<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-19377
-------
TCSI CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 68-0140975
- ------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1080 Marina Village Parkway, Alameda, CA 94501
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(510) 749-8500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __________
---
22,577,012 shares of Common Stock of the Registrant were outstanding as of May
5, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
March 31, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Three months ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (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 24
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,515 $ 22,308
Marketable securities 12,220 19,371
Receivables 11,549 11,570
Other receivables 812 922
Deferred tax assets 2,941 2,941
Other current assets 1,703 644
---------------- ---------------
Total current assets 58,740 57,756
Furniture, equipment and leasehold improvements, net 10,061 10,599
Noncurrent marketable securities 5,304 7,304
Noncurrent deferred tax assets 749 749
Other assets 4,121 4,421
---------------- ---------------
Total Assets $ 78,975 $ 80,829
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,187 $ 4,446
Accrued liabilities 3,895 3,198
Deferred revenue 2,178 1,379
Income taxes payable 817 662
---------------- ---------------
Total current liabilities 9,077 9,685
---------------- ---------------
Shareholders' equity:
Preferred Stock, par value $0.01 per share; 5,000,000 shares authorized;
none issued and outstanding - -
Common Stock, par value $0.10 per share; 75,000,000 shares authorized;
22,577,012 and 22,452,606 shares issued and outstanding, at March 31,
1999 and December 31, 1998, respectively 2,259 2,245
Additional paid-in capital 51,030 50,737
Accumulated other comprehensive income (loss) 15 (244)
Retained earnings 16,594 18,406
---------------- ---------------
Total shareholders' equity 69,898 71,144
---------------- ---------------
$ 78,975 $ 80,829
================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Services $ 6,457 $ 8,131
Software licensing fees 3,612 2,874
--------------- ---------------
Total revenues 10,069 11,005
--------------- ---------------
Costs and expenses:
Services 4,932 4,558
Product development 3,963 2,543
Selling, general and administrative 3,668 3,810
--------------- ---------------
Total costs and expenses 12,563 10,911
--------------- ---------------
Income (loss) from operations (2,494) 94
Interest income 682 766
--------------- ---------------
Income (loss) before income tax expense (1,812) 860
Income tax expense - 344
--------------- ---------------
Net income (loss) $ (1,812) $ 516
=============== ===============
Earnings (loss) per share (EPS) - Basic $ (0.08) $ 0.02
=============== ===============
Shares in calculation of (EPS) - Basic 22,538 22,219
=============== ===============
Earnings (loss) per share (EPS) - Diluted $ (0.08) $ 0.02
=============== ===============
Shares used in calculation of (EPS) - Diluted 22,538 22,991
=============== ===============
</TABLE>
4
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (1,812) $ 516
Adjustments to reconcile net (income) loss to net cash provided by operating activities:
Depreciation 641 719
Amortization 749 370
Changes in assets and liabilities:
Receivables 21 4,714
Other receivables 110 (294)
Other current assets (1,059) 77 (217)
Accounts payable (2,259) (739)
Accrued liabilities 697 (141)
Deferred revenue 799 818
Income taxes payable 155 20
------------ ------------
Net cash provided by (used in ) operating activities ( 1,958) 6,060
------------ ------------
Cash flows from investing activities:
Capital and leasehold improvement expenditures, net (552) (670)
Purchases of marketable securities (4,937) (8,243)
Maturates and sales of marketable securities 14,088 7,890
------------ ------------
Net cash provided by (used in) investing activities 8,599 (1,023)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock 307 676
------------ ------------
Net cash provided by financing activities 307 676
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 259 -
------------ ------------
Net increase in cash and cash equivalents 7,207 5,713
Cash and cash equivalents at the beginning of the period 22,308 33,566
------------ ------------
Cash and cash equivalents at the end of the period $ 29,515 $ 39,279
============ ============
Supplemental disclosures of cash flow information:
Cash paid (refunds received) during the period for income taxes $ (156) $ 326
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated interim financial statements of ("TCSI" or the
"Company"), included herein have been prepared on the same basis as the December
31, 1998 audited consolidated financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary to a fair statement of the
results for the interim periods presented. The results of operations for current
interim periods are not necessarily indicative of results to be expected for the
current year or for any other period. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the fiscal year ended December 31, 1998 included in the
Company's Annual Report on Form 10-K (File No. 0-19377).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain 1999 balances have been reclassified to conform to the current year
presentation.
