<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-19377
-------
TCSI Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 68-0140975
- ------------------------------------------------ ----------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1080 Marina Village Parkway, Alameda, CA 94501
- ---------------------------------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(510) 749-8500
--------------
(Registrant's telephone number, including area code)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
22,686,224 shares of Common Stock of the Registrant were outstanding as of
November 10, 1999.
<PAGE>
Table of Contents
Page
----
Part I - Financial Information
- ------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
September 30, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the nine
months ended September 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Market Risk 23
Part II - Other Information
- -----------------------------
Item 1. Legal Proceedings 24
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
TCSI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $19,022 $22,308
Marketable securities 15,876 19,371
Receivables, net 13,503 11,570
Other receivables 1,734 922
Deferred tax assets 2,941 2,941
Other current assets 2,619 644
------------- ------------
Total current assets 55,695 57,756
Equipment and leasehold improvements, net 9,115 10,599
Noncurrent marketable securities - 7,304
Noncurrent deferred tax assets 749 749
Other assets 3,604 4,421
------------- ------------
$69,163 $80,829
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,342 $ 4,446
Accrued liabilities 3,628 3,198
Deferred revenue 820 1,379
Income taxes payable 1,189 662
------------- ------------
Total current liabilities 6,979 9,685
------------- ------------
Stockholders' equity:
Preferred stock, par value $0.01 per share; 5,000,000 shares authorized;
none issued and outstanding - -
Common stock, par value $0.10 per share; 75,000,000 shares authorized;
22,686,224 and 22,452,606 shares issued and outstanding, at September 30,
1999 and December 31, 1998, respectively 2,269 2,245
Additional paid-in capital 51,265 50,737
Accumulated other comprehensive gain (loss) (508) (244)
Retained earnings 9,158 18,406
------------- ------------
Total stockholders' equity 62,184 71,144
------------- ------------
$69,163 $80,829
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Services $ 4,010 $ 7,383 $ 18,643 $24,154
Software licensing fees 3,276 2,333 8,867 7,706
--------------- -------------- --------------- ---------------
Total revenues 7,286 9,716 27,510 31,860
--------------- -------------- --------------- ---------------
Costs, expenses, and special items:
Services 4,762 5,378 14,713 14,992
Product development 3,070 3,264 10,932 8,709
Selling, general and administrative 4,795 3,425 12,402 10,933
Nonrecurring special items - - - (550)
--------------- -------------- --------------- ---------------
Total costs, expenses, and special items 12,627 12,067 38,047 34,084
--------------- -------------- --------------- ---------------
Loss from operations (5,341) (2,351) (10,537) (2,224)
Interest income 576 803 1,735 2,351
--------------- -------------- --------------- ---------------
Income (loss) before income tax provision (benefit) (4,765) (1,548) (8,802) 127
Income tax provision (benefit) 58 (150) 445 520
--------------- -------------- --------------- ---------------
Net loss $(4,823) $(1,398) $ (9,247) $ (393)
=============== ============== =============== ===============
Basic and diluted loss per share $(0.21) $(0.06) $(0.41) $(0.02)
=============== ============== =============== ===============
Weighted-average common shares 22,652 22,410 22,589 22,315
=============== ============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TCSI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------------
1999 1998
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,247) $ (393)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation 1,889 1,985
Amortization 2,127 928
Deferred tax assets - 376
Changes in assets and liabilities:
Receivables (1,933) 3,818
Other receivables (812) (104)
Other current assets (1,975) 110
Accounts payable (3,104) (573)
Accrued liabilities 430 1,111
Deferred revenue (559) (2,768)
Income taxes payable 527 (680)
----------------- -------------------
Net cash provided by (used in) operating activities (12,657) 3,810
----------------- -------------------
Cash flows from investing activities:
Capital and leasehold improvement expenditures, net (1,716) (2,145)
Purchases of marketable securities (26,837) (31,457)
Maturity and sale of marketable securities 37,636 27,574
----------------- -------------------
Net cash provided by (used in) investing activities 9,083 (6,028)
----------------- -------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 552 1,567
----------------- -------------------
Net cash provided by financing activities 552 1,567
----------------- -------------------
Effect of exchange rate changes on cash and cash equivalents (264) (172)
----------------- -------------------
Net decrease in cash and cash equivalents (3,286) (823)
Cash and cash equivalents at the beginning of the period 22,308 33,566
----------------- -------------------
Cash and cash equivalents at the end of the period $ 19,022 $ 32,743
================= ===================
Supplemental disclosures of cash flow information:
Cash paid (refunds received) during the period for income taxes $ (156) $ 663
================= ===================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
The Company
TCSI Corporation ("TCSI" or the "Company") currently operates in one
industry segment, which is providing integrated software products and services
for the global telecommunications industry.
