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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 0-19377
December 31, 1998 (Commission File Number)
TCSI Corporation
(Exact name of Registrant as specified in its charter)
Nevada 68-0140975
(State of Incorporation) (IRS Employer Identification No.)
1080 Marina Village Parkway, Alameda, California 94501
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (510) 749-8500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [__]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 12, 1999 was approximately $40.8 million.
The number of shares outstanding of the Registrant's common stock, $0.10
par value, as of March 12, 1999 was 22,572,532.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders to be held on May 6, 1999, are incorporated by reference into Part
III of this Report.
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TCSI CORPORATION
Table of Contents
Page
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PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A. Qualitative and Quantitative Disclosures About Market
Risk 27
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules,
and Reports on Form 8-K 29
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PART I
Item 1. Business
In addition to historical information contained herein, this Business
section and other parts of this Annual Report on Form 10-K contain certain
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements reflect current
expectations and there can be no assurance that the Company's actual future
performance will meet the Company's current expectations. Such forward-looking
statements are subject to a number of risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in the "Certain Factors That May Affect Future
Results and Market Price of Stock" section in Item 7: "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company
TCSI Corporation ("TCSI" or the "Company") provides integrated software
products and services for the global telecommunications ("telecom") industry.
TCSI's products and services enable telecom service providers, equipment
manufacturers, and systems integrators to rapidly meet the growing demand for
automated management of a wide range of networks and services. The Company
offers SolutionCore(R), a telecom applications development and deployment
platform; SolutionSuites(R), sets of packaged, highly-configurable applications;
and SolutionServicesTM, specialized implementation and consulting services. TCSI
serves its customers in offices throughout the United States, Europe, and
Asia-Pacific. TCSI's software solutions are purchased by many of the world's
leading telecommunications companies, including Bell Atlantic, Telkom South
Africa, Nippon Telegraph and Telephone ("NTT"), and IDC in Japan. The Company's
software is also incorporated into telecommunications equipment systems provided
by manufacturers including Hughes Network Systems, Motorola, Italtel, Lucent
Technologies, Anritsu, and NEC Corporation.
Since its inception in 1983, a significant portion of the Company's
revenues has been earned from telecom service providers and equipment
manufacturers. Prior to 1997, the Company also earned revenue from licensing
embedded software contained in wireless products and from the development of
system solutions for customers in the transportation industry. During the second
half of 1996, the Company divested its non-telecom product lines by licensing
its embedded software product lines and terminating its final
transportation-related development agreement. As a result, since 1997, the
Company has focused entirely on offering software solutions to the telecom
industry.
Industry Background
The telecommunications market can be divided into two tiers: (i)
traditional full-service providers and network operators, such as Regional Bell
Operating Companies ("RBOCs") and national communications carriers (incumbent
companies) and (ii) smaller network operators and independent telephone
companies (emerging companies). Incumbent companies typically have complex
technical requirements and large budgets devoted to the acquisition of
technology to maintain their legacy systems, enhance their existing service
offerings, and deploy new services and network management systems. In contrast,
emerging telecom companies typically have limited resources for the acquisition
of advanced technology, but are often more focused on rapidly building new
networks and leveraging proven and more complete systems. Several recent trends
within the communications industry are changing the needs of both incumbent and
emerging service providers and of telecom equipment manufacturers. These trends
include the following:
o Increased competition is driving the need for rapid introduction of
new products. Deregulation and privatization of the telecom industry
worldwide have intensified competition among existing operators of
public communications networks and have encouraged the rapid entry of
new service providers. Telephone network operators also face
increasing competition from cable companies and wireless companies for
the provisioning of telephone and newer services, including high
bandwidth data and video. To remain competitive, network operators are
continually
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seeking to differentiate themselves by improving existing service
offerings and accelerating the time-to-market for new services, while
at the same time reducing operational costs and downsizing their
organizations. These trends have increased the need for scalable and
flexible software solutions to enable the rapid introduction of new
and enhanced services to a growing number of subscribers and to
improve and automate the management of communications networks. The
need to manage and respond quickly to rapidly changing market and
infrastructure conditions has become a focus for many telecom
companies.
o Proliferation of new communications services. Use of communications
networks has grown rapidly in recent years as a result of increased
use of computing and networking technology, wireless services,
broadband data and video services, and other services. This has
resulted in increased demand for communications capacity worldwide
from operators of advanced intelligent networks, the Internet, and
other types of public networks. At the same time, network
infrastructures have become more diverse in order to provide new
services, and network operators must enhance and maintain these
increasingly complex infrastructures to support the broadening array
of services. For example, a single network operator's infrastructure
can include asynchronous transfer mode (ATM), Internet protocol (IP),
broadband synchronous optical network (SONET), frame relay, wireless
cellular and personal communication service (PCS), and internal
signaling and control networks, all of which must work together to
provide reliable and efficient service. As a result of this
proliferation of services, individual networks and the
interconnections among networks have become considerably more complex.
This increased complexity places a strain on network management and
control systems that incorporate multi-vendor equipment.
System Management Requirements
Competition among existing and new telecom service providers, the
proliferation of new communications services, and pressure to provision new
services quickly and cost-effectively has placed increased demands on telecom
service providers and equipment manufacturers. These demands have resulted in
the following system management requirements:
o Need to link technology and customers. Historically, a telecom
company's discrete network components and the broader network have
been managed separately from service activation and assurance of
specific services to the handling of billing, customer service, and
other administrative tasks. The introduction of a new service affects
all components of an operator's infrastructure. For example, a
customer desiring a temporary 800-number for a special event requires
a network operator to process the order and activate the service by
providing special instructions to the appropriate network components
(service fulfillment), monitor the network and respond to traffic
bottlenecks and unexpected service interruptions or failures (service
assurance), and update billing, accounting, and marketing databases
(customer care).
In response to increased competition, there is a greater need to
rapidly introduce new services and respond to customer service
requests. There is also an increased need to tighten the link between
a telecom network's technology components and service management (and
ultimately the customer). As a result, new network software
implementation will increasingly address specific business processes
and customer service requirements rather than network technology
requirements. The implication to software and hardware vendors is the
need to offer systems with proven technical and business viability.
Further, telecommunications service provider's technology decisions
are increasingly being led by marketing personnel, and include input
from various business functional areas throughout such companies. As
service providers focus more on customer care, there will be a need
for network systems designed to provide management more meaningful
information with automated links from the customer support processes
straight through to network and equipment management processes.
o Standardization of telecom management systems. Competition,
innovation, and profitability are becoming the main drivers shaping
the investment decisions of communications service providers and
equipment manufacturers in many parts of the world. Service providers
are looking for solutions that will not require them to lock into
complex proprietary technologies or to be limited to a small number of
equipment suppliers. Further, as deregulation enables companies to
compete on a more global scale, communications companies are
increasingly seeking to standardize network architecture and
infrastructure (including hardware and software components) as well as
business practices.
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As open, distributed computing and industry standards continue to
evolve, hardware and software vendors will need to supply
communications equipment and software solutions that permit such
standardization.
o New software requirements. The rapid proliferation of communication
services and networks requires highly flexible and customizable
management and control systems that can rapidly respond to changing
market and infrastructure conditions. Commonly called, operations
support systems ("OSS"), these systems must also integrate the
increasing number of network elements involved in any given
connection. New technology must enable and automate the rapid
provisioning of new and enhanced services. Increased competition
requires OSS solutions that enable cost-effective change management
and offer highly reusable technology in order to reduce the
time-to-market for new or enhanced services by taking advantage of
past development work. Scalability is increasingly important since the
rates of growth of new services and number of subscribers are highly
variable and often unpredictable. Solutions that are not highly
scalable may not be adequate for mission-critical, long-lived
networks. The mission-critical nature of public networks also demands
solutions that are highly reliable. Software products that meet all of
these requirements are very complex, and suppliers of these products
must increasingly provide highly specialized implementation,
integration, and customization services in order to provide complete
software solutions. The Company believes that few companies possess
both the industry expertise and software development capabilities to
provide integrated solutions to the communications industry.
Product Portfolio Strategy
TCSI believes that its future success depends primarily upon the
development and enhancement of OSS software products that meet market needs.
Prior to 1996, the Company's product development was primarily funded by
customers as part of the customized development of software applications for
such customers. The Company typically retained certain rights to developed
software products. In certain circumstances, however, the Company agreed to
restrict its use of such products to certain markets and during certain time
periods. During 1996, the Company began funding a larger portion of its product
development costs internally. During 1998 and 1997, the Company's product
development costs totaled $12.3 million and $5.9 million, respectively
Customer-sponsored product development costs were not material in 1998, 1997,
and 1996. The Company intends to continue internal company-sponsored product
development funding.
During 1998, the Company continued to enhance its development platform,
SolutionCore, and to develop component-based applications software
(SolutionSuites) used to automate business processes for a range of
communications networks and services. Through internal development,
key-licensing agreements, strategic alliances and joint marketing arrangements,
the Company intends to continue investing financial resources in the ongoing
development of its product portfolio.
In early 1997, the Company announced the integration of IONA Technologies'
Orbix product into SolutionCore. The integration of this Object Request Broker
(ORB) product enables the Company's product line to be fully interoperable with
the Common Object Request Broker Architecture ("CORBA") 2.0, a key industry
standard.
In 1998, the Company entered into a licensing agreement with ILOG to
incorporate ILOG JViews into SolutionCore. ILOG JViews is incorporated into the
first release of TCSI's Presentation Services Package (PSP) for SolutionCore.
ILOG's visualization expertise will enable PSP developers to create highly
graphical, Java-based user interfaces that incorporate two-dimensional
geographical mapping and graphical representations of customers' network
topologies and architectures. Later in 1998, the Company entered into an
agreement to incorporate Lumos' Element Access Server product (EAS) into
SolutionCore. The Element Access Server allows SNMP and TL1-based network
elements (NEs) to be controlled from clients running in a CORBA environment.
Integration of EAS into SolutionCore enables TCSI's customers to more easily
configure and manage their SNMP and TL1-based NEs.
In these strategic relationships, the Company has agreed to pay a license
fee for sales of all Company products that contain the integrated software
products. The Company believes these strategic relationships are a key component
of its product strategy, and will continue to seek ways to integrate third-party
technology to enhance its products.
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During 1998, we also took the steps necessary to orient our SolutionSuites
product portfolio to match industry standards and business processes that are
common to all service providers. Those processes are service fulfillment,
service assurance, and billing. The Company chose to focus initially on the
assurance and fulfillment processes, and identified the critical functions in
each process. During 1998, the Company expanded its product portfolio in the
assurance and fulfillment process areas as a result of the following three
agreements:
o The acquisition of GTE's Network Management Organization ("GTE-NMO")
expanded our service fulfillment product portfolio by providing
applications for order entry and service provisioning. Their product, the
WorldWin Suite, was built using SolutionCore, thus significantly increasing
the Company's ability to integrate it with other TCSI products. The
acquisition also provided us with a team of engineers with deep telecom
knowledge and satisfied emerging carrier market customers willing to serve
as references.
o A licensing agreement with NTT added configuration management and service
activation capabilities for data networks to our product portfolio. NTT's
product was developed on SolutionCore by NTT and TCSI engineers. The
product manages NTT's internal ATM networks, and the product is operational
in multiple sites throughout Japan. The Company intends to integrate select
components with provisioning components from GTE-NMO to provide full
flow-through service activation.
o A recent marketing alliance with RTS Software Corporation yielded a
solution that enables telecom service providers to manage customer service
agreements and the field technician workforce. The Company intends to
integrate RTS products into SolutionSuites to enable service providers to
link real-time network data to service level agreements, thereby improving
the service they provide to their customers.
Products and Services
TCSI provides software solutions and services that enable its customers to
minimize the costs and risks of developing and deploying complex OSS within the
communications industry. Software licensing fees represented 26%, 14%, and 17%
of total revenues for the years ended December 31, 1998, 1997, and 1996,
respectively. Services revenues accounted for 74%, 86%, and 71% of total
revenues for 1998, 1997, and 1996, respectively.
SolutionCore Product Line
SolutionCore, introduced in 1997, provides sophisticated application
development modules that can be used to rapidly build OSS for a variety of
network technologies. Components of SolutionCore are as follows:
o Object Services Package. The Object Services Package ("OSP") serves as
the foundation for TCSI's SolutionCore product line. OSP is a fifth
generation suite of advanced middleware and frameworks for building
and deploying large, business-critical OSS for the communications
industry. OSP enables application development and customization time
to be shortened; enables developers to better manage the building of
large-scale, distributed applications; enables full interoperability
with Telecommunication's Management Network ("TMN") based
applications; enables runtime changes, such as addition of application
servers or changes to name server locations; and integrates graphical
user interface, business application, and communication layers,
helping users improve quality and reduce operating costs.
o CORBA Services Package. The CORBA Services Package (CSP) enables full
interoperability between OSP and CORBA applications.
o TMN Services Package. The primary international standards for
communications management are consolidated in the TMN series of
recommendations from the International Telecommunications Union (ITU).
TMN Services Package ("TSP") provides full TMN capabilities as part of
the SolutionCore communications management platform. TSP supports the
integration and management of heterogeneous networks and provides
developers with a
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suite of development tools and application programming interfaces that
eliminates the complexities of the underlying infrastructure.
o Application Templates Package. Application Templates Package (ATP),
based on an object-oriented, reusable framework for building
large-scale communications applications, contains the templates that
provide the basis for fault and event management applications. These
features allow network operators to more effectively monitor the
status of their networks, providing their customers with better
services while reducing costs for development, training, and
maintenance. Product features also manage user access and the
administration of application servers.
o Presentation Services Package. The Presentation Services Package
("PSP") provides an integrated Java-based framework that reduces the
time, effort, and cost required to develop sophisticated, easy-to-use
graphical user interfaces (GUI's) for SolutionCore. PSP allows the GUI
developer to focus on satisfying the needs of their end-users, instead
of building and maintaining integration code.
o Gateway Services Package. In addition to the TMN communication
standards, the communications industry employs a number of other
standards and protocols for managing network elements. Among these are
the Simple Network Management Protocol (SNMP), widely deployed
worldwide for managing IP devices such as switches and routers; the
Transaction Language 1 (TL1) and Man-Machine Language (MML) protocols
for managing legacy transmission and other telecom equipment in the
United States and the rest of the world, respectively; and general
text-based protocols for managing non-standard compliant equipment.