NOTE 2 - RECEIVABLES AND CREDIT RISK
Receivable balances are primarily from large, credit-worthy customers in
the telecommunications industry. The Company performs ongoing credit evaluations
of its customers and does not require collateral. The Company does not
anticipate any significant default from a customer's inability to make a payment
for products received and/or for services rendered. Allowances are maintained
for potential credit losses.
Receivables consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- -------------
(IN THOUSANDS)
--------------
(Unaudited)
<S> <C> <C>
Billed receivables $ 7,064 $ 8,665
Unbilled receivables 4,885 3,305
Allowance for doubtful accounts (400) (400)
----------- -----------
$ 11,549 $ 11,570
=========== ===========
</TABLE>
NOTE 3 - FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
Furniture, equipment, and leasehold improvements are stated at cost.
Straight-line depreciation is provided for furniture and equipment in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives of three to five years. Amortization is provided for
leasehold improvements over the life of the lease utilizing the straight-line
method.
6
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TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Furniture, equipment, and leasehold improvement balances consist of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -----------
(IN THOUSANDS)
-------------
(Unaudited)
<S> <C> <C>
Computer and lab equipment $ 18,987 $ 18,464
Furniture and fixtures 4,354 4,325
Leasehold improvements 6,664 6,663
30,005 29,452
Accumulated depreciation and amortization (19,944) (18,853)
------------ --------
$ 10,061 $ 10,599
============ ========
</TABLE>
NOTE 4 - INCOME TAXES
At March 31, 1999, the Company had approximately $3.7 million of net
deferred tax assets. The realization of these deferred tax assets is dependent
upon the Company generating sufficient taxable income from future years in
appropriate jurisdictions to obtain benefit from the reversal of temporary
differences and from net operating loss and tax credit carryforwards. The amount
of net deferred tax assets considered realizable is subject to adjustment in
future periods if estimates of future taxable income are reduced, which would
negatively impact the Company's income tax provision in future periods.
NOTE 5 - NET INCOME (LOSS) PER SHARE
Per Share Information
Basic earnings (loss) per share is computed using 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 following table sets forth the computation
of basic and diluted earnings (loss) per share:
7
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
NUMERATOR:
Numerator for basic earnings (loss)
per Share $(1,812) $ 516
======= =======
DENOMINATOR:
Denominator for basic earnings (loss) per
Share - weighted-average shares 22,538 22,219
Effect of dilutive securities-employee stock options - 772
------- -------
Denominator for diluted earnings (loss) per share 22,538 22,991
======= =======
Earnings (loss) per share-basic and diluted $(0.08) $ 0.02
======= =======
</TABLE>
Since the Company had a net loss in the three months ended March 31, 1999.
Weighted-average common shares (with an exercise price greater than the average
market price of the Company's common stock) which were not included in the March
31, 1999 computation because their effects would be antidilutive were as
follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
------------------------ ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Weighted-average common shares 65 -
Weighted-average exercise price $ 2.05 $ -
======================== ============================
</TABLE>
Antidilutive securities:
The following antidilutive securities consists of option not included in
the computation of diluted loss per share because the exercise price of each of
these options was greater than the average market price of the Company's common
stock during the period:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
------------------------ --------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited) (Unaudited)
<S> <C> <C>
Absolute or weighted options outstanding at end of period 2,940 220
======================== ==========================
Weighted-average exercise price $ 5.77 $ 9.12
======================== ==========================
</TABLE>
8
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
NOTE 6 - COMPREHENSIVE INCOME/(LOSS)
The following is a summary of comprehensive income (loss) for the three-
month period ended March 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
--------------------- -------------------------
(IN THOUSANDS)
--------------
Unaudited Unaudited
<S> <C> <C>
Net income (loss) $ (1,812) $ 516
Translation gain 260 -
Unrealized gains (losses) on marketable securities - (102)
--------------------- -------------------------
Comprehensive income (loss) $ (1,552) $ 414
===================== =========================
</TABLE>
NOTE 7 - LITIGATION
On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice.
On 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 complaint in 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 seek damages of an unspecified amount. On April 20,
1998, the Court ordered plaintiffs to certify a class. Plaintiffs sent notice to
the class and the opt out period has expired. On May 5, 1999, the Company
announced that it has reached a preliminary settlement of the Copperstone State
Action and the Copperstone Federal Action. The settlement involves payment of an
amount comprised of proceeds from the Company's Director and Officer insurance
policies. Neither the Company nor the individuals involved is contributing to
the settlement of the actions. The settlement will not have a material effect on
TCSI's financial position or on its financial results of operations. The
settlement is subject to court approval.