Basis of Presentation
In the opinion of the management of the Company, the unaudited consolidated
interim financial statements included herein have been prepared on the same
basis as the December 31, 1998 audited consolidated financial statements and
include all adjustments, consisting of normal recurring adjustments, necessary
to a fair statement of the results for the interim periods presented. The
results of operations for current interim periods are not necessarily indicative
of results to be expected for the current year or for any other period. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 1998 included in the Company's Annual Report on Form 10-K (File No.
0-19377).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
NOTE 2 - RECEIVABLES AND CREDIT RISK
Receivable balances are primarily from large, credit-worthy customers in
the telecommunications industry. The Company performs ongoing credit
evaluations of its customers and does not require collateral. The Company does
not anticipate any significant default from a customer's inability to make a
payment for products received and/or for services rendered. Allowances are
maintained for potential credit losses.
Receivables consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- --------------------
(In thousands)
(Unaudited)
<S> <C> <C>
Billed receivables $10,640 $ 8,665
Unbilled receivables 3,263 3,305
Allowance for doubtful accounts (400) (400)
------------------- --------------------
Receivables, net $13,503 $11,570
=================== ====================
</TABLE>
6
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
NOTE 3 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements are stated at cost. Straight-line
depreciation is provided for furniture and equipment in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated service
lives of three to five years. Amortization is provided for leasehold
improvements over the life of the lease utilizing the straight-line method.
Equipment and leasehold improvement balances consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- -------------------
(In thousands)
(Unaudited)
<S> <C> <C>
Computer and lab equipment $ 19,723 $ 18,464
Furniture and fixtures 4,392 4,325
Leasehold improvements 7,053 6,663
-------------------- -------------------
31,168 29,452
Accumulated depreciation and amortization (22,053) (18,853)
-------------------- -------------------
Equipment and leasehold improvements, net $ 9,115 $ 10,599
==================== ===================
</TABLE>
NOTE 4 - INCOME TAXES
The Company recorded an income tax provision of $445,000 in the nine months
ended September 30, 1999 compared to $520,000 in the nine months ended September
30, 1998. The 1999 provision reflects taxes paid to foreign jurisdictions.
At September 30, 1999, the Company had approximately $3.7 million of net
deferred tax assets. The realization of these deferred tax assets is dependent
upon the Company generating sufficient taxable income from future years in
appropriate jurisdictions to obtain benefit from the reversal of temporary
differences and from net operating loss and tax credit carryforwards. The amount
of net deferred tax assets considered realizable is subject to adjustment in
future periods if estimates of future taxable income are reduced, which would
negatively impact the Company's income tax provision in future periods.
NOTE 5 - NET LOSS PER SHARE
Basic loss per share is computed using the weighted average number of
common shares outstanding. At September 30, 1999 and 1998, outstanding stock
options and other stock equivalents are not included in the calculation of the
diluted loss per share as their effect would be antidilutive. The following
table sets forth the computation of basic and diluted loss per share:
7
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
(Unaudited)
Numerator
Numerator for basic loss per share $(4,823) $(1,398) $(9,247) $ (393)
============== ============== ============ ===============
Denominator
Denominator for basic and diluted loss per
share - weighted-average common shares 22,652 22,410 22,589 22,315
============== ============== ============ ===============
Loss per share - basic and diluted $ (0.21) $ (0.06) $ (0.41) $ (0.02)
============== ============== ============ ===============
</TABLE>
The Company had a net loss for the three and nine months ended September
30, 1999. The effect of dilutive securities - employee stock options (with an
option exercise price less than the average market price of the Company's common
stock) which were not included in the three and nine months ended September 30,
1999 computations because their effect would be antidilutive were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- --------------------------------------
1999 1998 1999 1998
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
(Unaudited)
Weighted-average common shares 30 53 82 156
================ ================= ================= =================
Weighted-average exercise price $1.90 $3.15 $2.00 $5.20
================ ================= ================= =================
</TABLE>
Antidilutive securities:
The following antidilutive securities consist of options not included in
the computation of diluted loss per share because the exercise price of these
options was greater than the average market price of the Company's common stock
during the period:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------
1999 1998 1999 1998
----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
(Unaudited)
Absolute or weighted average options at end
of period 3,134 2,867 2,814 1,367
================= ============== ============== ==============
Weighted-average exercise price $ 5.13 $ 6.17 $ 5.75 $ 6.74
================= ============== ============== ==============
</TABLE>
8
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
NOTE 6 - COMPREHENSIVE LOSS
The following is a summary of comprehensive loss for the three and nine
months ended September 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ------------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
(In thousands)
(Unaudited)
Net income (loss) $(4,823) $(1,398) $(9,247) $(393)
Translation gains (losses) 8 (3) 38 (172)
Unrealized losses on securities (313) (17) (302) (114)
-------------- -------------- --------------- ----------------
Comprehensive loss $(5,128) $(1,418) $(9,511) $(679)
============== ============== =============== ================
</TABLE>
NOTE 7 - LITIGATION
On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997,
plaintiffs voluntarily dismissed the underwriter defendants without prejudice.