The Gateway Services Package (GSP) provides an easy to use toolkit for
accessing network elements using these protocols.
SolutionSuites Product Line
TCSI's SolutionSuites are families of configurable application products
that enable telecom service providers to automate and improve their business
processes for delivering communication services. Each SolutionSuite is a family
of best-of-breed products that can be sold separately, or bundled together into
an integrated process automation solution. These products combine application
software components that integrate and automate a broad range of communications
management processes. Such products are available on a range of platforms,
including UNIX and Windows NT servers, and are accessible from workstations and
PCs.
The Company is engaged in the process of continuously enhancing its
application product offerings in an effort to provide customers with complete
solutions. The Company currently offers the following SolutionSuites:
o Service Fulfillment Suite. The Service Fulfillment Suite provides
flow-through service creation, from Order Entry, Provisioning (design)
of the service, and Activation of the service in the network. It is
comprised of components acquired from GTE-NMO and from the license
agreement with NTT.
o Service Assurance Suite. The Service Assurance Suite manages the
reliability of communications networks, and the quality of the
communications services provisioned on those networks, including Fault
and Performance Management, Service Level Agreements, and Workforce
Management. This suite includes components provided in the marketing
alliance with RTS Software, developed internally, and acquired from
GTE-NMO.
o WorldWin Suite. The WorldWin Suite is the flagship product created by
the GTE-NMO group acquired from GTE by TCSI. The WorldWin Suite is a
complete OSS suite for emerging communications providers, including
Service Assurance, Service Fulfillment, and Billing interfaces. The
Company intends to market this product to the emerging carrier market
segment on a worldwide basis.
SolutionServices
The Company provides implementation services to develop customized
solutions based on its SolutionCore and configuration services for
SolutionSuites products through its SolutionServices program. These services may
involve the
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integration of the Company's products with legacy systems and with the software
products of other companies. The Company works with its customers to specify,
design, develop, and deploy the software necessary to meet its customers'
business and operational requirements. The Company has extensive experience in
developing and implementing solutions for the telecom industry in general, and
network and element management solutions in particular. The Company engages in
careful planning of the development and deployment phases, a formal development
process, and rules or conventions that govern every phase of framework and
application development. The Company's methods combine techniques from
object-oriented design and development, quality management, and distributed
systems deployment, and the Company's solutions rely heavily on its products.
Due to the complex requirements of its customer's network systems, the Company
believes its implementation services are a key factor in customer purchasing
decisions.
The Company is committed to responsive user support and believes that such
support is critical in continuing successful long-term relationships with its
customers. The Company offers technical customer support from 8:00 a.m. to 5:00
p.m. (Pacific Standard Time), five days per week, which can be extended at the
customer's option to 24 hours per day, seven days per week for an additional
fee. Support is provided by telephone, via e-mail, via remote login, and on-site
as necessary. The Company has established an Internet site that provides
technical information, as well as schedules of the Company's upcoming training
courses.
The Company conducts training courses for its customers, on a fee basis, at
the Company's training facilities in the States of California and Washington,
and at customer sites. Training courses include instruction in the installation,
customization, and usage of SolutionCore and related products. Specifically, the
Company offers OSP, TSP, and WorldWin courses on a regular basis.
As part of its software licensing agreements, the Company offers software
maintenance contracts to its customers. The maintenance contract entitles
customers to telephone support, product maintenance, and upgrades to minor
product releases. Substantially all licensees of the Company's software products
were covered by a software maintenance contract during the year ended December
31, 1998.
Marketing and Sales
The Company's products are typically intended for use in applications that
may be critical to a customer's business. Further, these applications are often
complex and require significant technical knowledge of the Company's products
and the customer's operations to be successfully deployed. To date, the Company
has primarily relied on its experienced worldwide direct sales force to sell its
products and related services. The sales team also significantly utilizes the
Company's engineering personnel to assist in product demonstrations, answer
customer questions, and determine system specifications.
The Company also uses other sales channels to augment its product sales.
Such channels have included sales representatives, distributors, equipment
manufacturers and systems integrators. In the past, significant training on the
use of the Company's products combined with extensive knowledge of
object-oriented technology and its use in developing advanced telecom systems
was required to sell TCSI products. Management believes that new sales channels
are an important part of the Company's growth strategy, as they will provide the
Company with access to important new customers and geographic markets.
Management intends to continue to invest in channel development. Further, as the
Company continues to make enhancements to its products, management believes that
the Company's products will be more attractive to third-party developers and
resellers.
Customers
The Company licenses its applications development and runtime environment,
SolutionCore, to customers around the world. The following chart shows a
representative sample of the Company's 1998 customers:
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Service Providers Equipment Manufacturers
----------------- -----------------------
AT&T Hughes Network Systems
Bell Atlantic Lucent
Telkom South Africa* Motorola
Nippon Telegraph and Telephone NEC Corporation
IDC Italtel
*customer through OEM relationship with Siemens Business Systems
To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. In 1998, 1997, and 1996,
revenues from the Company's five largest customers represented 74%, 64%, and 54%
of revenues, respectively. Further, as a percentage of telecom revenues, the
five largest telecom customers represented 62% of revenues in 1996, the only
year presented in which a portion of the Company's revenues were non-telecom
revenues. In 1998, one customer with multiple contracts, NEC Corporation,
represented approximately 43% of total revenues and Lucent Technologies
represented approximately 11% of total revenues. The Company anticipates that it
will continue to experience significant customer concentration.
The Company earns a significant portion of revenues from foreign customers.
Revenues outside of the United States accounted for approximately 70%, 78%, and
40% of the Company's total revenues for the years ended December 31, 1998, 1997,
and 1996, respectively. The Company expects that international revenues will
continue to account for a significant portion of its total revenues in future
periods.
Competition
The Company offers products and services in the evolving market for
telecommunications OSS software. Competition in this market is intense and is
characterized by rapidly changing technologies, evolving industry standards,
changing regulatory requirements, frequent new product introductions, and rapid
changes in customer requirements. To maintain and improve its competitive
position, the Company must continue to develop, acquire, license 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. 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 faces competition in each of the three functional areas that
the Company believes are necessary for the delivery of complete network
management software solutions: development environments, turnkey applications,
and custom services. The Company's SolutionCore and SolutionSuites product lines
enable the Company to provide its customers with both application development
software and telecom applications. Because certain of the Company's competitors
focus only on one functional area of OSS software, such competitors may be in a
position to develop competitive products targeted solely at the segment they
serve.
These competitors include major communications service providers and
equipment and computer manufacturers, each of which may have substantially
greater financial, manufacturing, technical, marketing, distribution and other
resources than the Company, and may also have greater name recognition and
longer-standing relationships with customers than the Company may have.
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 customer's need to rely
on an outside vendor such as the Company. There can be no assurance that the
Company's current or potential competitors will not develop products comparable
or superior to those developed by the Company or adapt more quickly than the
Company to new technologies, evolving industry standards, new product
introductions, or changing customer requirements.
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Other Company Information
Backlog
Orders for the Company's software products and services are typically in
the form of licensing and service contracts, which call for the delivery of
products and the performance of services over a nine to twelve month period.
Backlog for the Company's products and services represents an estimate of
remaining unearned contract value for all signed contracts, including
unrecognized license fees, development service fees, and maintenance and support
fees. Backlog generally does not include any potential sublicense fees or
royalties, which are recognized as earned. Backlog also does not include
expected future additions to contract value associated with existing customers'
master license agreements and service contracts. Because of variations in the
magnitude and duration of orders received by the Company, and because the
Company's contracts may be canceled or rescheduled by the customer without
significant penalty, the Company's backlog at any particular date may not be a
meaningful indicator of future financial results. There can be no assurance that
such TCSI's customers will in the future continue to place orders with the
Company which equal or exceed the comparable levels for prior periods. At
December 31, 1998, the Company's backlog amounted to approximately $16 million.
At December 31, 1997, the Company's backlog was approximately $20 million. The
decline in backlog from 1997 to 1998 is attributable to a decline in bookings,
the lengthy sales and implementation cycle associated with the Company's
products, and the lack of channel development in Europe.
Employees
At February 28, 1999, the Company had 305 employees, of which approximately
71% were professional engineering staff. None of the Company's employees are
represented by a labor union, and the Company has not experienced any work
stoppages. Management believes that the Company's employee relations are good.
The Company's future success will depend to a significant extent on its
ability to continue to recruit and assimilate skilled engineers, managers, and
other personnel. The Company's future success will also depend on its ability to
attract and retain qualified managerial, sales, and software engineering
personnel. The Company has at times experienced and continues to experience
difficulty in attracting and retaining qualified personnel. Competition for
qualified personnel in the software industry is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The complex nature of the networks of the Company's customers
requires that the Company recruit and hire personnel with expertise in and a
broad understanding of the industries in which the Company's customers compete.
Furthermore, competitors have in the past and may in the future attempt to
recruit the Company's employees. Failure to attract and retain key personnel
could have a material adverse effect on the Company's business, operating
results, and financial condition.
Intellectual Property
The Company's success and ability to compete is dependent in part upon its
proprietary software technology. The Company relies on a combination of patent,
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements, and technical measures to protect its proprietary rights. Currently,
the Company has seven patents and two applications pending for additional
patents. The Company expects to continue to file patent applications where it
believes it is appropriate to protect its proprietary technologies.
Executive Officers of the Company
The following are executive officers of the Company:
Name Age Position
- ---- --- --------
Ram A. Banin, Ph.D........... 57 President and Chief Executive Officer
Arthur H. Wilder............. 57 Chief Financial Officer, Secretary, and
Treasurer
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Dr. Banin joined TCSI in May 1992 and has served as President since
December 1996 and Chief Executive Officer and as a member of the Board of
Directors since July 1997. Prior to joining TCSI, Dr. Banin founded and operated
Banin Associates. Dr. Banin was also co-founder and Chief Executive Officer of
Atherton Technology from 1986 to 1989, as well as co-founder and Senior Vice
President of Daisy Systems from 1980 to 1985. Dr. Banin holds a Ph.D. in
Computer Science from the University of California at Berkeley, and an M.S. and
a B.S. in Physics from the Hebrew University of Jerusalem, Israel.
Mr. Wilder joined TCSI in November 1997. Prior to joining TCSI, Mr. Wilder
operated his own financial consulting practice in the San Francisco Bay Area.
Previously, he spent more than seven years with Flow Industries, Inc. and its
affiliated companies near Seattle, Washington. Initially, Mr. Wilder served as
Chief Financial Officer of the parent company and its pre-public subsidiary
companies. He later became Executive Vice President and then President of
FloWind Corporation, a subsidiary of Flow Industries, Inc. Mr. Wilder holds a
B.A. in Economics and an M.B.A. from San Jose State University.
Item 2. Properties
The Company's principal administrative, sales and marketing, customer
support, and product development facilities are located in Alameda, California.
In addition, the Company leases sales offices in Newmarket, United Kingdom;
Tokyo, Japan; and Raleigh, North Carolina, and product development facilities in
Bothell, Washington and San Jose, California. The Company currently has
approximately 170,000 square feet of facilities. The Company's leases have
various terms, expiring at different times through the year 2007. The Company
believes that its existing facilities are adequate to meet its current needs and
that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
Item 3. Legal Proceedings
In November 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. In July 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice. In June
1998, plaintiffs filed their second amended complaint. In January 1999,
defendants' demurrers to that complaint were orally overruled. In response,
certain of the defendants filed answers to the second amended complaint, while
the remaining defendants are awaiting the written order overruling defendants'
demurrers.
In November 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 complaint in the Tinkler Derivative
Action also names the Company as a nominal defendant. The plaintiff in the
Tinkler Derivative Action seeks damages of an unspecified amount. In February
1998, plaintiff filed a second amended complaint alleging breach of fiduciary
duties and violation of the California Corporations Code. In December 1998,
defendants answered the second amended complaint.
In September 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. In January 1998,
defendants moved to dismiss the Copperstone Federal Action. In April 1998, the
Court ordered plaintiffs to certify a class prior to ruling on defendants'
motion to dismiss. Plaintiffs thereafter provided shareholders with a period
during which they could choose to be excluded from the class; this period has
subsequently expired. In January 1999, the
9
<PAGE>
court dismissed the complaint with leave to amend. In February 1999, the
plaintiffs moved to stay the Copperstone Federal Action in favor of the
Copperstone State Action, or for additional time in which to file an amended
complaint. Defendants have requested that the Court dismiss the Copperstone
Federal Action with prejudice. Oral argument on the plaintiff's motion is
scheduled for April 1999.
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 financial position, results of operations, or cash flows in future
periods.
In 1997, Atmel Corporation ("Atmel") made a claim under the 1996 TCSI/Atmel
Corporation Purchase Agreement. In 1998, management obtained an equitable
settlement of this matter with the escrow agent releasing $550,000 (of a $1.0
million escrow fund) plus interest to TCSI, and the remaining $450,000 less fees
to Atmel. The settlement is reported as a nonrecurring special gain in the 1998
consolidated statement of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The common stock of the Company commenced trading on The Nasdaq National
Market under the symbol "TCSI" in July 1991. The following table sets forth the
high and low closing sale prices of the common stock for the periods indicated,
as reported by The Nasdaq National Market:
High Low
---- ---
1997
First quarter ......... $ 8.25 $ 4.38
Second quarter ........ 7.00 4.63
Third quarter ......... 8.00 4.63
Fourth quarter ........ 9.00 5.25
1998
First quarter ......... $ 8.94 $ 6.13
Second quarter ........ 8.13 5.00
Third quarter ......... 6.25 2.50
Fourth quarter ........ 3.25 2.00
The market price of the shares of common stock has been, and is likely to
continue to be, highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's business, operating
results, and financial condition, announcements of technological innovations,
new products, or new contracts of the Company or its competitors, developments
with respect to proprietary rights, adoption of new accounting standards
affecting the software industry, general market conditions, and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These types of broad market
fluctuations may adversely affect the market price of the Company's common
stock.