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 and the Company as a nominal defendant
(the "Tinkler Derivative Action"). The second amended complaint in the Tinkler
Derivative Action alleges that as a result of the facts alleged in the
Copperstone State Action,
9
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
defendants breached their fiduciary duties. On December 9, 1998, defendants
answered the second amended complaint.
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 vigorously
those actions that do not settle. The Company also is a party as a defendant in
various lawsuits, contractual disputes, and other legal claims, the results of
which are not presently determinable. In the opinion of management, resolution
of these legal actions is not expected to have a material adverse effect on the
financial position of the Company. However, depending on the amount and timing,
an unfavorable resolution of any of these matters could materially affect the
Company's future results of operations or cash flows in a particular period.
10
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In addition to historical information contained herein, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. The forward-looking statements
contained herein are subject to certain factors that could cause actual results
to differ materially from those reflected in the forward-looking statements.
Such factors include, but are not limited to, those discussed below and in the
Company's Form 10-K for the fiscal year ended December 31, 1997.
OVERVIEW
TCSI Corporation provides integrated software products and services for the
global telecommunications ("telecom") industry. Since its inception in 1983, a
significant portion of the Company's revenues has been earned from telecom
service providers and equipment manufacturers. Since 1993, the Company's telecom
growth has been led by sales of SolutionCore and related products and services.
Prior to 1997, the Company also earned revenues from licensing embedded software
contained in wireless products and from the development of system solutions for
customers in the insurance, healthcare, and transportation industries. During
the second half of 1996, the Company divested its non-telecom product lines by
licensing its embedded software product lines and terminating its final
transportation-related development agreement. As a result, since 1997, the
Company has focused almost entirely on offering software solutions to the
telecom industry.
The Company provides services to customers under level-of-effort and fixed
price contracts. Service revenues are generally recognized on the percentage-of-
completion method based on the percentage of contract costs incurred in relation
to total estimated contract costs calculated on a labor hour basis. Changes in
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.
Certain contracts contain payment milestones, which can be achieved only after
completion of the related services. In limited cases, some customers have
disputed fees charged for services provided. Although the Company has been and
is under no obligation to compromise its billed amounts, the Company has
periodically reduced its accounts receivable when such disputes could not be
amicably resolved and may do so in the future. Additionally, a portion of the
Company's revenues has been, and is expected to continue to be, derived from
software licensing fees from a limited number of customers. For fixed price
contracts, the Company recognizes revenues for services and software licensing
fees using the percentage-of-completion method. The Company recognizes revenues
under time-and-material-type contracts as the services are performed.
Additionally, the Company also licenses software to customers under contracts,
which do not require significant production, modification, or customization of
software. The Company recognizes revenues under these contracts when a non-
cancelable license agreement has been signed, the product has been shipped, the
fees are fixed and determinable, collectibility of the license fees is probable,
and vendor-specific objective evidence of fair value exists to allocate the
total fee to the elements of the arrangement.
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 1999
and 1998 quarterly results have been adversely affected by delays in the
purchase of software licenses and related services.
11
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
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.
RESULTS OF OPERATIONS
Revenues. The Company generates revenues from licensing its software
products and performing related services to the telecom industry. Total
revenues for the three months ended March 31, 1999 decreased 9% to $10.1
million, from $11.0 million for the comparable 1998 period. Two customers
accounted for more than 10% of the Company's revenue during the three months
ended March 31, 1999, contributing 43% and 11% respectively. Revenues from
services continued a downward trend to $6.5 million for the quarter ended March
31, 1999 from $8.1 million for comparable 1998 period. The downward trend may
continue until the Company's existing and future customers increase their
development efforts. Revenue from software licensing fees increased by 19% from
$2.9 million to $3.6 million, or 36% of total revenues for the three months
ended March 31, 1999. Runtime license revenue was again the largest component.
The Company expects that runtime license revenues will continue to vary from
quarter to quarter. Motorola, SEMA and Italtel accounted for the largest
portion of quarters license revenue.