On September 24, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The complaint in the Copperstone
Federal Action contained 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 sought damages of an unspecified amount. On April
20, 1998, the Court ordered plaintiffs to certify a class. Plaintiffs sent
notice to the class and the opt out period has expired.
On May 5, 1999, the Company announced that it had reached a preliminary
settlement of the Copperstone State Action and the Copperstone Federal Action.
On October 20, 1999, pursuant to the settlement agreement, the United States
District Court of the Northern District of California dismissed the Copperstone
Federal Action with prejudice. The settlement involved payment of an amount
comprised of proceeds from the Company's Director and Officer insurance
policies. Neither the Company nor the individuals involved contributed to the
settlement of the actions.
On November 20, 1996, a purported derivative action complaint was filed in
the Superior Court of the State of California, Alameda County, by Mike Tinkler
against the Company's Board of Directors and the Company as a nominal defendant
(the "Tinkler Derivative Action"). The second amended complaint in the
9
<PAGE>
TCSI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Continued)
Tinkler Derivative Action alleged that as a result of the facts alleged in the
Copperstone State Action, defendants breached their fiduciary duties. On
December 9, 1998, defendants answered the second amended complaint. The parties
have reached a preliminary settlement of the Tinkler Derivative Action. The
settlement involves payment of an amount comprised of proceeds from the
Company's Director and Officer insurance policies and a contribution by the
Company. The settlement is not expected to have a material adverse effect on
TCSI's financial position or on its financial results of operations. The
settlement is subject to court approval.
No trial is scheduled in the Tinkler Derivative Action. The Company
believes it has meritorious defenses to the action, and intends to defend it
vigorously. The Company is also a party as a defendant in various lawsuits,
contractual disputes, and other legal claims, the results of which are not
presently determinable. In the opinion of management, resolution of these legal
actions is not expected to have a material adverse effect on the financial
position of the Company. However, depending on the amount and timing, an
unfavorable resolution of any of these matters could materially affect the
Company's future results of operations or cash flows in future periods.
10
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In addition to historical information contained herein, this Management's
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain factors that could cause actual results to differ
materially from those reflected in the forward-looking statements. Such factors
include, but are not limited to, those discussed below and in the Company's Form
10-K for the fiscal year ended December 31, 1998.
Overview
TCSI Corporation provides integrated software products and services for the
global telecommunications ("telecom") industry. Since its inception in 1983, a
significant portion of the Company's revenues has been earned from telecom
service providers and equipment manufacturers. Since 1993, the Company's telecom
growth has been led by sales of SolutionCore(R) and related products and
services. Prior to 1997, the Company also earned revenues from licensing
embedded software contained in wireless products and from the development of
system solutions for customers in the insurance, healthcare, and transportation
industries. During the second half of 1996, the Company divested its non-telecom
product lines by licensing its embedded software product lines and terminating
its final transportation-related development agreement. As a result, since 1997,
the Company has focused almost entirely on offering software solutions to the
telecom industry.
The Company provides services to customers under time-and-material and
fixed price contracts. Service revenues are generally recognized on the
percentage-of-completion method based on the percentage of contract costs
incurred in relation to total estimated contract costs. Changes in total
estimated contract costs, if any, are recognized in the period such changes are
determined. The scope and size of the Company's system solutions can be large
and complex, typically requiring delivery over several quarters. From time-to-
time, customers have established payment milestones, which can be achieved only
after completion of the related services. In limited cases, some customers have
disputed fees charged for services provided. Although the Company has been and
is under no obligation to compromise its billed amounts, the Company has
periodically reduced its accounts receivable when such disputes could not be
amicably resolved and may do so in the future. Additionally, a portion of the
Company's revenues has been, and is expected to continue to be, derived from
software licensing fees from a limited number of customers. 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 non-cancelable 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 approval processes typically accompanying such
significant capital expenditures. Accordingly, the Company is substantially
dependent on its customers' decisions as to the timing and level of expenditures
and resource commitments. The variability in the timing of such expenditures
could cause material fluctuations in the Company's business, operating results,
and financial condition. In this regard, the consistency of the Company's 1999
and 1998 quarterly results have been adversely affected by delays in the
purchase of software licenses and related services.
