. For the three months ended March 31, 1998, selling, general, and
administrative expenses decreased 20 percent to $3.8 million from $4.8
million for the same period in 1997. As a percentage of revenue, selling,
general, and administrative expense was 35 percent for the three months
ended March 31, 1998 compared to 49 percent of revenue in the first quarter
of 1997. The decrease in spending is due to lower headcount and a
reallocation of telephone and Information Service expenses to their
corresponding user departments. Telephone and Information Services were
charged to general and administrative expense in prior periods.
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 40 percent and 34 percent for
the three months ended March 31, 1998 and 1997, respectively. The Company
incurred a tax provision of $0.3 million on pre-tax income of $0.9 million
for the quarter ended March 31, 1998 compared to a tax benefit of $0.3
million on a pre-tax loss of $0.9 million for the quarter ended March 31,
1997.
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 both, 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.
Liquidity and Capital Resources. For the three months ended March
31, 1998, net cash generated from operating activities was $6.1 million
compared to $1.5 million for the same period in 1997. The increase in cash
generated from operations is primarily due to net income in 1998 and
changes in accounts payable, accrued compensation, and deferred revenue.
The increase is primarily due to payment of year-end liabilities related to
the build-out of the Alameda facility in the first quarter of 1997 and
reduction in the bonus and commission payout in the first quarter of 1998
- ------------------------------------------------------------
* 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 16 for a
discussion of factors that could affect future performance.
<PAGE>
compared to the same period in 1997. 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-worth customers and, as a result, the Company does not anticipate
any significant default due to a customer's inability to make a payment for
products and/or services received.*
For the three months ended March 31, 1998, net cash used for
investment activities was $1.0 million compared to $0.9 million generated
from investment activities for the comparable 1997 period. The Company
purchased $8.2 million of marketable securities while $7.9 million of
marketable securities matured, compared to the purchase of $2.0 million and
$5.9 million of maturities for the comparable period in 1997. Cash provided
by financing activities remained the same at $0.7 million for the three
months ended March 31, 1998 and 1997 and was the result of options
exercised or stock purchased under the Employee Stock Purchase Plan.
- ------------------------------------------------------------
* 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 16 for a
discussion of factors that could affect future performance.
<PAGE>
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 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.
<PAGE>
Lengthy Sales and Implementation Cycles
The Company's products are typically intended for use in
applications that may be critical to a customer's business. The licensing
and implementation of the Company's software products generally involves a
significant commitment of resources by prospective customers. As a result,
the Company's sales process is often subject to delays associated with
lengthy approval processes that typically accompany significant capital
expenditures. For these and other reasons, the sales cycles associated with
the licensing of the Company's products is often lengthy (averaging
approximately nine to twelve months) and subject to a number of significant
delays over which the Company has little or no control. In addition, the
Company does not recognize service revenues until the services are
rendered. The time required to implement the Company's products can vary
significantly with the needs of its customers and is generally a process
that extends for several months. Because of their complexity, larger
implementations may take multiple quarters to complete. From time to time
the Company has provided services to implement certain large projects, and,
although no contractual basis exists for the customer to do so, certain
customers have delayed payment of a portion of service fees and in some
cases have disputed the fees charged. There can be no assurance the Company
will not experience additional delays or disputes regarding payment in the
future, particularly if the Company receives orders for large, complex
installations. Therefore, the Company believes that its quarterly and
annual operating results and financial condition are likely to vary
significantly in the future.
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 software products and
services have in the past accounted for and are expected to continue to
account for a substantial majority of the Company's revenues. Accordingly,
the Company's future business, operating results, and financial condition
are significantly dependent upon the continued market acceptance of its
portfolio of products and services. There can be no assurance that the
Company's technology will continue to achieve market acceptance or that the
Company will be successful in developing, introducing, or marketing
<PAGE>
improvements to its products. Moreover, the life cycle of distributed
object products is difficult to estimate due in large part to the recent
changes in the telecom market, the effect of future product enhancements,
and competition. A decline in the demand for the Company's technology as a
result of new or existing competing technologies, or other factors would
have a material adverse effect on the Company's business, operating
results, and financial condition.
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
and in the first quarter of 1998, 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.
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.