Revenues from the Asia-Pacific region decreased to $3.7 million for the
three months ended March 31, 1999 from $6.1 million for the comparable 1998
period. Revenues declined as the result of completing many of the Asia-Pacific
follow-on contracts late last year. Revenues from the America region increased
to $3.7 million for the three months ended March 31, 1999 from $3.1 million for
the comparable 1998 period. The increase is attributable to a Motorola source
code buy-out and continued follow-on contract revenues with Lucent, AT&T and
Bell Atlantic. Revenues from the Europe region increased to $2.7 million for
the three months ended March 31, 1999, compared to $1.8 million for the
comparable 1998 period. The Europe region benefited from some initial sales of
Worldwin product line. The Company generally recognizes service revenues
involving design, development, testing and deployment over a twelve- to
eighteen-month period. The Company expects
12
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
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, 1999, the concentration of
revenues from the Company's five largest customers decreased to 71% from 77% for
the comparable 1998 period. The revenues from these customers represent many
separate and distinct projects that are geographically dispersed throughout the
world. There can be no assurance that such customers will continue to place
orders with the Company which will equal or exceed the comparable levels for
prior periods. (See "Certain Factors That May Affect Future Results and Market
Price of Stock-Customer Concentration")
Costs of Services. The Company incurs direct costs in the development and
deployment of its customers' software solutions. The major components of direct
costs are employee compensation, subcontractor fees, training costs, and other
billable direct costs, including travel expenses. Direct costs also include an
allocation for benefits, facilities, telephone expenses, information systems
support, depreciation, and amortization of intangibles. Costs of services for
the three months ended March 31, 1999 increased slightly to $4.9 million from
$4.6 million in the comparable 1998 period. As a percentage of service revenues,
costs of services were 76% of revenues from services for the three months ended
March 31, 1999 compared to 56% for the comparable 1998 period. The cost of
service percentage may remain or decrease from first quarter 1999 levels since
existing and future customers are beginning to increase their development
efforts.
Product Development. Product development expenses include employee
compensation, subcontractor fees, training costs, and other product development
costs for existing and potential new products, along with an allocation for
benefits, facilities, telephone expenses, information systems support, and
depreciation. For the three months ended March 31, 1999, the Company invested
$4.0 million or 40% of revenues on product development compared with $2.5
million or 23% of revenues for the comparable 1998 period. This is the first
quarter that contains incremental expenditures associated with the development
engineers obtained in conjunction with the acquisition of the NMO division of
GTE this past December. It also includes one-time transitional personnel
expenses for people on loan to TCSI during the first quarter of 1999. We
anticipate that development costs for the remainder of 1999 will return to
normal levels. The Company expects to continue to invest in SolutionCore, as
well as its new component-based applications, SolutionSuites and WorldWin.
There can be no assurance, however, that the Company's product development
spending will result in the successful introduction of new products.
Selling, General, and Administrative Expenses. Selling expenses include
sales and marketing, employee compensation, promotional material, trade shows,
travel, and facilities expenses. General and administrative expenses include
compensation costs related to executive management, finance, and 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, 1999, selling, general, and administrative expenses decreased 3%
to $3.7 million from $3.8 million for the comparable 1998 period. Selling,
general, and administrative expenses were 36% of revenues for the three months
ended March 31, 1999 compared to 35% of revenues in the comparable 1998 period.
The decrease in spending is due to lower headcount and related expenses. We
place great importance on controlling costs and managing the selling, general,
and administrative expenses.
13
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
Income Tax Provision (Benefit). At March 31, 1999, the Company had
approximately $3.7 million of net deferred tax assets. The realization of
these deferred tax assets is dependent upon the Company generating sufficient
taxable income from future years in appropriate jurisdictions to obtain
benefit from the reversal of temporary differences and from net operating loss
and tax credit carryforwards. The amount of net deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced, which would negatively impact the Company's income
tax provision in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities was $2.0 million for the three months
ended March 31, 1999 compared to net cash provided by operating activities of
$6.0 million for the comparable 1998 period. The increase in cash used for
operations was primarily due to the 1.8 million loss for the three months ended
March 31, 1999 and changes to receivables, other current assets, accounts
payable and accrued liabilities. The loss is primarily attributable to payment
of amounts related to the purchase of the NMO division from GTE and
prepayments related to multiple partnering agreements signed during the quarter.