As of March 12, 1999, the number of shareholders of record of the Company's
common stock was 101 and the number of beneficial shareholders was approximately
4,500. The Company has declared no cash dividends on its common stock since the
Company's initial public offering. The Company currently intends to retain any
earnings for use in its business and does not anticipate paying any cash
dividends in the foreseeable future.
11
<PAGE>
Item 6. Selected Consolidated Financial Data
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data
Revenues:
Services ..................................................... $ 31,560 $ 33,970 $ 42,733 $ 43,790 $ 34,872
Software licensing fees ...................................... 10,760 5,608 10,230 11,572 5,434
-------- -------- -------- -------- --------
Total services and licensing fees .............................. 42,320 39,578 52,963 55,362 40,306
Equipment, non-telecom ....................................... -- -- 7,270 -- --
-------- -------- -------- -------- --------
Total revenues ................................................. 42,320 39,578 60,233 55,362 40,306
Costs, expenses, and special items:
Services ..................................................... 20,297 21,071 28,773 24,945 17,985
Equipment, non-telecom ....................................... -- -- 6,810 -- --
Product development .......................................... 12,311 5,932 6,642 -- --
Selling, general, and administrative ......................... 16,164 18,563 25,010 19,498 14,556
Write-off of in-process technology acquired .................. 831 -- -- -- --
Nonrecurring special items, net .............................. (550) 1,088 (4,587) -- --
-------- -------- -------- -------- --------
Total costs, expenses, and special items ....................... 49,053 46,654 62,648 44,443 32,541
-------- -------- -------- -------- --------
Income (loss) from operations .................................. (6,733) (7,076) (2,415) 10,919 7,765
Gain on sale of investment in common stock ..................... -- -- 585 -- --
Other income and expense ....................................... 3,266 3,104 2,276 982 591
-------- -------- -------- -------- --------
Income (loss) before income tax provision (benefit) ............ (3,467) (3,972) 446 11,901 8,356
Income tax provision (benefit) ................................. 1,054 (1,350) 152 3,831 2,926
-------- -------- -------- -------- --------
Net income (loss) .............................................. $ (4,521) $ (2,622) $ 294 $ 8,070 $ 5,430
======== ======== ======== ======== ========
Earnings (loss) per share (EPS) - Basic ....................... $ (0.20) $ (0.12) $ 0.01 $ 0.45 $ 0.31
======== ======== ======== ======== ========
Shares used in calculation of EPS - Basic ...................... 22,349 21,638 20,515 18,069 17,525
======== ======== ======== ======== ========
Earnings (loss) per share (EPS) - Diluted ...................... $ (0.20) $ (0.12) $ 0.01 $ 0.42 $ 0.30
======== ======== ======== ======== ========
Shares used in calculation of EPS - Diluted .................... 22,349 21,638 21,542 19,224 18,216
======== ======== ======== ======== ========
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Balance Sheet Data (in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and marketable securities .............. $ 48,983 $ 55,467 $ 52,607 $ 22,027 $ 22,212
Working capital ................................................ 48,071 59,358 50,717 31,374 18,675
Total assets ................................................... 80,829 84,231 88,133 50,630 35,324
Shareholders' equity ........................................... 71,144 74,148 73,610 37,376 23,792
</TABLE>
12
<PAGE>
Item 7. 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 under "Certain Factors
That May Affect Future Results" and in Item 1 of this Form 10-K.
Overview
TCSI Corporation ("TCSI" or the "Company") 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
its inception in 1983, a significant portion of the Company's revenues has been
earned from telecom service providers and equipment manufacturers. 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, health care, 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 recognized on the percentage-of-completion
method based on the percentage of contract costs incurred in relation to total
estimated contract costs. Changes to total estimated contract costs, if any, are
recognized in the period such changes are determined. The scope and size of many
of the Company's system solutions are large and complex, typically requiring
delivery over several quarters. From time-to-time, customers have established
payment milestones, which can be achieved only after completion of the related
services. 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. The Company recognizes revenues under
time-and-material-type contracts as the services are performed. For fixed-price
contracts, the Company recognizes revenues using the percentage-of-completion
method. Additionally, the Company 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
noncancelable license agreement has been signed, the product has been shipped,
the fees are fixed and determinable, collectibility is probable, and
vendor-specific objective evidence of fair value exists to allocate the total
fee to 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 customer 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 and related services.
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
Operations Support Systems ("OSS") software being developed, 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 quarterly
revenues and operating results due to termination, cancellation, or non-renewal
of agreements.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 it may periodically acquire businesses, products, or
technologies to enhance the Company's current product offerings.
Results of Operations
The following table sets forth selected income statement data as a
percentage of revenues for each of the years ended December 31:
1998 1997 1996
---- ---- ----
(percentage of
total revenues)
Revenues:
Services ............................................. 74 86 71
Software licensing fees .............................. 26 14 17
Equipment, non-telecom ............................... -- -- 12
---- ---- ----
Total revenues .................................... 100 100 100
---- ---- ----
Costs, expenses, and special items:
Services ............................................. 48 53 48
Equipment, non-telecom ............................... -- -- 11
Product development .................................. 29 15 11
Selling, general, and administrative ................. 38 47 42
Write-off of in-process technology acquired .......... 2 -- --
Nonrecurring special items, net ...................... (1) 3 (8)
---- ---- ----
Loss from operations ................................... (16) (18) (4)
Other income and expense ............................... 8 8 5
---- ---- ----
Income (loss) before income tax provision (benefit) .... (8) (10) 1
Income tax provision (benefit) ......................... 3 3 (1)
---- ---- ----
Net income (loss) ...................................... (11) (7) --
==== ==== ====
Revenues
The Company generates revenues from the sale of its software products and
related services to the telecom industry. In 1998, software licensing fees
represented 26% and services represented 74% of total revenues. In 1997,
software licensing fees represented 14% and services represented 86% of total
revenues. In 1996, software licensing fees represented 17% and services
represented 71% of total revenues. Additionally, 1996 included equipment
revenues representing 12% of total revenues. Software licensing fees increased
to $10.8 million in 1998, which reflects the Company's progress in transitioning
from a custom software services provider to a software product developer.
For the years ended December 31, the revenue breakdown is as follows:
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
1998 1997 1996
------- ------- -------
(in thousands)
Total revenues:
Services ........................... $31,560 $33,970 $42,733
Software licensing fees ............ 10,760 5,608 10,230
Equipment, non-telecom ............. -- -- 7,270
------- ------- -------
Totals ........................ $42,320 $39,578 $60,233
======= ======= =======
1998 1997 1996
------- ------- -------
(in thousands)
Telecom revenues:
Services ........................... $31,560 $33,908 $36,191
Software licensing fees ............ 10,760 5,071 6,725
------- ------- -------
Totals ........................ $42,320 $38,979 $42,916
======= ======= =======
Total revenues increased 7% in 1998 to $42.3 million from $39.6 million in
1997. The increase in revenues for 1998 was primarily attributable to a 92%
increase in software licensing fees to $10.8 million. License revenues primarily
improved as a result of completing several major projects in the United States
that were delayed in 1997 and the Company's focus on transitioning from being a
custom software services provider to becoming a software product developer. The
decrease in revenues for 1997 versus 1996 was attributable to the deployment
phase of a significant agreement that the Company entered into during 1994 with
a non-telecom customer. In connection with this agreement, the Company purchased
equipment on behalf of the customer. Excluding the equipment purchase, total
telecom revenues decreased 9% to $39.0 million in 1997 from $42.9 million in
1996. The Company expects software licensing fees to continue to vary on a
quarterly and annual basis.
Total revenues from services decreased 7% in 1998 to $31.6 million from
$34.0 million. Total revenues from services decreased 20% in 1997 to $34.0
million from $42.7 million in 1996. Total telecom revenues from services
decreased 6% in 1997 to $33.9 million from $36.2 million in 1996. The downward
trend may continue until the Company's existing and future customers ramp up
their development efforts.
Total software licensing revenues increased 92% in 1998 to $10.8 million
from $5.6 million in 1997. The increase was primarily due to the completion of
several major projects in the United States that were delayed in 1997 and the
Company's focus on transitioning from being a custom software services provider
to becoming a software product developer. Software licensing revenues decreased
45% in 1997 to $5.6 million from $10.2 million in 1996. The decline is primarily
the result of the discontinuance of non-telecom product lines in late 1996.
Total telecom software licensing revenues decreased 25% in 1997. The decline in
telecom software licensing fees in 1997 is attributed to delays with our system
deployments in North America. Prior to 1998, the demand centered more on
follow-on services than on new licenses. The Company expects software licensing
revenues to continue to vary on a quarterly and annual basis.
15
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
For the years ended December 31, the percentage of revenues by geographic
location are summarized as follows:
1998 1997 1996
---- ---- ----
Revenues:
United States ...................... 30% 22% 60%
Asia-Pacific ....................... 53 54 28
Europe ............................. 17 24 12
---- ---- ----
100% 100% 100%
==== ==== ====
1998 1997 1996
---- ---- ----
Telecom revenues:
United States ...................... 30% 21% 56%
Asia-Pacific ....................... 53 54 28
Europe ............................. 17 25 16
---- ---- ----
100% 100% 100%
==== ==== ====
Telecom revenues from the United States increased 48% to $12.6 million in
1998. The increase was the result of continued relationships with existing
customers, particularly Lucent Technologies and the result of completing several
major projects with our telecom service providers. The 1997 increase was the
result of continued relationships with existing customers, particularly NEC
Corporation, resulting in revenues from follow-on contracts signed in 1997. In
1997 and 1996, revenue decreased as a result of merger activity among the
Regional Bell Operating Companies (RBOC's) that slowed the decision-making
process. This also contributed to low bookings and delayed deployments. In 1998,
telecom revenue from the Asia-Pacific region continues to remain strong, roughly
the same as 1997, due to continued relationships with existing customers
resulting in revenues from follow-on contracts signed in 1997. Telecom revenue
from Europe fell to 17% of total revenue for 1998 from 25% in 1997. The decline
was attributed largely to slow channel development. The Company generally
realizes services revenues involving design, development, testing, and
deployment over a twelve to eighteen month period. The Company expects that
international revenues will continue to account for a significant portion of its
total revenue in future periods.
To date, a significant portion of revenues has been concentrated among a
limited number of customers. In 1998, 1997, and 1996, total revenues from the
Company's five largest telecom customers represented 74%, 64%, and 54% of
revenues, respectively. In 1998, one customer with multiple contracts, NEC
Corporation, represented approximately 43% of total revenues and Lucent
Technologies, represented approximately 11% of total revenues. The Company
anticipates that it will continue to experience significant customer
concentration. There can be no assurance that such customers or any other
customers will continue to place orders with the Company that will equal or
exceed the comparable levels for prior periods.
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 declined 4% to
$20.3 million in 1998 from $21.1 million in 1997. Costs of services decreased
27% in 1997 from $28.8 million in 1996. As a percentage of service revenues,
cost of services were 64%, 62%, and 67% for 1998, 1997, and 1996, respectively.
The cost of service percentage for 1998 remained relatively consistent with the
cost of service percentage for 1997. Cost of services declined 4% while service
revenues declined 7% from 1997 levels. The cost of service percentage may remain
at or go below 1998 levels until existing and future customers ramp up their
development efforts. In 1996, costs of services included increased investments
in the completion of a number of North American telecom software solutions. Such
customer-related investments were reduced in the first half of 1997 thereby
contributing to lower direct costs of services in 1997. In addition, the decline
in cost of services in 1997 compared to 1996 is also attributable to the
divestiture of non-telecom business units in late 1996.
16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
Product Development
Product development includes employee compensation, subcontractor fees,
training costs, and other product development costs for existing and potential
new software products, including an allocation for benefits, facilities,
telephone expenses, information systems support, and depreciation. Prior to
1996, customers had primarily funded the Company's product development as part
of the development of software applications. As a result, internally funded
product development costs had not been material. During 1996, the Company began
internally funding its product development costs.
The Company invested $12.3 million, or 29% of revenues, in product
development in 1998 compared to $5.9 million, or 15% of revenues, in product
development in 1997. In 1996, the Company invested $6.6 million, or 11% of
revenues, in product development. During 1998, product development spending
increased 108%, reflecting the Company's continuing commitment to become a true
software product developer. In December 1998, TCSI acquired GTE's Network
Management Organization ("GTE-NMO") which provided the Company with an
established customer base (particularly in the emerging carrier segment) and a
new product development center in the Pacific Northwest.
In 1996, product development costs included telecom product development
costs from two major upgrades of SolutionCore as well as non-telecom product
development costs from its divested business units. In 1997, the funds were used
primarily for enhancements made to SolutionCore. The Company expects to continue
to invest in Solution Core(R) as well as its new component-based applications,
SolutionSuites. 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.
Selling, general, and administrative expenses decreased 13% to $16.2
million in 1998 from $18.6 million in 1997. Selling, general, and administrative
expenses were $25.0 million in 1996. The decline was primarily due to cost
reduction efforts and an allocation of telephone and information systems support
expenses to the internal users offset by one-time payments in connection with
the GTE-NMO acquisition. In 1997, selling, general, and administrative expenses
decreased 26% from $25.0 million in 1996. The decline was primarily due to the
discontinuance of non-telecom business units in late 1996, as well as the
Company's business realignment decisions made during the past year. Selling,
general, and administrative expenses as a percentage of revenue were 38%, 47%,
and 42% in 1998, 1997, and 1996, respectively. The increase in selling, general,
and administrative expenses as a percentage of revenues in 1997 is primarily
attributable to the decline in total revenues for the year compared to 1996
total revenues.