<PAGE>
Implementation Risks
As characteristic of companies providing software solutions to the
telecom industry, the complexities involved in implementing the Company's
software solutions entail risks of performance shortfalls. In some cases
the Company has agreed to accept some financial responsibility, in the form
of negotiated penalty amounts, should the Company's products not meet
specifications or cause customer system downtime. There can be no assurance
that the Company will not encounter delays or other difficulties due to
such complexities. Because the Company's customer base consists of a
relatively limited number of customers, the 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 the Americas accounted for 72 percent of the
Company's total revenues for the period ended March 31, 1998. 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 of 1997,
unexpected changes in regulatory requirements, including a slowdown in the
rate of privatization of telecom service providers, reduced protection for
intellectual property rights in some countries, potentially adverse tax
consequences, tariffs, and other trade barriers. In addition, 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
<PAGE>
risk of exchange rate losses from foreign currency denominated sales, the
Company may engage in hedging transactions. There can be no assurance that
such hedging transactions will not have a material adverse effect on the
Company's business, operating results, and financial condition.
Dependence on Telecommunications Carriers; Government Regulation
Many of the Company's principal customers are major telecom
carriers. Such companies operate within the telecom industry, which has
recently been characterized by intense competition in the development of
new technology, equipment, and customer services. The Company believes that
large telecom carriers have become increasingly cautious in making
significant capital expenditures, due in part to increased competition from
smaller, rapidly developing alternative carriers, decreasing prices for
telecom services and equipment, and regulatory rate structures that have
become less dependent on the level of carriers' capital expenditures. These
and other factors have in the past and may in the future cause such
customers to experience significant fluctuations in capital expenditures
for network management software solutions.
The telecom industry is subject to extensive regulation in the
United States and other countries, and the Company's customers generally
must receive regulatory approvals in conducting their businesses. Although
the telecom industry has recently been characterized by government
deregulation, there can be no assurance that deregulatory trends will
continue or that reregulation will not occur. Government regulatory
policies are likely to continue to have a major impact on the Company's
ability to attract and retain customers. For example, regulatory
authorities may continue to oversee the pricing of new and existing telecom
services, which, in turn impact carriers' ability to make significant
capital expenditures. The enactment by federal, state, or foreign
governments of new laws or regulations or change in the interpretation of
existing regulations could adversely affect the Company's customers, and
thereby affect the Company's business, operating results, and financial
condition.
Competition
The Company offers products and services in the evolving market
for telecommunications Operation Support System (OSS) software. Competition
in this market is intense and is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory
requirements, frequent new product introductions, and rapid changes in
customer requirements. To maintain and improve its competitive position,
the Company must continue to develop and introduce, in a timely and
cost-effective manner, new services, products, and product features that
keep pace with competitive offerings by telecom companies and independent
software vendors, technological developments, and emerging industry
standards in the development of telecommunications network management
software solutions. The principal competitive factors in the Company's
market are quality, performance, price, customer support, corporate
reputation, and product features such as scalability, interoperability,
functionality, customizability, and ease of use.
<PAGE>
The Company's current and prospective competitors offer a variety
of solutions to address OSS needs. The Company faces competition in each of
the three functional areas the Company believes are necessary for the
delivery of complete OSS software telecom applications platform,
configurable applications, and custom services. The Company's SolutionCore
and SolutionSuites product lines enable the Company to provide its
customers with both application development software and telecom
applications. Because certain of the Company's competitors focus only on
one functional area of OSS software, such competitors may be in a position
to develop competitive products targeted solely at the segment they serve.
These competitors include major communications service providers, RBOCs,
and equipment and computer manufacturers, each of which may have
substantially greater financial, manufacturing, technical, marketing,
distribution, greater name recognition, longer-standing relationships with
customers than the Company and other resources. Furthermore, many of the
Company's current and potential customers continuously evaluate whether to
design, develop, and support internally the software solutions provided by
the Company, thereby obviating the need for relying on an outside vendor
such as the Company. There can be no assurance that the Company's current
or potential competitors will not develop products comparable or superior
to those developed by the Company or adapt more quickly than the Company to
new technologies, evolving industry standards, new product introductions,
or changing customer requirements.
Rapid Technological Change; Need to Manage Product Transitions
The market for the Company's products is characterized by rapidly
changing technologies, evolving industry standards, changing regulatory
environments, frequent new product introductions, and rapid changes in
customer requirements. The introduction of products embodying new
technologies and the emergence of new industry standards and practices can
render existing products obsolete and unmarketable. As a result, the life
cycles of the Company's products are difficult to estimate. This poses
substantial risks for the Company because the Company's products and
software solutions typically have lengthy development and sales cycles. The
Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective
basis, new products and product features that keep pace with technological
developments and emerging industry standards and address the evolving needs
of its customers. There can be no assurance that the Company will be
successful in developing and marketing new products or product features
that respond to technological change or evolving industry standards, that
the Company will not experience difficulties that could delay or prevent
the successful development, introduction, and marketing of these new
products and features, or that its new products or product features will
adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons,
to develop and introduce enhancements of existing products or new products
in a timely manner, the Company's business, operating results, and
financial condition will be materially adversely affected.