Investing Activities
Net cash provided by investing activities was $8.6 million for the three
months ended March 31, 1999 compared to net cash used in investing activities of
$1.0 million for the comparable 1998 period. The Company purchased $4.9 million
of marketable securities while $14.0 million of marketable securities matured,
compared to the purchase of $8.2 million and $7.9 million of maturities for the
comparable period in 1998. Working capital increased $1.6 million to $49.7
million. The increase is primarily due to the proceeds from maturity of long-
term marketable securities that were reinvested in short-term instruments. In an
effort to mitigate interest rate risk (as a result of interest rates decreasing
approximately 75 basis points in the fourth quarter of 1998), the weighted
average maturity date of the Company's investment portfolio was reduced to
benefit from anticipated future higher interest rates, as indicated by the
futures markets in the first quarter of 1999.
Financing Activities
Net cash provided by financing activities was $0.3 million for the three
months ended March 31, 1999 compared to $0.7 million for the comparable 1998
period. The decrease was the result of a decrease in stock options exercised and
stock purchased pursuant to the Employee Stock Purchase Plan which is a function
of market conditions and investment decisions made by employees.
As of March 31, 1999, the Company had cash and cash equivalents and
marketable securities of $47.0 million. The Company believes that existing cash
balances (including cash equivalents and marketable securities), together with
other potential sources of liquidity, including cash flows from operating
activities, will provide adequate cash to fund its operations for at least the
next twelve months.
14
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
Statements in this report which are prefaced with words such as "expects,"
"anticipates," "believes" and similar words and other statements of similar
sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances which may or may not be within the Company's control and as to
which there can be no firm assurances given. These forward-looking statements,
like any other forward-looking statements, involve risks and uncertainties that
could cause actual results to differ materially from those projected or
anticipated.
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 substantial portion of the Company's revenue 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, results of operations 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.
Lengthy Sales and Implementation Cycles
15
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
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
software 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 software 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 licensing
of the Company's software products and performing 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 Operations Support System
("OSS") software developed by the Company, the Company has in the past relied
and will in the future continue to 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, even if successful, that the revenues from such
products will compensate for any concurrent loss of development and
implementation service revenues. The failure by the Company to successfully
develop and market such products and technologies would have a material adverse
effect on its business, operating results, and financial condition.
The Company's future business, operating results, and financial condition
are significantly dependent upon the continued market acceptance of its
portfolio of products and services. There can be no assurance that the Company's
technology will continue to achieve market acceptance or that the Company will
be successful in developing, introducing, or marketing improvements to its
products. Moreover, the life cycle of component-based 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 software as a result of new or existing competing
technologies, or other factors would have a material adverse effect on the
Company's business, operating results, and financial condition.
Customer Concentration
To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In particular, in 1997 and in
1998, 26.9% and 43.0% of total revenues was derived from contracts negotiated
through a large equipment manufacturer in Asia. While the recent economic
crisis in Asia
16
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
has not materially adversely affected the Company, there can be no assurance
that it will not do so in the future. In addition, the Company anticipates that
it will continue to experience significant customer concentration. There can be
no assurance that such customers or any other customers will in the future
continue to place orders with the Company which equal or exceed the comparable
levels for prior periods. In addition, the Company's customers typically
designate one individual to procure network management software. If any of these
individuals were terminated, transferred, or replaced, the Company would be
vulnerable to cancellation of an order if, for example, the Company's
competitors had preexisting relationships with the 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 telecom equipment
manufacturers, systems integrators, and service providers. 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 revenues, loss of market share, failure to
achieve market acceptance, or may otherwise adversely impact the Company's
business, operating results, and financial condition.
Implementation Risks
As is 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, if the Company's products did 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
implementation complexities. Because the Company's customer base consists of a
relatively limited number of customers, the product defects or implementation
errors would be potentially damaging to the Company's reputation. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results, and financial condition.
International Sales
Revenues outside of the Americas accounted for 63% of the Company's total
revenues for the three- months ended March 31, 1999. The Company expects that
international revenues will continue to account for a significant portion of its
total revenues in future periods. The Company intends to penetrate additional
international markets and to further expand its existing international
operations. The Company's international business involves a number of inherent
risks, including greater difficulty in accounts receivable collection and,
therefore, longer accounts receivable collection periods; 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;
unexpected changes in regulatory requirements; including a slowdown in the rate
of privatization of telecom service providers; reduced protection for
intellectual property rights in some countries; potentially adverse tax
consequences; tariffs; and other trade barriers. In addition, while the recent
economic crisis in Asia has not materially adversely affected the Company, there
can be no assurance that it will not do so in the future. Also, access to
foreign markets is often difficult due to the established relationships between
government owned or controlled communications
17
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
companies and local suppliers of communications products. There can be no
assurance the Company will be able to successfully penetrate such foreign
markets. In addition, there can be no assurance that the Company will be able to
sustain or increase revenues derived from international licensing and services
or that the foregoing factors will not have a material adverse effect on the
Company's future international business, and consequently, on the Company's
business, operating results, and financial condition.