Write-off of In-process Technology Acquired
In connection with the acquisition of GTE-NMO, the Company wrote off
approximately $831,000 of in-process technology acquired in the fourth quarter
of 1998 because the technology had not yet reached technological feasibility and
had no alternative future use.
Nonrecurring Special Items
In 1998, the Company recorded a nonrecurring gain of $550,000 following the
settlement of litigation related to the sale of a non-telecom business unit. In
1997, the Company concluded the sale of equipment resulting in a nonrecurring
loss of $1.1 million. In 1996, the Company recorded a nonrecurring gain of $7.9
million related to the licensing of its embedded wireless technology to Atmel
Corporation ("Atmel"). These gains and losses are described in further detail
below.
17
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
In 1997, Atmel made a claim under the 1996 TCSI/Atmel Corporation Purchase
Agreement. In 1998, management obtained an equitable settlement of this matter
with the escrow agent releasing $550,000 (of a $1.0 million escrow fund) plus
interest to TCSI, and the remaining $450,000 less fees to Atmel. In the fourth
quarter of 1998, the Company recorded a nonrecurring gain of $550,000.
The Company incurred a charge to operations of $1.1 million in the first
two quarters of 1997 resulting from adjustments to the market-value of equipment
held for resale related to the termination of a transportation contract in the
third quarter of 1996. The Company concluded the sale of the equipment in the
third quarter of 1997. Related to this same agreement, in the third quarter of
1996, the Company recorded a charge of approximately $3.3 million to cover the
costs related to the termination of this agreement. The customer paid the
Company approximately $5.3 million to terminate the agreement.
As part of the Company's strategy to focus on its core telecom operations,
in November 1996, the Company licensed its embedded wireless technology and
related product lines to Atmel Corporation ("Atmel") in exchange for Atmel
common stock valued at $10.0 million. In the fourth quarter of 1996, the Company
recorded a gain on this licensing of its technology, net of transaction costs
and project commitments, totaling $7.9 million and a gain of approximately $0.6
million from the sale of the Atmel stock (described as "Gain on sale of
investment in common stock" in the 1996 consolidated statement of operations).
Income Tax Provision (Benefit)
TCSI recorded an income tax provision (benefit) of $1.1 million, $(1.4)
million, and $152,000 for 1998, 1997, and 1996 respectively. The tax provision
for 1998 differed from the Federal statutory rate primarily due to a valuation
allowance recorded in the current year of $2.4 million. The valuation allowance
was provided to reduce the net deferred tax assets to the amount which
management believes is recognizable, based on the weight of available evidence,
on a more likely than not basis.
At December 31, 1998, the Company had approximately $3.7 million of
deferred tax assets, net of a valuation allowance of $2.4 million. Realization
of TCSI's net deferred tax assets is dependent upon the Company generating
sufficient taxable income in future years in appropriate jurisdictions to obtain
benefit from the reversal of temporary differences and from net operating loss
and tax credit carryforwards. However, the amount of 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 provided by operating activities was $2.3 million, $6.4 million,
and $6.9 million for the years 1998, 1997, and 1996, respectively. Cash flows
from operating activities for 1998 primarily reflected a net loss of $4.5
million, adjusted for depreciation and amortization of $4.1 million, a decrease
in receivables of $2.3 million, a decrease in deferred revenue of $2.3 million,
and an increase in accounts payable of $2.0 million. Cash flows from operating
activities for 1997 primarily reflected a net loss of $2.6 million, adjusted for
depreciation and amortization of $4.2 million, decreases in accounts payable of
$2.3 million and in accrued liabilities of $1.8 million, and an increase in
deferred revenue of $2.7 million. Cash flows from operating activities for 1996
primarily reflected net income of approximately $294,000, adjusted for
depreciation and amortization of $4.2 million, and decreases in receivables and
income taxes payable of $4.1 million and $2.6 million, respectively.
In the first quarter of 1997, 1996 year-end liabilities related to the
buildout of the Alameda facility in the first quarter of 1997 were paid. In
addition, there was a decrease in accrued liabilities resulting from reductions
in bonus and commission payments in 1998 compared to 1997. Other significant
changes are the decreases in deferred revenue and income taxes payable. The
decrease in deferred revenue from 1997 is primarily attributable to the decrease
in the volume
18
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
of contracts being entered into that incorporate prepayments and to the
completion of several major projects. The decrease in income taxes payable over
1997 is consistent with the refunds received during 1997.
Investing Activities
Net cash used in investing activities was $15.0 million, $6.7 million, and
$25.0 million for the years 1998, 1997, and 1996, respectively. The Company
purchased $40.3 million, $21.6 million, and $35.9 million of marketable
securities in 1998, 1997, and 1996, respectively, while $35.6 million, $21.6
million, and $19.3 million of marketable securities matured or were sold in each
respective year. During the year 1998, the Company shifted a portion of its
investment portfolio into longer-term noncurrent marketable securities in
anticipation of the predicted decline in interest rates. In addition, the
Company acquired GTE-NMO; this contributed to decreases in cash flows from
investing activities of $6.5 million in 1998. The net decrease in cash flows
from investing activities also included $3.6 million of cash used for capital
expenditures in 1998 compared to $7.2 million of cash used for capital
expenditures and leasehold improvements during 1997. The capital expenditures
during 1997 are primarily related to the consolidation of the Company's
facilities in Northern California and to the establishment of the Company's
office in the United Kingdom. Management expects cash used in investing
activities will continue to vary on a quarterly and annual basis and from time
to time, it may acquire businesses, products, or technologies to enhance the
Company's current product offerings.
Financing Activities
Net cash provided by financing activities was $1.6 million, $3.3 million,
and $32.1 million for the years 1998, 1997, and 1996, respectively. The decrease
from 1997 to 1998 was primarily 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.
The decrease from 1996 to 1997 was due to the fact that the Company raised funds
through a follow-on public offering, realizing net proceeds of approximately
$25.8 million. In addition, in 1996, cash flows from financing activities
included $2.6 million of tax benefits from stock options; there were no cash
flows from tax benefits of stock option in 1998 and 1997.
Additional Information on Liquidity and Capital Resources
As of December 31, 1998, the Company had cash and cash equivalents and
short-term marketable securities of $41.6 million. The Company believes that
existing cash balances (including cash equivalents and marketable securities),
together with existing sources of liquidity, including cash flows from operating
activities, will provide adequate cash to fund its operations for at least the
next twelve months. The Company also has noncurrent marketable securities
totaling $7.3 million. Over the past three years, the Company has satisfied its
liquidity needs principally through cash flows from operating activities.
However, fluctuating receivable balances may affect the Company's operating cash
flows in the future. The Company's receivables 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.
Allowances are maintained for potential credit losses. To date, such losses have
been within management's expectations.
During 1998, working capital decreased from $59.4 million in 1997 to $48.1
million. The decrease is primarily attributable to the purchase of GTE-NMO.
During 1997, working capital increased $8.6 million to $59.4 million at December
31, 1997. The increase is primarily due to the maturity of approximately $5.8
million of long-term marketable securities that were reinvested in short-term
instruments and the receipt of approximately $3.6 million in income tax refunds.
Cash provided by financing activities decreased $1.7 million to $1.6 million in
1998 compared to 1997. Cash provided by financing activities declined $28.8
million to $3.3 million in 1997 compared to 1996. In 1998 and 1997, the cash
provided by financing activities was received as a result of the exercise of
employee stock options and the employee stock purchase plan. In addition, the
Company raised approximately $10.0 million from the licensing of its embedded
wireless software in late 1996.
At December 31, 1998, the Company had no outstanding debt.
19
<PAGE>
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. 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 a quarterly or an
annual 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 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
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 are often lengthy (historically 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
20
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 component-based software 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 operations support systems
("OSS") 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 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 products and services have in the
past accounted for, and are expected to continue to account for, a substantial
majority of the Company's revenues. Accordingly, the Company's future business,
operating results, and financial condition are significantly dependent upon the
continued market acceptance of its portfolio of products and services. There can
be no assurance that the Company's technology will continue to achieve market
acceptance or that the Company will be successful in developing, introducing, or
marketing improvements to its products. Moreover, the life cycle of
component-based products is difficult to estimate due in large part to the
recent changes in the telecom markets, 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. 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 1998, a
large portion of revenues was derived from contracts negotiated through a large
equipment manufacturer in Asia. While the economic crisis in Asia has not
materially adversely affected the Company, there can be no assurance that it
will not do so in the future. In addition, the Company anticipates that it will
continue to experience significant customer concentration. There can be no
assurance that such customers or any other customers will in the future continue
to place orders with the Company which equal or exceed the comparable levels for
prior periods. In addition, the Company's customers typically designate one
individual to procure network management software. If any of such individuals
were terminated, transferred, or replaced, the Company would be vulnerable to
cancellation of an order if, for example, the Company's competitors had
preexisting 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 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 revenue, loss of market share, failure to
achieve market acceptance, or may otherwise adversely impact the Company's
business, operating results, and financial condition.
21
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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. From time to time,
the Company has agreed to accept some financial responsibility, in the form of
negotiated penalty amounts, when the Company's products did not meet
specifications or caused customer system downtime. There can be no assurance
that the Company will not encounter similar delays or other difficulties due to
such implementation complexities in the future. 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 North America accounted for 70% of the Company's total
revenues for the year ended December 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 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; and tariffs and other trade barriers. In addition, while the
recent economic crisis in Asia has not materially adversely affected the
Company, there can be no assurance that it will not do so in the future. Also,
access to foreign markets is often difficult due to the established
relationships between government owned or controlled communications companies
and local suppliers of communications products. There can be no assurance the
Company will be able to successfully penetrate such foreign markets. In
addition, there can be no assurance that the Company will be able to sustain or
increase 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 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.
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 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 OSS software.
22
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 been characterized by government deregulation and liberalization,
there can be no assurance that such 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; and the pricing may, in turn, impact carriers'
ability to make significant capital expenditures. The enactment by federal,
state, or foreign governments of new laws or regulations or change in the
interpretation of existing regulations could adversely affect the Company's
customers, and thereby affect the Company's business, operating results, and
financial condition.
Competition
The Company offers products and services in the evolving market for
telecommunications OSS software. Competition in this market is intense and is
characterized by rapidly changing technologies, evolving industry standards,
changing regulatory requirements, frequent new product introductions, and rapid
changes in customer requirements. To maintain and improve its competitive
position, the Company must continue to develop, acquire, license 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. 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 faces competition in each of the three functional areas that
the Company believes are necessary for the delivery of complete network
management software solutions: development environments, turnkey applications,
and custom services. The Company's SolutionCore and SolutionSuites product lines
enable the Company to provide its customers with both application development
software and telecom applications. Because certain of the Company's competitors
focus only on one functional area of OSS software, such competitors may be in a
position to develop competitive products targeted solely at the segment they
serve.
These competitors include major communications service providers and
equipment and computer manufacturers, each of which may have substantially
greater financial, manufacturing, technical, marketing, distribution and other
resources than the Company, and may also have greater name recognition and
longer-standing relationships with customers than the Company may have.
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 customer's need to rely
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
23
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 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 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
24
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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. For example, in December 1998, the
Company acquired GTE-NMO. This provided the Company with an established customer
base, particularly in the emerging carrier segment and a new product development
center in the Pacific Northwest.
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
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 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,
25
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
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 and intends to defend each of them vigorously. 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.
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 one year, 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.
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.
26
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of December 31, 1998, the Company's cash and
investment portfolio includes fixed-income securities. These securities are
subject to interest rate risk and will 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.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 is incorporated by reference herein from
Part IV, Item 14(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
27
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive Proxy Statement pursuant to
Regulation 14A ("Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report, and certain information included therein is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is set forth under the captions
"Proposal 1: Election of Directors," "Board Meetings, Committees, and Director
Compensation," and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Company's Proxy Statement and under the caption "Executive Officers of the
Registrant" in Part I hereof, which information is incorporated herein by
reference.
Item 11. Executive Compensation
The information required by Item 11 is set forth under the caption
"Executive Compensation" in the Company's Proxy Statement, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is set forth under the caption
"Security Ownership of Directors, Officers, and Principal Shareholders" in the
Company's Proxy Statement, which information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is set forth under the caption
"Compensation Committee Interlocks and Insider Participation" in the Company's
Proxy Statement, which information is incorporated herein by reference.
28
<PAGE>
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
The following consolidated financial statements of TCSI Corporation are
filed as part of this Report:
Page
----
Report of Independent Auditors............................................. 34
Consolidated Balance Sheets at December 31, 1998 and 1997.................. 35
Consolidated Statements of Operations for the years ended 36
December 31, 1998, 1997, and 1996.......................................
Consolidated Statements of Shareholders' Equity for the years ended 37
December 31, 1998, 1997, and 1996.......................................
Consolidated Statements of Cash Flows for the years ended 38
December 31, 1998, 1997, and 1996.......................................
Notes to Consolidated Financial Statements................................. 39
2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedule of TCSI Corporation
is filed as part of this report and should be read in conjunction with the
consolidated financial statements of TCSI Corporation:
Schedule Page
-------- ----
II Valuation and Qualifying Accounts.......................... 54
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
3. Exhibits
The index of exhibits is at page 30.
(b) Reports on Form 8-K in the fourth quarter of 1998:
During the quarter ended December 31, 1998, the Company filed a current
report on Form 8-K dated December 4, 1998, reporting the acquisition of GTE
Network Management Organization ("GTE-NMO").
29
<PAGE>
3. Exhibits
Exhibit
Number Document Description
- ------ -----------------------------------------------------------------
3.1 Restated Articles of Incorporation of the Company incorporated
herein by reference to Exhibit 3.1 of the Company's Registration
Statement No. 33-40872 on Form S-1 filed on May 29, 1991.