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
11
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
nature of the advanced element, network, and service management systems being
developed, successful deployment of these systems can contain significant
technological risks. The Company has in the past relied, and will in the future
rely, on its development and implementation expertise. Additionally, development
and implementation of these systems often occurs over several quarters. There
exists the risk that a change in a customer's technology or business strategy
during such lengthy development and implementation periods may cause early
termination of a project or discontinuance of future phases. In this regard, the
Company, in limited cases, has experienced and may continue to experience
fluctuations in revenues and operating results on a quarterly basis due to
termination, cancellation, or non-renewal of agreements.
Management believes that revenue growth is highly dependent upon the
development and enhancement of software products that meet market needs. Prior
to 1996, the Company's product development was primarily funded by customers as
part of the development of software applications for such customers. The Company
typically retained certain rights to developed software products. In certain
circumstances, however, the Company agreed to restrict its use of such products
to certain markets and during certain time periods. During 1996, the Company
began funding a larger portion of its product development costs. Although
management intends to target product development spending at levels consistent
with other software companies, from time to time, spending may be greater or
less than these amounts, as circumstances dictate. Furthermore, management
expects that, from time to time, it may acquire businesses, products, or
technologies to enhance the Company's current product offerings.
Results of Operations
Revenues. The Company generates revenues from the sale of its software
products and related services to the telecom industry. Total revenues for the
quarter ended September 30, 1999 decreased 25% to $7.3 million, from the
comparable 1998 period. Total revenues for the nine months ended September 30,
1999 decreased 14% to $27.5 million, from the comparable 1998 period. The
decrease in revenues resulted primarily from the completion of several projects
in the Asia-Pacific region and a lack of follow-on work in that region due to
channel slow-downs by submarine cable and communications satellite customers. In
the third quarter, four customers each accounted for more than 10% of total
revenue. Revenues from services ("service revenues"), for the three months ended
September 30, 1999, were $4.0 million, a 46% decrease from $7.4 million for the
comparable 1998 period. For the nine months ended September 30, 1999 services
revenues were $18.6 million, a 23% decrease from $24.1 million for the
comparable 1998 period. The downward trend may continue until the Company's
existing and future customers ramp up their development efforts. Revenue from
software licensing fees ("license revenues"), for the three months ended
September 30, 1999 were $3.3 million, a 40% increase from $2.3 million for the
comparable 1998 period. For the nine months ended September 30, 1999, license
revenues increased 15% to $8.9 million from $7.7 million for the comparable 1998
period. Runtime license revenue was again the largest component. The Company
expects that runtime license revenues will continue to vary from quarter to
quarter. Four customers accounted for 83% of license revenues for the quarter
ended September 30, 1999.
Revenues from the Asia-Pacific region decreased to $1.4 million and $9.4
million for the three and nine months ended September 30, 1999, respectively,
compared to $4.7 million and $16.7 million for the comparable 1998 periods.
Revenues declined as the result of completing many of the Asia-Pacific follow-on
contracts late last year, and a slowdown in new service contracts. Revenues
from the America region were $2.6 million and $8.7 million for the three and
nine months ended September 30, 1999, respectively, compared to $3.2 million and
$10.2 million for the comparable 1998 periods. For the nine months ending
12
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
September 30, 1999 revenues declined as the result of completing many of the
Americas follow-on contracts last year, and a slowdown in new service contracts.
Revenues from the Europe region increased to $3.3 million and $9.4 million for
the three and nine months ended September 30, 1999, respectively, compared to
$1.9 million and $4.9 million for the comparable 1998 periods. The Europe region
received the greatest benefits from sales of WorldWin, the product line acquired
in the Company's purchase of GTE's Network Management Organization ("GTE-NMO").
The Company generally recognizes service revenues involving design, development,
testing and deployment over a twelve- to eighteen-month period. The Company
expects the geographical mix of revenues to vary from period to period as it
responds to global buying habits and develops relationships with new and
existing partners and channels.