International sales also entail risks associated with currency
fluctuations. The Company has attempted to reduce the risk of fluctuations in
currency exchange rates associated with international revenues by pricing its
products and services in United States dollars whenever possible. The Company,
however, generally pays the expenses of its international operations in local
currencies and generally does not engage in hedging transactions with respect to
such obligations. Upward fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive to foreign customers,
leading to a reduction in sales or profitability. Furthermore, future
international activity may result in foreign currency denominated sales, and, in
such event, gains and losses on the conversion to U.S. dollars of accounts
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,
which historically have not been material, the Company has engaged in a limited
quantity of 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 telecom
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
18
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
customer requirements. To maintain and improve its competitive position, the
Company must continue to develop and introduce, in a timely and cost-effective
manner, new services, products, and product features that keep pace with
competitive offerings by telecom companies and independent software vendors,
technological developments, and emerging industry standards in the development
of telecommunications network management software solutions. The principal
competitive factors in the Company's market are quality, performance, price,
customer support, corporate reputation, and product features such as
scalability, interoperability, functionality, customizability, and ease of use.
The Company's current and prospective competitors offer a variety of
solutions to address OSS needs. The Company faces competition in each of the
three functional areas the Company believes are necessary for the delivery of
complete OSS software: telecom applications platform, configurable applications,
and custom services. The Company's SolutionCore and SolutionSuites product
lines enable the Company to provide its customers with both application
development software and telecom applications. 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, 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
19
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
technology. As a result, uncertainties related to the timing and nature of new
product announcements, and introductions or modifications by systems vendors and
by vendors of relational database software 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 steps may
not preclude competitors from developing products with functionality or features
similar to the Company's products. In addition, effective patent, copyright,
trademark, and trade secret protection may be unavailable or limited in certain
foreign countries. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
operating results, and financial condition.
While the Company believes that its products and trademarks and their
use by customers does not infringe upon the proprietary rights of third parties,
there can be no assurance that the Company will not receive future
communications from third parties asserting that the Company's products or their
use by customers infringe, or may infringe, the proprietary rights of such third
parties. The Company expects that software product developers will be
increasingly subject to infringement claims as the numbers of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, including
meritless claims, could result in costly, time-consuming litigation, and
diversion of technical and management personnel. In the event any third party
was to make a valid claim and a license was not made available on commercially
reasonable terms, or if the Company was unable to develop non-infringing
alternative technology, the Company's business, operating results, and financial
condition could be materially adversely affected.
In addition, certain of the Company's customers regard the solutions
provided by the Company to be proprietary to such customers and may attempt to
prohibit the Company from using or otherwise benefiting
20
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(continued)
from certain of the advances made in developing such solutions. Although the
Company intends to increasingly standardize its integration solutions through
the use of component-based 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.
For example, in November 1998, the Company appointed a new Vice President of
Marketing. 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 periodically 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 could
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.
The failure to successfully evaluate, negotiate, and effect acquisition
transactions could have a material adverse effect on the Company's business,
operating results, and financial condition.
Volatility of Stock Price
21
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Continued)
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. Due to the foregoing factors, it is likely that the Company's
revenues or operating results will be below the expectations of public market
analysts and investors in some future period. In such event, the price of the
Company's Common Stock could be materially adversely affected. In addition, the
stock market from time to time has experienced significant price and volume
fluctuations that have particularly affected the market prices of technology
company stocks. 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. The Company believes it has meritorious defenses to all of
these actions is not expected to have a material adverse effect on the financial
position of the Company. However, depending on the amount and timing, an
unfavorable resolution of any of these matters could materially affect the
Company's future results of operations or cash flows in particular period.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. In early 1998, the
Company developed procedures for evaluating and managing the risks and costs
associated with Year 2000 problems. TCSI believes it is devoting the necessary
resources to identify and modify its systems and products impacted by the Year
2000 problem and to implement new systems and release new product versions to
become Year 2000 compliant in a timely manner. The Company has concluded its
assessment of the Year 2000 issues and has determined that the consequences of
its Year 2000 issues will not have a material effect on its business, results of
operations, or financial conditions. The Company believes its products are Year
2000 compliant.