3.2 Certificate of Amendment of the Restated Articles of
Incorporation of the Company, dated December 12, 1994,
incorporated herein by reference to Exhibit 3.2 of Form 10-K
filed March 9, 1995.
3.3 Amended Bylaws of the Company incorporated herein by reference to
Exhibit 3.2 of the Company's Registration Statement No. 33-40872
on Form S-1 filed on May 29, 1991.
3.4 Amended and Restated Bylaws of the Company incorporated herein by
reference to Exhibit 3.4 of the Company's Quarterly Report on
Form 10-Q filed on October 16, 1998.
4.1 Preferred Shares Rights Agreement dated as of February 16, 1999,
between the Company and BankBoston, N.A., incorporated herein by
reference to Exhibit 4 of Form 8-A filed on February 25, 1999.
10.1# Teknekron Communications Systems, Inc. 1991 Stock Incentive Plan
as amended February 28, 1992, incorporated herein by reference to
Exhibit 4 of the Company's Registration Statement No. 33-57540 on
Form S-8 filed on January 28, 1993.
10.2# Amendment to Teknekron Communications Systems, Inc. 1991 Stock
Incentive Plan, dated March 3, 1995, changing the name of the
plan to TCSI Corporation 1991 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.2 of Form 10-K filed March 9,
1995.
10.3# Amendments to TCSI Corporation 1991 Stock Incentive Plan, dated
December 8, 1995 and March 1, 1996, incorporated herein by
reference to Exhibit 10.3 of Form 10-K filed March 25, 1996.
10.4 Teknekron Communications Systems, Inc. Equity Sharing Plan
restated as of May 17, 1991, incorporated herein by reference to
Exhibit 4 of the Company's Registration Statement No. 33-41808 on
Form S-8 filed on July 19, 1991.
10.5 Amendment One to Teknekron Communications Systems, Inc. Equity
Sharing Plan dated January 4, 1993, incorporated herein by
reference to Exhibit 10.4 of Form 10-K filed March 26, 1993.
10.6 Amendment to Teknekron Communications Systems, Inc. Equity
Sharing Plan, dated March 3, 1995, changing the name of the plan
to TCSI Corporation Equity Sharing Plan, incorporated herein by
reference to Exhibit 10.5 of Form 10-K filed March 9, 1995.
10.7 Form of Indemnity Agreement between the Company and each of its
directors and officers incorporated herein by reference to
Exhibit 10.8 of the Company's Registration Statement No. 33-40872
on Form S-1 filed on May 29, 1991.
10.8 Form of specimen, TCSI Corporation Equity Sharing Plan
Non-Qualified Notice of Grant of Stock Options and Grant
Agreement and Annex I (attached thereto), dated March 3, 1995,
incorporated herein by reference to Exhibit 10.10 of Form 10-K
filed March 9, 1995.
10.9 Form of specimen, Teknekron Communications Systems, Inc. Equity
Sharing Plan Amended Option Agreement, dated as of January 4,
1993, incorporated herein by reference to Exhibit 10.14 of Form
10-K filed March 26, 1993.
- ----------
#Plans in which executive officers participate.
30
<PAGE>
Exhibit
Number Document Description
- ------ -----------------------------------------------------------------
10.10# Form of specimen, TCSI Corporation 1991 Stock Incentive Plan
Notice of Grant of Stock Options and Grant Agreement and Annex I
(attached thereto), dated March 3, 1995, incorporated herein by
reference to Exhibit 10.12 of Form 10-K filed March 9, 1995.
10.11# Form of specimen, amendment to TCSI Corporation 1991 Stock
Incentive Plan, dated December 6, 1996, changing eligible
participants, repricing and transferability of options, and
approval of material amendments, incorporated herein by reference
to Exhibit 10.13 of Form 10-K filed March 27, 1997.
10.12# Form of specimen, amendment to TCSI Corporation 1991 Stock
Incentive Plan, dated May 30, 1997, increasing the maximum number
of options which may be awarded in a fiscal year incorporated
herein by reference to Exhibit 10.30 of Form 10-Q filed November
13, 1997.
10.13 Lease between Mitsubishi Estate Housing Co. and the Company dated
December 27, 1993, concerning lease of the Company's facilities
at 15-1, Jinnan 1-Chome, Shibuya-ku, Tokyo, Japan, incorporated
by reference to Exhibit 10.12 of Form 10-K filed March 28, 1994.
10.14 Description of ongoing Incentive Bonus Program and form of
standard letter of agreement entered into between the Company and
Ram A. Banin, Ph.D., incorporated herein by reference to Exhibit
10.2 of Form 10-K filed March 9, 1995.
10.15 Lease between Browning-Ferris Industries of California, Inc. and
the Company, dated December 16, 1994, concerning the lease of the
Company's facilities located at 150 Almaden Blvd., Suite 850, San
Jose, California, incorporated herein by reference to Exhibit
10.15 of Form 10-K filed March 9, 1995.
10.16 Lease between Browning-Ferris Industries of California, Inc. and
the Company, dated December 16, 1994, concerning the lease of the
Company's facilities located at 150 Almaden Blvd., Suite 800 and
900, San Jose, California, incorporated herein by reference to
Exhibit 10.16 of Form 10-K filed March 9, 1995.
10.17 Lease between JMB/San Jose Associates and the Company, dated
January 31, 1996, concerning lease of the Company's facilities
located at 150 Almaden Blvd., Fifth Floor, San Jose, California,
incorporated herein by reference to Exhibit 10.21 of Form 10-K
filed March 25, 1996.
10.18 TCSI 1994 Board of Directors Option Plan, dated as of December 2,
1994, incorporated herein by reference to Exhibit 4 of the
Company's Registration Statement No. 33-98842 on Form S-8 filed
on October 27, 1995.
10.19 Amendment to TCSI 1994 Board of Directors Option Agreement, dated
December 6, 1996, changing eligibility of outside directors to
receive equity securities under an employee benefit plan,
transferability of options, and approval of material amendments,
incorporated herein by reference to Exhibit 10.20 of Form 10-K
filed March 27, 1997.
10.20 Form of specimen, TCSI 1994 Board of Directors Option Agreement,
dated as of December 2, 1994, incorporated herein by reference to
Exhibit 10.18 of Form 10-K filed March 9, 1995.
- ----------
#Plans in which executive officers participate.
31
<PAGE>
Exhibit
Number Document Description
- ------ -----------------------------------------------------------------
10.21 Lease between Cow Holdings Limited and the Company, dated July
25, 1996, concerning lease of Company's facilities located at
8605 Westwood Center Dr., Vienna, Virginia, incorporated herein
by reference to Exhibit 10.23 of Form 10-K filed March 27, 1997.
10.22 Amendment to lease between White Pearl Investment Company (former
landlord: Cow Holdings Limited) and the Company, dated December
19, 1997, changing the landlord and terminating the lease
effective December 19, 1997.
10.23 Sublease between Computer Associates International, Inc. and the
Company, dated July 12, 1996, concerning the lease of Company's
facilities located at 1080 Marina Village Parkway, Alameda,
California, incorporated herein by reference to Exhibit 10.24 of
Form 10-K filed March 27, 1997.
10.24 Lease between Tricoho, Ltd. and the Company, dated July 22, 1996,
concerning lease of Company's facilities located at 15851 Dallas
Parkway, Suite 367, Dallas, Texas, incorporated herein by
reference to Exhibit 10.25 of Form 10-K filed March 27, 1997.
10.25 Sublease between Innovative Managed Care Systems, Inc. and the
Company, dated March 7, 1997, concerning the sublease of the
Company's facilities located at 15851 Dallas Parkway, Suite 367,
Dallas, Texas.
10.26# Form of specimen, TCSI Employee Stock Purchase Plan, dated
January 19, 1997, incorporated herein by reference to Exhibit
10.26 of Form 10-K filed March 27, 1997.
10.27# Amendment to TCSI Employee Stock Purchase Plan, dated December 5,
1997, amending the maximum number of shares an employee may
purchase in an offering.
10.28 Arrangements with Executive Officer, dated May 1, 1992 and
Amendment to Employment Agreement, dated June 11, 1997,
incorporated herein by reference to Exhibit 10.27 of Form 10-Q
filed August 14, 1997.
10.29 Arrangements with Executive Officer, Employment Agreement, dated
December 20, 1993, incorporated herein by reference to Exhibit
10.28 of Form 10-Q filed August 14, 1997.
10.30 Arrangements with Executive Officer, Termination Agreement, dated
July 31, 1997, incorporated herein by reference to Exhibit 10.29
of Form 10-Q filed August 14, 1997.
10.31* Lease between Kenburgh Land and Properties Limited and the
Company, dated February 14, 1997, concerning the lease of the
Company's facilities located at First Floor Suffolk House,
Fordham Road, Newmarket, United Kingdom.
10.32* Amendment to TCSI 1994 Outside Directors Stock Option Plan, dated
May 5, 1998, changing the number of options granted to each New
Outside Director from 31,500 to 20,000 and reducing the annual
grant from 6,000 shares to 5,000 shares.
21.0 Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule for 1998.
27.2 Amended Financial Data Schedule for 1997.
- ----------
*Filed herewith.
#Plans in which executive officers participate.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TCSI Corporation
(Registrant)
March 12, 1999 /s/ RAM A. BANIN
------------------------------------------------------------
Ram A. Banin, Ph.D., Chief Executive Officer
(Principal Executive Officer)
March 12, 1999 /s/ ARTHUR H. WILDER
------------------------------------------------------------
Arthur H. Wilder, Chief Financial Officer, Secretary, and
Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
March 12, 1999 /s/ JOHN C. BOLGER
------------------------------------------------------------
John C. Bolger, Chairman of the Board of Directors
March 12, 1999 /s/ RAM A. BANIN
------------------------------------------------------------
Ram A. Banin, Director
March 12, 1999 /s/ NORMAN E. FRIEDMANN
------------------------------------------------------------
Norman E. Friedmann, Ph.D., Director
March 12, 1999 /s/ DONALD GREEN
------------------------------------------------------------
Donald Green, Director
March 12, 1999 /s/ WILLIAM A. HASLER
------------------------------------------------------------
William A. Hasler, Director
March 12, 1999 /s/ DAVID G. MESSERSCHMITT
------------------------------------------------------------
David G. Messerschmitt, Ph.D., Director
March 12, 1999 /s/ HARVEY E. WAGNER
------------------------------------------------------------
Harvey E. Wagner, Director
33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
TCSI Corporation
We have audited the accompanying consolidated balance sheets of TCSI
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TCSI
Corporation at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
San Francisco, California
February 4, 1999
34
<PAGE>
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................................... $ 22,308 $ 33,566
Marketable securities ........................................................ 19,371 20,301
Receivables .................................................................. 11,570 11,803
Other receivables ............................................................ 922 682
Deferred tax assets .......................................................... 2,941 2,164
Other current assets ......................................................... 644 925
-------- --------
Total current assets ................................................. 57,756 69,441
Furniture, equipment, and leasehold improvements, net .......................... 10,599 10,165
Noncurrent marketable securities ............................................... 7,304 1,600
Noncurrent deferred tax assets ................................................. 749 2,297
Intangible and other noncurrent assets ......................................... 4,421 728
-------- --------
Total assets ......................................................... $ 80,829 $ 84,231
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ............................................................. $ 4,446 $ 2,410
Accrued liabilities .......................................................... 3,198 2,880
Deferred revenue ............................................................. 1,379 3,640
Income taxes payable ......................................................... 662 1,153
-------- --------
Total current liabilities ............................................ 9,685 10,083
-------- --------
Commitments (Note 10)
Shareholders' equity:
Preferred shares, par value $0.01 per share; 5,000,000 shares authorized; none
outstanding ............................................................... -- --
Common shares, par value $0.10 per share; 75,000,000 shares authorized;
22,452,606 and 22,135,949 shares issued and outstanding at December 31,
1998 and 1997, respectively ............................................... 2,245 2,214
Additional paid-in capital ................................................... 50,737 49,133
Accumulated other comprehensive loss ......................................... (244) (126)
Retained earnings ............................................................ 18,406 22,927
-------- --------
Total shareholders' equity ........................................... 71,144 74,148
-------- --------
Total liabilities and shareholders' equity ......................... $ 80,829 $ 84,231
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Services ........................................ $ 31,560 $ 33,970 $ 42,733
Software licensing fees ......................... 10,760 5,608 10,230
-------- -------- --------
Total services and licensing fees ....... 42,320 39,578 52,963
Equipment, non-telecom .......................... -- -- 7,270
-------- -------- --------
Total revenues .......................... 42,320 39,578 60,233
-------- -------- --------
Costs, expenses, and special items:
Services ........................................ 20,297 21,071 28,773
Equipment, non-telecom .......................... -- -- 6,810
Product development ............................. 12,311 5,932 6,642
Selling, general, and administrative ............ 16,164 18,563 25,010
Write-off of in-process technology acquired ..... 831 -- --
Nonrecurring special items, net ................. (550) 1,088 (4,587)
-------- -------- --------
Total costs, expenses, and special items 49,053 46,654 62,648
-------- -------- --------
Loss from operations .............................. (6,733) (7,076) (2,415)
Gain on sale of investment in common stock ........ -- -- 585
Other income and expense .......................... 3,266 3,104 2,276
-------- -------- --------
Income (loss) before income tax provision (benefit) (3,467) (3,972) 446
Income tax provision (benefit) .................... 1,054 (1,350) 152
-------- -------- --------
Net income (loss) ................................. $ (4,521) $ (2,622) $ 294
======== ======== ========
Earnings (loss) per share (EPS) - Basic ........... $ (0.20) $ (0.12) $ 0.01
======== ======== ========
Shares used in calculation of EPS - Basic ......... 22,349 21,638 20,515
======== ======== ========
Earnings (loss) per share (EPS) - Diluted ......... $ (0.20) $ (0.12) $ 0.01
======== ======== ========
Shares used in calculation of EPS - Diluted ....... 22,349 21,638 21,542
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
Common Shares
------------- Accumulated
Number Additional Other Total
of Paid-in Comprehensive Retained Shareholders'
Shares Amount apital Loss Earnings Equity
-------- -------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ................ 18,602 $ 1,860 $ 10,261 $ -- $ 25,255 $ 37,376
Net income ................................. -- -- -- -- 294 294
Proceeds from exercise of options .......... 1,117 112 3,586 -- -- 3,698
Tax benefits from exercise of options ...... -- -- 2,570 -- -- 2,570
Deferred tax benefits from option exercises. -- -- 3,827 -- -- 3,827
Issuance of common shares, net of offering
costs-- March 1996 ...................... 1,500 150 25,695 -- -- 25,845
-------- -------- -------- -------- -------- --------
Balances at December 31, 1996 ................ 21,219 2,122 45,939 -- 25,549 73,610
Net loss ................................... -- -- -- -- (2,622) (2,622)
Proceeds from exercise of options .......... 829 83 2,692 -- -- 2,775
Proceeds from employee stock purchase plan . 88 9 502 -- -- 511
Unrealized gains on marketable securities .. -- -- -- 108 -- 108
Foreign currency translation adjustments ... -- -- -- (234) -- (234)
-------- -------- -------- -------- -------- --------
Balances at December 31, 1997 ................ 22,136 2,214 49,133 (126) 22,927 74,148
Net loss ................................... -- -- -- -- (4,521) (4,521)
Proceeds from exercise of options .......... 172 16 911 -- -- 927