To date, a portion of revenues has been concentrated among a limited number
of customers. For the three months ended September 30, 1999, revenues from the
Company's five largest customers decreased to 60% from 82% for the comparable
1998 period. The revenues from these customers represent many separate and
distinct projects that are geographically dispersed throughout the world. There
can be no assurance that such customers will continue to place orders with the
Company which will equal or exceed the comparable levels for prior periods.
(See "Certain Factors That May Affect Future Results and Market Price of Stock-
Customer Concentration".)
Costs of Services. The Company incurs direct costs in the development and
deployment of its customers' software solutions. The major components of direct
costs are employee compensation, subcontractor fees, training costs, and other
billable direct costs, including travel expenses. Direct costs also include an
allocation for benefits, facilities, telephone expenses, information systems
support, depreciation, and amortization of intangibles. Costs of services for
the three and nine months ended September 30, 1999 were $4.8 million and $14.7
million, or 65% and 53% of total revenues, respectively, compared to $5.4
million and $15.0 million, or 55% and 47% of total revenues for the comparable
1998 periods. The cost of service percentage may remain at or increase from
third quarter 1999 levels until existing and future customers ramp up their
development efforts.
Product Development. Product development expenses include employee
compensation, subcontractor fees, training costs, and other product development
costs for existing and potential new products, in addition to an allocation for
benefits, facilities, telephone expenses, information systems support, and
depreciation. For the three and nine months ended September 30, 1999, product
development expenses were $3.1 million and $10.9 million, or 42% and 40% of
total revenues, respectively, compared with $3.3 million and $8.7 million, or
34% and 27% of total revenues for the comparable 1998 periods. The Company
expects to continue to invest in its new component-based applications. There
can be no assurance, however, that the Company's product development spending
will result in the successful introduction of new products.
Selling, General and Administrative Expenses. Selling expenses include
sales and marketing, employee compensation, promotional material, trade shows,
travel, and facilities expenses. General and administrative expenses include
compensation costs related to executive management, finance, and administrative
personnel along with the other administrative costs including recruiting, legal
and accounting fees, insurance, and bad debt expense. For the three and nine
months ended September 30, 1999, selling, general, and administrative expenses
were $4.8 million and $12.4 million, or 66% and 45% of total revenues,
respectively, compared with $3.4 million and $10.9 million, or 35% and 34% of
total revenues for the comparable 1998 periods. The increase in selling, general
and administrative expenses reflects the
13
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Company's increased sales and marketing activities, and in the third quarter of
1999, costs associated with the Tinkler Derivative Action, the Copperstone
Federal Action and the Copperstone State Action.
Income Tax Provision (Benefit). At September 30, 1999, the Company had
approximately $3.7 million of net deferred tax assets. The realization of these
deferred tax assets is dependent upon the Company generating sufficient taxable
income from future years in appropriate jurisdictions to obtain benefit from the
reversal of temporary differences and from net operating loss and tax credit
carryforward. The amount of net deferred tax assets considered realizable is
subject to adjustment in future periods if estimates of future taxable income
are reduced, which would negatively impact the Company's income tax provision in
future periods.
Liquidity and Capital Resources
Operating Activities
Net cash used in operating activities was $12.7 million for the nine months
ended September 30, 1999 compared to net cash provided by operating activities
of $3.8 million for the comparable 1998 period. The increase in cash used for
operations was primarily due to the loss for the nine months ended September 30,
1999 of $9.2 million, the reduction in accounts payable of $3.1 million,
primarily attributed to payments of accrued expenses related to the purchase of
the NMO division from GTE, and prepaid license fees of $2.0 million.
Investing Activities
Net cash provided by investing activities was $9.1 million for the nine
months ended September 30, 1999 compared to net cash used of $6.0 million for
the comparable 1998 period. The increase is attributable to the net sale of
marketable securities for $10.8 million offset by capital asset additions of
$1.7 million. The increase is primarily due to the maturity of long-term
securities that were reinvested in short-term instruments.
Financing Activities
Net cash provided by financing activities was $552,000 for the nine months
ended September 30, 1999 compared to $1.6 million for the comparable 1998
period. The decrease was the result of a decrease in stock options exercised
and stock purchased pursuant to the Employee Stock Purchase Plan which is a
function of market conditions and investment decisions made by employees.
As of September 30, 1999, the Company had cash and cash equivalents and
marketable securities of $34.9 million. The Company believes that existing cash
balances (including cash equivalents and marketable securities), together with
existing sources of liquidity, including cash flows from operating activities,
will provide adequate cash to fund its operations for at least the next twelve
months.