The Company believes that its costs associated with implementing these
procedures will not have a material adverse effect on the results of operations
or financial condition of the Company. However, there can be no assurance that
unexpected delays or increased costs associated with implementation will not
have an adverse effect on the Company's operations. In addition, there can be no
assurance that the Company's software contains all date code changes necessary
to prevent processing errors potentially arising from calculations using the
Year 2000 date. Any disruptions in product development or other operations of
the Company as a result of Year 2000 noncompliance would materially adversely
affect the Company's business, financial condition and results of operations.
22
<PAGE>
TCSI CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
IF OPERATIONS
(Continued)
TCSI believes that the purchasing patterns of customers and potential
customers may also be affected by Year 2000 issues as companies expend
significant resources to upgrade their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products such as those offered by the Company. Furthermore, there can
be no assurance that the Company's customers and suppliers are or will be Year
2000 compliant. Failure of the Company's customers and suppliers to address the
Year 2000 issues at all, sufficiently, or in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. As of March 31, 1999, the Company's cash and investment
portfolio includes fixed-income securities. These securities are subject to
interest rate risk and will likely decline in value if interest rates increase.
Due to the short duration of the Company's investment portfolio, an immediate
10% increase or decrease in interest rates would not have a material effect on
the fair market value of the Company's portfolio. The Company has the ability
to hold its fixed income investments until maturity, and therefore the Company
would not expect its operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates in
its investment portfolio.
Foreign Currency Exchange Risk. The majority of the Company's revenues are
denominated in U.S. dollars and, as a result, the Company has relatively little
exposure to foreign currency exchange risk. The Company does not use derivative
financial instruments for trading or speculative purposes.
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TCSI CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 4, 1996, a purported class action complaint was filed in
the Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice.
On 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 complaint in 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 seek damages of an unspecified amount. On April 20,
1998, the Court ordered plaintiffs to certify a class. Plaintiffs sent notice to
the class and the opt out period has expired. On May 5, 1999, the Company
announced that it has reached a preliminary settlement of the Copperstone State
Action and the Copperstone Federal Action. The settlement involves payment of an
amount comprised of proceeds from the Company's Director and Officer insurance
policies. Neither the Company nor the individuals involved is contributing to
the settlement of the actions. The settlement will not have a material effect on
TCSI's financial position or on its financial results of operations. The
settlement is subject to court approval.
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 and the Company as a nominal
defendant (the "Tinkler Derivative Action"). The second amended 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. On
December 9, 1998, defendants answered the second amended complaint.
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
vigorously those actions that do not settle. The Company also is a party as a
defendant in various lawsuits, contractual disputes, and other legal claims, the
results of which are not presently determinable. In the opinion of management,
resolution of these legal actions is not expected to have a material adverse
effect on the financial position of the Company. However, depending on the
amount and timing, an unfavorable resolution of any of these matters could
materially affect the Company's future results of operations or cash flows in a
particular period.
24
<PAGE>
TCSI CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended March
31, 1999.
25
<PAGE>
TCSI CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 14, 1999.
TCSI CORPORATION
(Registrant)
By /s/ Arthur H. Wilder
____________________
Arthur H. Wilder
Chief Financial Officer,Secretary, and
Treasurer
(Principal Financial Officer and Principal
Accounting Officer)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO CUH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 29,515 22,308
<SECURITIES> 12,220 19,371
<RECEIVABLES> 11,949 11,970
<ALLOWANCES> 400 400
<INVENTORY> 0 0
<CURRENT-ASSETS> 58,740 57,756
<PP&E> 10,061 10,599
<DEPRECIATION> 19,944 18,853
<TOTAL-ASSETS> 78,975 80,829
<CURRENT-LIABILITIES> 9,077 9,685
<BONDS> 0 0
0 0
0 0
<COMMON> 2,259 2,245
<OTHER-SE> 67,639 68,899
<TOTAL-LIABILITY-AND-EQUITY> 78,975 80,829
<SALES> 10,069 11,005
<TOTAL-REVENUES> 10,069 11,005
<CGS> 4,932 4,558
<TOTAL-COSTS> 12,563 10,911
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (682) (766)
<INCOME-PRETAX> (1,812) 860
<INCOME-TAX> 0 344
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,812) 516
<EPS-PRIMARY> (0.08) 0.02
<EPS-DILUTED> (0.08) 0.02
</TABLE>