Proceeds from employee stock purchase plan . 145 15 693 -- -- 708
Unrealized gains on marketable securities .. -- -- -- 19 -- 19
Foreign currency translation adjustments ... -- -- -- (137) -- (137)
-------- -------- -------- -------- -------- --------
Balances at December 31, 1998 ................ 22,453 $ 2,245 $ 50,737 $ (244) $ 18,406 $ 71,144
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ (4,521) $ (2,622) $ 294
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation ................................................ 2,827 3,012 3,452
Amortization ................................................ 1,409 1,232 788
Write-off of in-process technology acquired ................. 831 -- --
Deferred income taxes ....................................... 771 (1,110) (157)
Changes in:
Receivables ............................................... 2,271 1,677 4,140
Other assets .............................................. 189 2,205 497
Accounts payable .......................................... 2,036 (2,282) 687
Accrued liabilities ....................................... (772) (1,825) (118)
Deferred revenue .......................................... (2,261) 2,682 (162)
Income taxes payable ...................................... (491) 3,383 (2,561)
-------- -------- --------
Net cash provided by operating activities .............. 2,289 6,352 6,860
-------- -------- --------
Cash flows from investing activities:
Capital and leasehold equipment expenditures, net ................ (3,777) (7,208) (7,548)
Purchases of marketable securities ............................... (40,338) (21,566) (35,907)
Maturities and sales of marketable securities .................... 35,583 21,500 19,261
Acquisition of GTE-NMO ........................................... (6,513) -- --
Decrease (increase) in other noncurrent assets ................... -- 556 (845)
-------- -------- --------
Net cash used in investing activities .................. (15,045) (6,718) (25,039)
-------- -------- --------
Cash flow from financing activities:
Proceeds from issuance of common stock ........................... 1,635 3,286 29,543
Tax benefits from exercise of options ............................ -- -- 2,570
-------- -------- --------
Net cash provided by financing activities .............. 1,635 3,286 32,113
Effect of exchange rate changes on cash and cash equivalents ..... (137) (234) --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............. (11,258) 2,686 13,934
Cash and cash equivalents at the beginning of year ............... 33,566 30,880 16,946
-------- -------- --------
Cash and cash equivalents at the end of year ..................... $ 22,308 $ 33,566 $ 30,880
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid (refunds received) for income taxes, net ............. $ 800 $ (3,624) $ 353
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
TCSI Corporation currently operates in one industry segment, which is
providing integrated software products and services for the global
telecommunications industry.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company generates revenue through two sources: software licenses and
services. The Company's license revenues are generated from licensing the
Company's products directly to end users and original equipment manufacturers.
Service revenues are generated from maintenance contracts and training and
consulting services performed for customers that license the Company's products.
The Company provides its software to customers under contracts which
generally include both software licensing fees and systems solutions services.
The Company accounts for fixed-price contracts using the
percentage-of-completion method. Percentage of completion is determined using
the number of dollars incurred as compared to the total estimated dollars to
complete the contract. Actual remaining effort under fixed-price contracts could
vary significantly from the estimates, and such differences could be material to
the financial statements. Differences between invoiced amounts and revenue
recognized are reflected as unbilled receivables or deferred revenue. The
Company recognizes revenue from software licensing fees when a noncancelable
license agreement has been signed, the product has been shipped, the fees are
fixed and determinable, collectibility is probable and vendor-specific objective
evidence of fair value exists to allocate the total fee to elements of the
arrangement.
Statement of Position 97-2, Software Revenue Recognition ("SOP 97-2"), was
issued in October 1997 by the American Institute of Certified Public Accountants
("AICPA") and was amended by Statement of Position ("SOP 98-4"). The Company
adopted SOP 97-2 effective January 1, 1998. Based on its interpretation of SOP
97-2 and SOP 98-4, the Company believes its current revenue recognition policies
and practices are consistent with these pronouncements. Additionally, the AICPA
issued SOP 98-9 in December 1998, which provides certain amendments to SOP 97-2,
and is effective for transactions entered into by the Company beginning January
1, 2000. Implementation guidelines for SOP 98-9 and SOP 98-4 have not yet been
issued. Once available, such implementation guidelines could lead to
unanticipated changes in our current revenue recognition policies and these
changes could affect the timing of the Company's future revenues and results of
operations.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the stock
option grants.
39
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Software Development Costs
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed", provides
for the capitalization of certain software development costs incurred after
technological feasibility of the software is achieved. Software development
costs subject to potential capitalization were not material in 1998, 1997 and
1996, and, as such, were expensed.
Income Taxes
Deferred income taxes are recorded for temporary differences between the
bases of assets and liabilities as recognized by tax laws and their carrying
value as reported in the consolidated financial statements.
Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998. SFAS 130
establishes standards for the reporting and display of comprehensive income
(loss) and its components. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and changes in the accumulated foreign
currency translation adjustments which, prior to the adoption of SFAS 130, were
reported separately in shareholders' equity, to be disclosed as components of
comprehensive income (loss). Prior year financial statements have been
reclassified as necessary to conform to the requirements of SFAS 130. The
adoption of SFAS 130 had no impact on the Company's net income (loss) or total
shareholders' equity.
Components of comprehensive loss for the years ended December 31 were as
follows:
1998 1997
------- -------
(in thousands)
Net loss ....................................... $(4,521) $(2,622)
Translation losses ............................. (137) (234)
Unrealized gains on marketable securities ...... 19 108
------- -------
Comprehensive loss ............................. $(4,639) $(2,748)
======= =======
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:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings (loss) per
share -- net income (loss) ....................... $ (4,521) $ (2,622) $ 294
======== ======== ========
Denominator:
Denominator for basic earnings (loss) per
share -- weighted-average shares ................. 22,349 21,638 20,515
Effect of dilutive securities-employee stock options* -- -- 1,027
-------- -------- --------
Denominator for diluted earnings (loss) per share ...... 22,349 21,638 21,542
======== ======== ========
Earnings (loss) per share-Basic and diluted ............ $ (0.20) $ (0.12) $ 0.01
======== ======== ========
</TABLE>
*See explanation on the following page.
40
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
*Since the Company had net losses in 1998 and 1997, weighted-average common
shares (with an exercise price less than the average market price of the
Company's common stock) which were not included in the 1998 and 1997
computations because their effects would be antidilutive were as follows:
1998 1997
---- ----
(in thousands)
Weighted-average common shares 97 305
==== ====
Antidilutive securities:
The following antidilutive securities consists of options 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:
1998 1997 1995
---- ---- ----
(in thousands)
Absolute options outstanding
at end of period 2,686 1,413 616
===== ===== =====
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
finalized Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", which defines the
types of costs that are capitalizable for computer software projects and
requires all other costs to be expensed in the period incurred. The new SOP
requires that in order for costs to be capitalizable they must be intended to
create a new system or add identifiable functionality to an existing system.
This SOP is effective for fiscal years beginning after December 15, 1998, with
earlier application permitted. The Company does not believe that its adoption
will have a material impact on its financial position, results of operations, or
cash flows.
NOTE 2 - MARKETABLE SECURITIES
The Company accounts for its marketable securities under the Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of investments and debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
Investments are classified as held-to-maturity when the Company has the intent
and ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost. Investments not classified as such are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
determined by quoted market prices, with the unrealized gains and losses, net of
tax, included in accumulated other comprehensive loss within shareholders'
equity. Realized and unrealized gains and losses from investments have been
insignificant to the results of operations and financial position of the
Company.
Marketable securities at December 31 consist of the following:
41
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
1998 1997
-----------------
(in thousands)
<S> <C> <C>
Held-to-maturity securities:
Obligations of states and political subdivisions ................... $ -- $ 1,000
Debt securities of U.S. companies .................................. -- 9,853
------- -------
-- 10,853
Available-for-sale securities:
Debt securities of U.S. companies .................................. 20,323 5,856
Debt securities of foreign companies ............................... 2,625 --
U.S. Treasury securities and obligations of U.S. government agencies 3,600 5,084
Unrealized gains ................................................... 127 108
------- -------
26,675 11,048
------- -------
$26,675 $21,901
======= =======
</TABLE>
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. All of the Company's
securities have stated maturities of two years or less. The Company's cash flows
relating to the purchases and maturities of its marketable securities for the
years ended December 31 are as follows:
1998 1997 1996
------- ------- -------
(in thousands)
Purchases of marketable securities:
Investments held-to-maturity ................... $ -- $14,129 $18,795
Investments available-for-sale ................. 40,338 7,437 17,112
------- ------- -------
$40,338 $21,566 $35,907
======= ======= =======
Maturities and sales of marketable securities:
Investments held-to-maturity ................... $10,853 $17,600 $10,540
Investments available-for-sale ................. 24,730 3,900 8,721
------- ------- -------
$35,583 $21,500 $19,261
======= ======= =======
NOTE 3 - 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. Allowances are maintained for
potential credit losses. To date, such losses have been within management's
expectations.
Receivables at December 31 consist of the following:
1998 1997
-------- --------
(in thousands)
Billed receivables ........................... $ 8,665 $ 10,366
Unbilled receivables ......................... 3,305 1,837
Allowance for doubtful accounts .............. (400) (400)
-------- --------
$ 11,570 $ 11,803
======== ========
At December 31, 1998, two customer balances exceeded 10% of total
receivables; one customer comprised 44% of total receivables and another
customer comprised 22% of total receivables.
42
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - MAJOR CUSTOMERS AND REVENUES BY GEOGRAPHIC AREA
For the year ended December 31, 1998, two customers accounted for greater
than 10% of revenue: one contributed to approximately 43% of revenues and other
to approximately 11% of revenues. For the year ended December 31, 1997, three
customers accounted for greater than 10% of revenue: one customer represented
27% of revenues and two customers represented 11% of revenues each. For the year
ended December 31, 1996, no customer represented more than 10% of revenue.
Revenues from customers by geographic area for the years ended December 31
were as follows:
1998 1997 1996
------- ------- -------
(in thousands)
United States .................. $12,559 $ 8,555 $36,032
Asia-Pacific ................... 22,414 21,474 17,206
Europe ......................... 7,347 9,549 6,995
------- ------- -------
$42,320 $39,578 $60,233
======= ======= =======
For the years ended December 31, 1997 and 1996, approximately $39.0 million
and $42.9 million of total revenues, respectively, were telecom revenues. All
non-telecom product lines were discontinued by the end of 1996.
NOTE 5 - FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS, NET
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 three to five years 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 at December 31 consist of
the following:
1998 1997
-------- --------
(in thousands)
Computer equipment ............................... $ 18,464 $ 14,814
Furniture and fixtures ........................... 4,325 3,613
Leasehold improvements ........................... 6,663 6,660
-------- --------
29,452 25,087
Accumulated depreciation and amortization ........ (18,853) (14,922)
-------- --------
$ 10,599 $ 10,165
======== ========
NOTE 6 - EMPLOYEE PROFIT-SHARING/401(k) PLAN AND STOCK OPTION PLANS
Profit Sharing/401(k)
Eligible employees can contribute amounts to the Company's Profit
Sharing/401(k) Plan ("Plan") via payroll withholding subject to certain
limitations. The Company matches contributions by plan participants based upon a
percentage of the participant's contribution determined by the Board of
Directors for each plan year. Total charges to income under the Plan in 1998,
1997, and 1996, were approximately $795,000, $725,000, and $637,000,
respectively.
43
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity Sharing Plan
The Equity Sharing Plan ("Equity Plan") provides for the issuance of up to
2.6 million common shares for the granting of options to employees and
consultants. The Equity Plan provides for issuance of incentive options at an
exercise price of not less than 100% of fair value at the time of grant. As
provided by the Equity Plan, all ungranted options expired March 1, 1996;
accordingly, no shares are available for grant at December 31, 1998.
Information regarding the Equity Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Option Shares Exercise Price
------------- --------------
(in thousands)
<S> <C> <C>
Outstanding at December 31, 1995 ........................ 1,059 $ 3.34
Granted ............................................. 134 13.06
Exercised ........................................... (588) 3.78
Options canceled and available for future grant ..... (77) 6.18
------
Outstanding at December 31, 1996 ........................ 528 5.05
Exercised ........................................... (354) 2.41
Options canceled .................................... (137) 12.49
------
Outstanding at December 31, 1997 ........................ 37 2.97
Exercised ........................................... (34) 2.89
------
Outstanding at December 31, 1998 ........................ 3 3.86
======
Exercisable at December 31, 1998 ........................ 3 $ 3.86
====== ======
</TABLE>
At December 31, 1998, the weighted average contractual life of options
outstanding is less than one year and the range of exercise prices is $3.83 to
$3.90 per share. The weighted average grant date fair value of options granted
during 1996 was $13.86 per share. As discussed above, all ungranted options
expired March 1, 1996 so no options have been available for grant since that
date.