Certain Factors That May Affect Future Results and Market Price of Stock
Statements in this report which are prefaced with words such as "expects,"
"anticipates," "believes" and similar words and other statements of similar
sense, are forward-looking statements. These statements
14
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
are based on the Company's current expectations and estimates as to prospective
events and circumstances which may or may not be within the Company's control
and as to which there can be no firm assurances given. These forward-looking
statements, like any other forward-looking statements, involve risks and
uncertainties that could cause actual results to differ materially from those
projected or anticipated.
Potential Fluctuations in Future Operating Results
The Company has experienced and expects to continue to experience
significant fluctuations in revenues and operating results on an annual or
quarterly basis as a result of a number of factors, many of which are beyond the
control of the Company. These factors include the cancellation, modification, or
non-renewal of service, license, or maintenance agreements; the size and timing
of significant customer engagements and license fees; the relative proportion of
services and software licensing fees; personnel changes; capital spending
patterns of the Company's customers; concentration of the Company's customers;
the lengthy sales cycles of the Company's products and services; industry
acceptance of the Company's products and services; changes in operating
expenses; new product introductions and product enhancements by the Company or
its competitors; the ability of the Company to develop, introduce, and market
new products and product enhancements on a timely basis; changes in pricing
policies by the Company or its competitors; regulatory changes, currency
fluctuations, and general economic factors. These factors are difficult to
forecast, and these or other factors could have a material adverse effect on the
Company's business, operating results, and financial condition.
Historically, a 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 is often lengthy (averaging approximately nine to twelve months) and
subject to a number of significant delays over which the Company has little or
no control. In addition, the Company does
15
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
not recognize service revenues until the services are rendered. The time
required to implement the Company's products can vary significantly with the
needs of its customers and is generally a process that extends for several
months. Because of their complexity, larger implementations may take multiple
quarters to complete. From time to time, the Company has provided services to
implement certain large projects, and, although no contractual basis exists for
the customer to do so, certain customers have delayed payment of a portion of
service fees and in some cases have disputed the fees charged. There can be no
assurance the Company will not experience additional delays or disputes
regarding payment in the future, particularly if the Company receives orders for
large, complex installations. Therefore, the Company believes that its quarterly
and annual operating results and financial condition are likely to vary
significantly in the future.
Acceptance of the Company's Products; Product Development Risks
A substantial portion of the Company's revenues are derived from the sale
of the Company's products and services which provide software solutions to major
corporations in the worldwide telecom services and equipment industries.
Although many telecom companies currently seek to integrate their business
operation systems and network operation systems, there can be no assurance that
these or other service providers will continue to seek the integration of such
systems or that such companies will use the Company's products. Due to the
complex nature of the advanced Operations Support System ("OSS") software
developed by the Company, the Company has in the past relied and will in the
future continue to rely on its development and implementation expertise. The
Company continues to develop software products that reduce the customization
necessary to fully integrate customers' systems. There can be no assurance,
however, that the Company will continue to successfully develop and market such
products or, even if successful, that the revenues from such products will
compensate for any concurrent loss of development and implementation service
revenues. The failure by the Company to successfully develop and market such
products and technologies would have a material adverse effect on its business,
operating results, and financial condition.
The Company's future business, operating results, and financial condition
are significantly dependent upon the continued market acceptance of its
portfolio of products and services. There can be no assurance that the Company's
technology will continue to achieve market acceptance or that the Company will
be successful in developing, introducing, or marketing improvements to its
products. Moreover, the life cycle of component-based products is difficult to
estimate due in large part to the recent changes in the telecom market, the
effect of future product enhancements, and competition. A decline in the demand
for the Company's software as a result of new or existing competing
technologies, or other factors would have a material adverse effect on the
Company's business, operating results, and financial condition.
Customer Concentration
To date, a significant portion of the Company's revenues has been
concentrated among a limited number of customers. For the three months ended
September 30, 1999, revenues from the Company's five largest customers comprised
60% of total revenues. In addition, the Company anticipates that it will
continue to experience significant customer concentration. There can be no
assurance that such customers or any other customers will in the future continue
to place orders with the Company which equal or exceed the comparable levels for
prior periods. In addition, the Company's customers typically designate one
individual to procure network management software. If any of these individuals
were terminated, transferred, or replaced, the Company would be vulnerable to
cancellation of an order if, for example, the Company's competitors had existing
relationships with the individual's replacement. As a result of these factors,
the Company's business, operating results, and financial condition could be
materially adversely affected.