The Company's products are designed to operate on a variety of
hardware and software platforms and with a variety of databases employed by
its customers in their networks. The Company must continually modify and
enhance its products to keep pace with changes in hardware and software
platforms and database technology. As a result, uncertainties related to
the timing and nature of new product announcements, introductions or
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
position. Such acquisitions would subject the Company to numerous risks,
including risks associated with the integration into the Company of new
employees and technology. Moreover, the negotiation and acquisition of such
transactions involve the diversion of substantial management resources and
the evaluation of such opportunities requires substantial diversion of
engineering and technological resources. In addition, transactions
involving the issuance by the Company of common stock or other securities
could result in immediate and substantial dilution to the Company's
existing shareholders, large one-time write-offs, or the creation of
goodwill or other intangible assets that could result in amortization
expenses. To date, the Company has not consummated an acquisition
transaction. The failure to successfully evaluate, negotiate, and effect
acquisition transactions could have a material adverse effect on the
Company's business, operating results, and financial condition.
Potential Volatility of Stock Price
The market price of the shares of the Company's Common Stock has
been and is likely to continue to be highly volatile and may be
significantly affected by factors such as actual or anticipated
fluctuations in the Company's business, operating results, and financial
condition, announcements of technological innovations, new products, or new
contracts by the Company or its competitors, developments with respect to
proprietary rights, adoption of new accounting standards affecting the
software industry, general market conditions, and other factors. In
addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market
prices for the common stocks of technology companies. These types of broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has
often been initiated against such company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results, and financial condition. In this regard, in late 1996,
two 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
<PAGE>
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
<PAGE>
Item 1. Legal Proceedings
On November 4, 1996, a purported class action complaint was filed
in the Superior Court of the State of California, Alameda County, by Albert
J. Copperstone and Joseph Siciliano against the Company, certain of its
officers and directors, and certain underwriters (the "Copperstone State
Action"). The complaint in the Copperstone State Action alleges that during
a purported class period of October 11, 1995 - 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 June 5, 1998.
On November 20, 1996, a purported derivative action complaint was
filed in the Superior Court of the State of California, Alameda County, by
Mike Tinkler against the Company's Board of Directors (the "Tinkler
Derivative Action"). The complaint in the Tinkler Derivative Action also
names the Company as a nominal defendant. The complaint in the Tinkler
Derivative Action alleges that as a result of the facts alleged in the
Copperstone State Action, defendants breached their fiduciary duties to the
Company, violated California law, and were unjustly enriched. The plaintiff
in the Tinkler Derivative Action seeks damages of an unspecified amount. On
February 24, 1998, plaintiff filed a second amended complaint. Defendants
will file a demurrer.
On September 24, 1997, a purported class action complaint was
filed in the United States District Court for the Northern District of
California by Copperstone and Siciliano against the Company and certain of
its officers and directors (the "Copperstone Federal Action"). The
Copperstone Federal Action contains virtually identical factual allegations
as the Copperstone State Action, and alleges violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The
plaintiffs in the Copperstone Federal Action also seek damages of an
unspecified amount. On January 14, 1998, defendants moved to dismiss the
Copperstone Federal Action. On April 20, 1998 the Court ordered that
plaintiffs seek class certification prior to adjudicating defendants'
motion to dismiss.
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.
On April 24, 1998, a former employee served TCSI Corporation with
a complaint filed in Alameda County Superior Court alleging wrongful
termination. The former employee seeks relief for pay, compensatory
damages, punitive damages, and attorneys' fees. TCSI Corporation is
preparing a response.
<PAGE>
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit Number Document Description Page Number
==============================================================================
27 Financial Data Schedule 29
(b) Reports on Form 8-K filed in the first quarter of 1998.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
TCSI Corporation
-------------------------------------------
(Registrant)
May 13, 1998 /s/ Arthur H. Wilder
- ---------------- --------------------
Date Arthur H. Wilder, Chief Financial Officer, Secretary, and
Treasurer (Principal Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<NAME> TCSI Corporaton
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 85,352
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