1991 Stock Incentive Plan
The 1991 Stock Incentive Plan ("Stock Plan") provides for the issuance of
up to 3.0 million common shares for the granting of options or restricted shares
to employees, directors, and consultants. The Stock Plan provides for issuance
of incentive options at an exercise price per share of not less than 100% of
fair value at the time of the grant. The Stock Plan also provides for issuance
of nonstatutory options and restricted stock awards at an exercise price per
share equal to the fair value of the shares at the date of grant. Options
granted under the Stock Plan generally have a term of up to six years from the
date of the grant and are exercisable to the extent vested. The option term and
vesting schedule is established by the 1991 Stock Plan Committee at the date of
grant. No grants of restricted stock have been issued under the Stock Plan.
In 1996, the Company's shareholders approved an amendment to the Stock Plan
that increased the number of common shares reserved for option grants to 7.5
million. Beginning January 1, 1997, the number of options eligible to be granted
under the Stock Plan automatically increases by 0.75 million each year.
Information regarding the Stock Plan is as follows:
44
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
<TABLE>
<CAPTION>
Weighted
Average
Option Shares Exercise Price
------------- --------------
(in thousands)
<S> <C> <C>
Outstanding at December 31, 1995 ........................ 2,442 $ 5.73
Granted ............................................... 970 16.47
Exercised ............................................. (529) 3.48
Options canceled and available for future grant ....... (439) 10.06
------
Outstanding at December 31, 1996 ........................ 2,444 9.61
Granted ............................................... 3,330 6.04
Exercised ............................................. (475) 4.15
Options canceled and available for future grant ....... (1,807) 11.55
------
Outstanding at December 31, 1997 ........................ 3,492 5.99
Granted ............................................... 833 3.14
Exercised ............................................. (138) 4.42
Options canceled and available for future grant ....... (919) 6.10
------
Outstanding at December 31, 1998 ........................ 3,268 5.29
======
Exercisable at December 31, 1998 ........................ 855 $ 5.76
====== ======
</TABLE>
At December 31, 1998, there were 4,291,040 options available for grant
under the 1991 Stock Incentive Plan.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Price Shares Life Exercise Price Shares Exercise Price
- -------------- ------ ---- -------------- ------ --------------
(in thousands) (years) (in thousands)
<S> <C> <C> <C> <C> <C>
$ 1.79 - 5.00.............. 685 4.93 $ 2.39 136 $ 3.11
5.01 - 6.00.............. 1,397 4.47 5.83 339 5.67
6.01 - 10.00.............. 1,183 4.31 6.59 379 6.75
10.01 - 22.58.............. 3 3.58 20.78 1 20.79
------ -----
3,268 855
====== =====
</TABLE>
The weighted average grant date fair value of options granted during 1998,
1997, and 1996 was $4.13, $3.70, and $11.14 per share, respectively.
1994 Outside Directors Stock Option Plan
In 1995, the Company's shareholders adopted the 1994 Outside Directors
Stock Option Plan ("Directors' Plan") which provides for the issuance of up to
300,000 common shares for options to nonemployee directors. In May 1998, the
board approved an amendment to the plan whereby each eligible director is to be
granted options to purchase 20,000 shares upon appointment or election to the
Board of Directors ("Board"); before the amendment, the amount was 31,500
shares. In addition, the amendment provides that current directors will be
granted options to purchase an additional 5,000 shares per year; before the
amendment, the amount was 6,000 shares per year. Options vest monthly over a
three-year period. At December 31, 1998, the weighted average contractual life
of options outstanding is 3.3 years and the range of exercise prices is $2.39 to
$10.75 per share.
45
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Information regarding the Directors' Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Option Shares Exercise Price
------------- --------------
(in thousands)
<S> <C> <C>
Outstanding at December 31, 1995 ........................... 86 $7.93
Granted ................................................ 30 8.75
-----
Outstanding at December 31, 1996 ........................... 116 8.14
Granted ................................................ 24 6.26
Options canceled and available for future grant ........ (44) 7.32
-----
Outstanding at December 31, 1997 ........................... 96 8.04
Granted ................................................ 72 5.34
-----
Outstanding at December 31, 1998 ........................... 168 6.89
=====
Exercisable at December 31, 1998 ........................... 84 $8.14
===== =====
</TABLE>
At December 31, 1998, there were 132,500 options available for grant under
the Directors' Plan.
The weighted average grant date fair value of options granted during 1998,
1997, and 1996 was $5.05, $3.78, and $5.40, per share, respectively.
Stock-Based Compensation and Pro forma Consolidated Information
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires disclosure of the fair value,
as defined, of options granted to employees and related compensation expense.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model. A weighted-average expected life of the
option of four years and no dividend yield were assumed.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The Company is also required to present pro forma consolidated information
as if provisions of SFAS 123 had been implemented as of January 1, 1995. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The effect of adjustments
made to obtain pro forma consolidated net loss per share is not expected to be
indicative of the effect on future periods' pro forma consolidated results. The
Company's pro forma consolidated information for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss ............................. $ (7,212) $ (6,508) $ (2,968)
========== ========== ==========
Pro forma net loss per share - Basic and diluted $ (0.32) $ (0.30) $ (0.14)
========== ========== ==========
Expected volatility ............................ 0.920 0.957 0.978
========== ========== ==========
Risk-free interest rate ........................ 5.15% 6.38% 6.60%
========== ========== ==========
</TABLE>
46
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Employee Stock Purchase Plan
In December 1996, the Company adopted the Employee Stock Purchase Plan
("Purchase Plan") under Section 423 of the Internal Revenue Code and reserved
500,000 shares of Company common stock for issuance under this plan. The number
of shares available under the Purchase Plan will increase annually by the lesser
of 100,000 shares, 1% of the Company's outstanding shares, or an amount
determined by the Board. All employees, as defined by the Purchase Plan, may
contribute up to 15% of their compensation to purchase shares of the Company's
common stock at the lesser of 85% of the fair market value at the beginning or
end of each six-month offering period. The offering periods commence each
February and August. During the years ended December 31, 1998 and 1997, 145,153
and 87,504 shares, respectively, of common stock were issued under the Purchase
Plan. Under the Purchase Plan, 267,343 shares are available for issuance at
December 31, 1998.
Option Repricing
In January 1997, the Company's Board approved the repricing of 1.1 million
options granted under the 1991 Stock Incentive Plan. All employees were given
the opportunity to exchange their current options for new options with an
exercise price of $6.63 per share (fair value of the related common shares as of
January 28, 1997). Of these options, 50% vested in January 1998, 25% in January
1999, and 25% will vest in January 2000. These options are included in the
respective option schedules as cancellations and subsequent grants.
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31 using the liability method
are as follows:
1998 1997
------- -------
(in thousands)
Current deferred tax assets:
Revenue differences related to timing ........... $ 850 $ 1,555
Other accrued items ............................. 1,028 320
------- -------
Total current deferred tax assets ............. 1,878 1,875
------- -------
Noncurrent deferred tax assets:
Net operating loss carryforward ................ 2,604 1,532
Benefit of credit carryforward ................. 854 852
In-process technology acquired ................. 334 --
Depreciation ................................... 415 202
------- -------
Total noncurrent deferred tax assets .......... 4,207 2,586
------- -------
Total deferred tax assets ......................... 6,085 4,461
Less: valuation allowance ........................ (2,395) --
------- -------
Net deferred tax assets ..................... $ 3,690 $ 4,461
======= =======
Realization of the Company's net deferred tax assets is dependent upon the
Company generating sufficient taxable income in 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 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.
47
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The current and deferred portions of the income tax provision (benefit) for
the years ended December 31 are as follows:
1998 1997 1996
------- ------- -------
(in thousands)
Current:
Federal ............................ $ (506) $ (656) $ (640)
State .............................. -- -- 97
Foreign ............................ 789 416 852
------- ------- -------
283 (240) 309
------- ------- -------
Deferred:
Federal ............................ 734 (994) (136)
State .............................. 37 (116) (21)
------- ------- -------
771 (1,110) (157)
------- ------- -------
$ 1,054 $(1,350) $ 152
======= ======= =======
The provision (benefit) for income taxes differed from the amount computed
by applying the Federal statutory income tax rate for the years ended December
31 as follows:
1998 1997 1996
------- ------- -------
Federal statutory rate ............... (34)% (34)% 34%
State taxes, net of federal .......... (3) (3) 5
Tax exempt interest .................. (6) (5) (10)
Foreign taxes ........................ 7 7 --
Valuation allowance .................. 69 -- --
Other items .......................... 3 1 5
------- ------- -------
Income tax provision (benefit) ....... *% (34)% 34%
======= ======= =======
*Not Meaningful
TCSI recorded an income tax provision (benefit) of $1.1 million, $(1.4)
million, and $152,000 for 1998, 1997, and 1996 respectively. The tax provision
for 1998 differed from the Federal statutory rate primarily due to a valuation
allowance recorded in the current year of approximately $2.4 million. The
valuation allowance was provided to reduce the net deferred tax assets to the
amount which management believes, based on the weight of available evidence, is
recognizable on a more likely than not basis.
At December 31, 1998, the Company had a net operating loss carryforward for
Federal income tax purposes of approximately $8.1 million which will expire in
varying amounts in 2012 and 2018 and a foreign tax credit carryforward of
approximately $850,000 which will expire in the year 2001.
NOTE 8-FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of each foreign
operation is the local currency. The effects of translation rate changes related
to long term assets and liabilities located outside the United States are
included as a component of accumulated other comprehensive loss within
shareholders' equity. Through 1998, foreign currency transaction gains and
losses (which are recorded in the consolidated statements of operations) have
not been significant.
NOTE 9-ACQUISITION OF GTE-NMO
In December 1998, the Company completed the acquisition of the net assets
of GTE Network Management Organization ("GTE-NMO"), a former division of GTE
Government Systems Corporation ("GTE"). GTE-NMO is a
48
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Bothell, Washington-based organization that develops and implements network
management solutions. It licenses WorldWin communications software ("WorldWin").
WorldWin is a family of operations support system ("OSS") products offering
telephony, cable, and wireless providers a flexible platform for launching new
services, while protecting existing network The acquisition price was
approximately $7,958,000 and consisted of cash of $6,513,000, forgiveness of an
existing receivable of $355,000, the assumption of a liability of $333,000, and
acquisition costs of $757,000. The acquisition was accounted for as a purchase.
The purchase price for book purposes was allocated by the Company approximately
as follows (in thousands):
Accounts receivable, net ............................................. $2,633
Furniture, fixtures, and leasehold improvements, net ................. 850
Intangible asset-developed technology (two-year estimated life) ...... 772
Intangible asset-core technology (five-year estimated life) .......... 1,788
Intangible asset-assembled workforce (three-year estimated life) ..... 699
Intangible asset-goodwill (seven-year estimated life) ................ 385
In-process technology ................................................ 831
------
Total consideration .............................................. $7,958
======
Intangible assets acquired in connection with the acquisition are being
amortized over the estimated lives noted above.
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The unaudited
pro forma consolidated information set forth below presents the consolidated
results of operations (as if the acquisition had occurred at the beginning of
the periods presented) for the period from the date of acquisition, after giving
effect to certain adjustments such as the write-off of in-process technology
acquired of $831,000 and one-time payments of $1.2 million for acquisition costs
and for fees to GTE for managing GTE-NMO's operations during the first month of
TCSI's ownership.
These unaudited pro forma consolidated results have been prepared for
comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisition taken place at the beginning of the period
presented or the results which may occur in the future. Unaudited pro forma
consolidated results for the years ended December 31 were as follows:
1998 1997
-------- ---------
(unaudited)
Pro forma revenues ...................................... $ 51,742 $ 52,578
======== ========
Pro forma net loss ...................................... $ (5,010) $ (3,122)
======== ========
Pro forma loss per share - Basic and diluted ............ $ (0.22) $ (0.14)
======== ========
Shares used in computation of pro forma loss per share .. 22,349 21,638
======== ========
Purchased In-Process Technology. Management estimates that approximately
$831,000 of the purchase price represents purchased in-process technology that
has not yet reached technological feasibility and has no alternative future use.
Accordingly, this amount was expensed in 1998. The value assigned to in-process
technology was determined by identifying the product development projects in
areas for which technological feasibility had not been achieved and assessing
the date of completion of the product development effort. The state of
completion was determined by estimating the costs and time incurred to date
relative to those costs and time to be incurred to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows only from the percentage of product development efforts
complete at the date of acquisition, and discounting the net cash flows back to
their present value. The discount rate included a factor that took into account
the uncertainty surrounding the successful development of the purchased
in-process technology. Research and development costs to bring the products from
the acquired company to technological feasibility are not expected to have a
material impact on the Company's future results of operations or cash flows.
49
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Developed Technology. Management estimates that approximately $772,000 of
the purchase price represents developed technology. The value assigned to
developed technology was determined using an income approach methodology which
estimated development and technical support expenses and deducting them from
projected revenues to arrive at projected earnings before interest and taxes.
Core Technology. Management estimates that approximately $1.8 million of
the purchase price represents purchased core technology. The value assigned to
core technology was determined using an income approach methodology. GTE-NMO's
core technology is comprised of its existing products.