16
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
Product Defects
The Company provides complex software products for major telecom equipment
manufacturers, systems integrators, and service providers. The development and
enhancement of such complex software entails substantial risks of product
defects. The Company has in the past identified software defects in certain of
its products. There can be no assurance that errors will not be found in
existing or new products or releases after commencement of commercial licensing,
which may result in delay or loss of revenues, loss of market share, failure to
achieve market acceptance, or may otherwise adversely impact the Company's
business, operating results, and financial condition.
Implementation Risks
As is characteristic of companies providing software solutions to the
telecom industry, the complexities involved in implementing the Company's
software solutions entail risks of performance shortfalls. In some cases, the
Company has agreed to accept some financial responsibility, in the form of
negotiated penalty amounts, if the Company's products did not meet
specifications or caused customer system downtime. There can be no assurance
that the Company will not encounter delays or other difficulties due to such
implementation complexities. Because the Company's customer base consists of a
relatively limited number of customers, the product defects or implementation
errors could be potentially damaging to the Company's reputation. Any such
occurrence could have a material adverse effect upon the Company's business,
operating results, and financial condition.
International Sales
Revenues outside of the Americas accounted for 68% of the Company's total
revenues for the nine months ended September 30, 1999. The Company expects that
international revenues will continue to account for a significant portion of its
total revenues in future periods. The Company intends to penetrate additional
international markets and to further expand its existing international
operations. The Company's international business involves a number of inherent
risks, including greater difficulty in accounts receivable collection and,
therefore, longer accounts receivable collection periods; difficulty in staffing
and managing foreign operations; a longer sales cycle than with domestic
customers; potentially unstable political and economic conditions; language
barriers; cultural differences in the conduct of business; seasonality;
unexpected changes in regulatory requirements, including a slowdown in the rate
of privatization of telecom service providers; reduced protection for
intellectual property rights in some countries; potentially adverse tax
consequences; tariffs and other trade barriers. Access to foreign markets is
often difficult due to the established relationships between government owned or
controlled communications companies and local suppliers of communications
products. There can be no assurance the Company will be able to successfully
penetrate such foreign markets. In addition, there can be no assurance that the
Company will be able to sustain or increase revenues derived from international
licensing and services or that the foregoing factors will not have a material
adverse effect on the Company's future international business, and consequently,
on the Company's business, operating results, and financial condition.
International sales also entail risks associated with currency
fluctuations. The Company has attempted to reduce the risk of fluctuations in
currency exchange rates associated with international revenues by pricing its
products and services in United States dollars whenever possible. The Company,
however, generally pays the expenses of its international operations in local
currencies and generally does not engage in hedging transactions with respect to
such obligations. Upward fluctuations in currency exchange rates
17
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
could cause the Company's products to become relatively more expensive to
foreign customers, leading to a reduction in sales or profitability.
Furthermore, future international activity may result in foreign currency
denominated sales, and, in such event, gains and losses on the conversion to
U.S. dollars of accounts receivable and accounts payable arising from
international operations may contribute to fluctuations in the Company's
operating results. In order to reduce the risk of exchange rate losses from
foreign currency denominated sales, which historically have not been material,
the Company has engaged in a limited quantity of hedging transactions. There can
be no assurance that such hedging transactions will not have a material adverse
effect on the Company's business, operating results, and financial condition.
Dependence on Telecommunications Carriers; Government Regulation
Many of the Company's principal customers are major telecom carriers. Such
companies operate within the telecom industry, which has recently been
characterized by intense competition in the development of new technology,
equipment, and customer services. The Company believes that large telecom
carriers have become increasingly cautious in making significant capital
expenditures, due in part to increased competition from smaller, rapidly
developing alternative carriers, decreasing prices for telecom services and
equipment, and regulatory rate structures that have become less dependent on the
level of carriers' capital expenditures. These and other factors have in the
past and may in the future cause such customers to experience significant
fluctuations in capital expenditures for network management software solutions.
The telecom industry is subject to extensive regulation in the United
States and other countries, and the Company's customers generally must receive
regulatory approvals in conducting their businesses. Although the telecom
industry has recently been characterized by government deregulation, there can
be no assurance that deregulatory trends will continue or that reregulation will
not occur. Government regulatory policies are likely to continue to have a major
impact on the Company's ability to attract and retain customers. For example,
regulatory authorities may continue to oversee the pricing of new and existing
telecom services, which, in turn impact carriers' ability to make significant
capital expenditures. The enactment by federal, state, or foreign governments of
new laws or regulations or change in the interpretation of existing regulations
could adversely affect the Company's customers, and thereby affect the Company's
business, operating results, and financial condition.