Assembled Workforce. Management estimates that approximately $0.7 million
of the purchase price represents the value of the assembled workforce. The value
of the assembled workforce was estimated using a cost approach. This approach
identified the employees that would require significant cost to replace them and
train new employees. Next, each employee's fully burdened cost (including
salary, benefits and overhead), the cost to train the employee and the
recruiting costs (such as locating, interviewing and hiring) were estimated. The
costs were totaled to estimate the value of the assembled workforce.
A company's assembled workforce represents an asset which incorporates
several factors such as the knowledge and expertise specific to the company, its
products and its ability to generate sales and future profitability, and the
logistics of having a workforce in place without the need to recruit, interview,
hire and train new employees. These characteristics are very important in many
industries, especially in high technology companies, where there is often a
shortage of skilled employees and where the competition to hire them is strong.
The more specialized the workforce, the greater the cost of its assemblage, and
hence, the greater its value.
NOTE 10-COMMITMENTS
The Company is obligated under operating lease agreements for its
facilities with noncancelable lease terms in excess of one year. Certain of
these leases contain renewal options and require that the Company pay for taxes,
insurance, and maintenance expenses. Rent expense under these leases during the
years 1998, 1997, and 1996 was $2.2 million, $2.2 million, and $2.3 million,
respectively. Future minimum lease payments on noncancelable operating leases as
of December 31, 1998 are as follows (in thousands):
1999................................................... $ 3,098
2000................................................... 1,973
2001................................................... 1,681
2002................................................... 1,690
2003................................................... 1,614
Thereafter............................................. 1,415
---------
$ 11,471
=========
NOTE 11-LEGAL PROCEEDINGS
In November 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. In July 1997, plaintiffs
voluntarily dismissed the underwriter defendants without prejudice. In June
1998, plaintiffs filed their second amended complaint. In January 1999,
defendants' demurrers to that complaint were orally overruled. In response,
certain of the defendants filed answers to the second amended complaint, while
the remaining defendants are awaiting the written order overruling defendants'
demurrers.
50
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In November 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 complaint in the Tinkler Derivative
Action also names the Company as a nominal defendant. The plaintiff in the
Tinkler Derivative Action seeks damages of an unspecified amount. In February
1998, plaintiff filed a second amended complaint alleging breach of fiduciary
duties and violation of the California Corporations Code. In December 1998,
defendants answered the second amended complaint.
In September 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. In January 1998,
defendants moved to dismiss the Copperstone Federal Action. In April 1998, the
Court ordered plaintiffs to certify a class prior to ruling on defendants'
motion to dismiss. Plaintiffs thereafter provided shareholders with a period
during which they could choose to be excluded from the class; this period has
subsequently expired. In January 1999, the court dismissed the complaint with
leave to amend. In February 1999, the plaintiffs moved to stay the Copperstone
Federal Action in favor of the Copperstone State Action, or for additional time
in which to file an amended complaint. Defendants have requested that the Court
dismiss the Copperstone Federal Action with prejudice. Oral argument on the
plaintiff's motion is scheduled for April 1999.
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 financial position, results of operations, or cash flows in future
periods.
In 1997, Atmel Corporation ("Atmel") made a claim under the 1996 TCSI/Atmel
Corporation Purchase Agreement. In 1998, management obtained an equitable
settlement of this matter with the escrow agent releasing $550,000 (of a $1.0
million escrow fund) plus interest to TCSI, and the remaining $450,000 less fees
to Atmel. The settlement is reported as a nonrecurring special gain in the 1998
consolidated statement of operations.
NOTE 12-NONRECURRING SPECIAL ITEMS
In 1998, the Company recorded a nonrecurring gain of $550,000 following the
settlement of litigation (described in Note 11 above) related to the sale of a
non-telecom business unit. In 1997, the Company concluded the sale of equipment
resulting in a nonrecurring loss of $1.1 million. In 1996, the Company recorded
a nonrecurring gain of $7.9 million related to the licensing of its embedded
wireless technology to Atmel Corporation ("Atmel"). These gains and losses are
described in further detail below.
The Company incurred a charge to operations of $1.1 million in the first
two quarters of 1997 resulting from adjustments to the market-value of equipment
held for resale related to the termination of a transportation contract in the
third quarter of 1996. The Company concluded the sale of the equipment in the
third quarter of 1997. Related to this same agreement, in the third quarter of
1996, the Company recorded a charge of approximately $3.3 million to cover the
costs related to the termination of this agreement. The customer paid the
Company approximately $5.3 million to terminate the agreement.
As part of the Company's strategy to focus on its core telecom operations,
in November 1996, the Company licensed its embedded wireless technology and
related product lines to Atmel Corporation ("Atmel") in exchange for Atmel
common stock valued at $10.0 million. In the fourth quarter of 1996, the Company
recorded a gain on this licensing of its
51
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
technology, net of transaction costs and project commitments, totaling $7.9
million and a gain of approximately $0.6 million from the sale of the Atmel
stock (described as "Gain on sale of investment in common stock" in the 1996
consolidated statement of operations).
NOTE 13-SUBSEQUENT EVENT-PREFERRED SHARES RIGHTS AGREEMENT (unaudited)
In February 1999, the Company's Board declared a dividend distribution of
one preferred share purchase right for each share of the Company's common stock
outstanding. Each right will entitle shareholders to buy 1/1000th of one share
of the Company's Series A Participating Preferred Stock at an exercise price of
$13.00. The rights will become exercisable following the tenth day after a
person or group announces acquisition of 15% or more of the Company's common
stock or announces commencement of a tender offer, the consummation of which
would result in ownership by the person or group of 15% or more of the common
stock. The Company will be entitled to redeem the rights at $0.01 per right at
any time on or before the tenth day following acquisition by a person or group
of 15% or more of the Company's common stock.
The dividend distribution was made on March 11, 1999 payable to
shareholders of record on March 11, 1999. The rights expire on March 11, 2009.
NOTE 14 - SELECTED UNAUDITED QUARTERLY FINANCIAL DATA
Selected unaudited quarterly financial data for 1998 is as follows:
<TABLE>
<CAPTION>
1998 Quarter Ended
----------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
(unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Services ...................................................... $ 8,131 $ 8,640 $ 7,383 $ 7,406
Software licensing fees ....................................... 2,874 2,499 2,333 3,054
-------- -------- -------- --------
Total revenues ........................................ 11,005 11,139 9,716 10,460
-------- -------- -------- --------
Costs, expenses, and special items:
Services ...................................................... 4,558 5,056 5,378 5,305
Product development ........................................... 2,543 2,902 3,264 3,602
Selling, general, and administrative .......................... 3,810 3,698 3,425 5,231
Write-off of in-process technology acquired ................... -- -- -- 831
Nonrecurring special items, net ............................... -- (550) -- --
-------- -------- -------- --------
Total costs, expenses, and special items .............. 10,911 11,106 12,067 14,969
-------- -------- -------- --------
Income (loss) from operations ................................... 94 33 (2,351) (4,509)
Other income and expense ........................................ 766 782 803 915
-------- -------- -------- --------
Income (loss) before income tax provision ....................... 860 815 (1,548) (3,594)
Income tax provision (benefit) .................................. 344 326 (150) 534
-------- -------- -------- --------
Net income (loss) ............................................... $ 516 $ 489 $ (1,398) $ (4,128)
======== ======== ======== ========
Net income (loss) per share (EPS) - Basic ....................... $ 0.02 $ 0.02 $ (0.06) $ (0.18)
======== ======== ======== ========
Shares used in calculation of EPS - Basic ....................... 22,219 22,312 22,410 22,452
======== ======== ======== ========
Net income (loss) per share (EPS) - Diluted ..................... $ 0.02 $ 0.02 $ (0.06) $ (0.18)
======== ======== ======== ========
Shares used in calculation of EPS - Diluted ..................... 22,991 22,516 22,410 22,452
======== ======== ======== ========
</TABLE>
52
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Selected unaudited quarterly financial data for 1997 is as follows:
<TABLE>
<CAPTION>
1997 Quarter Ended
--------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
(unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Services ......................................................... $ 7,803 $ 9,055 $ 9,239 $ 7,873
Software licensing fees .......................................... 2,031 449 518 2,610
-------- -------- -------- --------
Total revenues ..................................................... 9,834 9,504 9,757 10,483
-------- -------- -------- --------
Costs, expenses, and special items:
Services ......................................................... 5,143 5,139 5,617 5,172
Product development .............................................. 1,452 1,361 1,408 1,711
Selling, general, and administrative ............................. 4,568 4,306 4,287 5,402
Nonrecurring special items, net .................................. 270 818 -- --
-------- -------- -------- --------
Total costs, expenses, and special items ................. 11,433 11,624 11,312 12,285
-------- -------- -------- --------
Loss from operations ............................................... (1,599) (2,120) (1,555) (1,802)
Other income and expense ........................................... 749 729 808 818
-------- -------- -------- --------
Loss before income tax benefit ..................................... (850) (1,391) (747) (984)
Income tax benefit ................................................. (289) (472) (254) (335)
-------- -------- -------- --------
Net loss ........................................................... $ (561) $ (919) $ (493) $ (649)
======== ======== ======== ========
Net loss per share (EPS) - Basic ................................... $ (0.03) $ (0.04) $ (0.02) $ (0.03)
======== ======== ======== ========
Shares used in calculation of EPS - Basic .......................... 21,343 21,327 21,730 22,015
======== ======== ======== ========
Net loss per share (EPS) - Diluted ................................. $ (0.03) $ (0.04) $ (0.02) $ (0.03)
======== ======== ======== ========
Shares used in calculation of EPS - Diluted ........................ 21,343 21,327 21,730 22,015
======== ======== ======== ========
</TABLE>
53
<PAGE>
TCSI Corporation
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balances at Charge to Balances at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ---------------------------------------------------------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for uncollectible accounts .................... $ 400 $ 75 $ (75) $ 400
======= ======= ======= =======
Year ended December 31, 1997:
Allowance for uncollectible accounts ...................... $ 400 $ 263 $ (263) $ 400
======= ======= ======= =======
Year ended December 31, 1996:
Allowance for uncollectible accounts ...................... $ 400 $ 1,248 $(1,248) $ 400
======= ======= ======= =======
</TABLE>
54
TCSI Corporation
EXHIBIT 10.32
AMENDMENT TO 1994 OUTSIDE DIRECTORS STOCK OPTION PLAN
(May 5, 1998)
WHEREAS: Section 7 of the 1994 Outside Directors Stock Option Plan (the
"Director Plan") permits amendment of the Director Plan by the Board of
Directors of TCSI Corporation (the "Corporation");
NOW, THEREFORE, BE IT RESOLVED: That the first paragraph of Section 9 of
the Director Plan be amended to read in its entirety as follows:
"A Stock Option of 5,000 shares of Common Stock shall be granted to each
Outside Director as of December 2, 1994. Thereafter, a Stock Option of
20,000 shares of Common Stock shall be granted to each New Outside Director
(as hereinafter defined) upon appointment or election to the Board. Subject
to the availability of sufficient shares of Comon Stock in accordance with
Section 3 hereof, a Stock Option for 5,000 shares of Common Stock shall be
granted to each Outside Director annually on the anniversary of the initial
award made to the Outside Director under this Plan, but only if such
Outside Director is an Outside Director at such time."
TCSI Corporation
EXHIBIT 21.0
Subsidiary
Foreign Sales Corporation
(Incorporated in U.S. Virgin Islands)
TCSI Corporation
EXHIBIT 23.1
Consent Of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1991 Stock Incentive Plan (No. 33-57540, 333-8353 and
333-66101), as amended, Equity Sharing Plan (No. 33-41808), as amended, 1994
Board of Directors Stock Option Plan (No. 33-98842), as amended, and Employee
Stock Purchase Plan (No. 333-31705), and in the related Prospectuses, of TCSI
Corporation of our report dated February 4, 1999, with respect to the
consolidated financial statements and financial statement schedule of TCSI
Corporation included in this annual report (Form 10-K) for the year ended
December 31, 1998.
/s/ ERNST & YOUNG LLP
San Francisco, California
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,308
<SECURITIES> 19,731
<RECEIVABLES> 12,892
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 57,756
<PP&E> 29,452
<DEPRECIATION> 18,853
<TOTAL-ASSETS> 80,829
<CURRENT-LIABILITIES> 9,685
<BONDS> 0
0
0
<COMMON> 2,245
<OTHER-SE> 68,899
<TOTAL-LIABILITY-AND-EQUITY> 80,829
<SALES> 0
<TOTAL-REVENUES> 42,320
<CGS> 0
<TOTAL-COSTS> 20,297
<OTHER-EXPENSES> 12,592 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,467)
<INCOME-TAX> 1,054
<INCOME-CONTINUING> (4,521)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,521)
<EPS-PRIMARY> (.20)<F1>
<EPS-DILUTED> (.20)
<FN>
<F1>
For purposes of this exhibit, "PRIMARY" means "BASIC."
<F2>
Excludes CGS & Selling, general, administrative expenses as these are part of
5-03(b)(2) and 5-03(b)(4), respectively.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,566
<SECURITIES> 20,301
<RECEIVABLES> 12,885
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 69,441
<PP&E> 25,087
<DEPRECIATION> 14,922
<TOTAL-ASSETS> 84,231
<CURRENT-LIABILITIES> 10,083
<BONDS> 0
0
0
<COMMON> 2,214
<OTHER-SE> 71,934
<TOTAL-LIABILITY-AND-EQUITY> 84,231
<SALES> 0
<TOTAL-REVENUES> 39,578
<CGS> 0
<TOTAL-COSTS> 21,071
<OTHER-EXPENSES> 7,020 <F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,972)
<INCOME-TAX> (1,350)
<INCOME-CONTINUING> (2,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,622)
<EPS-PRIMARY> (0.12) <F1>
<EPS-DILUTED> (0.12)
<FN>
<F1>
For purposes of this exhibit, "PRIMARY" means "BASIC."
<F2>
Excludes CGS & Selling, general, administrative expenses as these are part of
5-03(b)(2) and 5-03(b)(4), respectively.
</FN>
</TABLE>