Competition
The Company offers products and services in the evolving market for telecom
OSS software. Competition in this market is intense and is characterized by
rapidly changing technologies, evolving industry standards, changing regulatory
requirements, frequent new product introductions, and rapid changes in customer
requirements. To maintain and improve its competitive position, the Company must
continue to develop and introduce, in a timely and cost-effective manner, new
services, products, and product features that keep pace with competitive
offerings by telecom companies and independent software vendors, technological
developments, and emerging industry standards in the development of
telecommunications network management software solutions. The principal
competitive factors in the Company's market are quality, performance, price,
customer support, corporate reputation, and product features such as
scalability, interoperability, functionality, customizability, and ease of use.
18
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
The Company's current and prospective competitors offer a variety of
solutions to address OSS needs. The Company faces competition in each of the
three functional areas the Company believes are necessary for the delivery of
complete OSS software: telecom applications platforms, configurable applications
and custom services. The Company's SolutionCore, SolutionSuites and
SolutionServices product lines enable the Company to provide its customers with
both application development software, telecom applications and custom
services. 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 and distribution resources and greater name
recognition and longer-standing relationships with customers than the Company.
Furthermore, many of the Company's current and potential customers continuously
evaluate whether to design, develop, and support internally the software
solutions provided by the Company, thereby obviating the need for relying on an
outside vendor such as the Company. There can be no assurance that the Company's
current or potential competitors will not develop products comparable or
superior to those developed by the Company or adapt more quickly than the
Company to new technologies, evolving industry standards, new product
introductions, or changing customer requirements.
Rapid Technological Change; Need to Manage Product Transitions
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions, and rapid changes in customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. As a result, the life cycles of the Company's products are
difficult to estimate. This poses substantial risks for the Company because the
Company's products and software solutions typically have lengthy development and
sales cycles. The Company's future success will depend on its ability to enhance
its existing products and to develop and introduce, on a timely and cost-
effective basis, new products and product features that keep pace with
technological developments and emerging industry standards and address the
evolving needs of its customers. There can be no assurance that the Company will
be successful in developing and marketing new products or product features that
respond to technological change or evolving industry standards, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction, and marketing of these new products and features, or
that its new products or product features will adequately meet the requirements
of the marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce enhancements of
existing products or new products in a timely manner, the Company's business,
operating results, and financial condition will be materially adversely
affected.
The Company's products are designed to operate on a variety of hardware and
software platforms and with a variety of databases employed by its customers in
their networks. The Company must continually modify and enhance its products to
keep pace with changes in hardware and software platforms and database
technology. As a result, uncertainties related to the timing and nature of new
product announcements, 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.
19
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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 imposed by certain customers on the use of certain intellectual
property will not adversely affect the Company's business, operating results,
and financial condition.
20
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
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. Competition for the hiring of such personnel in the software industry is
intense, and there can be no assurance that the Company will be successful in
locating candidates with appropriate qualifications. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, operating results, and financial condition.
Risks Associated with Acquisitions
The Company periodically evaluates potential acquisitions of complementary
businesses, products, and technologies. To support its growth plans, the Company
may acquire companies that have a significant installed base of products not yet
offered by the Company, have strategic distribution channels or customer
relationships, or otherwise present opportunities which management believes
enhance the Company's competitive position. Such acquisitions could subject the
Company to numerous risks, including risks associated with the integration into
the Company of new employees and technology. Moreover, the negotiation and
acquisition of such transactions involve the diversion of substantial management
resources and the evaluation of such opportunities requires substantial
diversion of engineering and technological resources. In addition, transactions
involving the issuance by the Company of common stock or other securities could
result in immediate and substantial dilution to the Company's existing
shareholders, large one-time write-offs, or the creation of goodwill or other
intangible assets that could result in amortization expenses. Other than the
purchase of GTE-NMO in December, 1998, the Company has not consummated an
acquisition transaction. The failure to successfully evaluate, negotiate, and
effect acquisition transactions could have a material adverse effect on the
Company's business, operating results, and financial condition.
Volatility of Stock Price
The market price of the shares of the Company's Common Stock has been and
is likely to continue to be highly volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's business,
operating results, and financial condition, announcements of technological
innovations, new products, or new contracts by the Company or its competitors,
developments with respect to proprietary
21
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
rights, adoption of new accounting standards affecting the software industry,
general market conditions, and other factors. Due to the foregoing factors, it
is likely that the Company's revenues or operating results will be below the
expectations of public market analysts and investors in some future period. In
such event, the price of the Company's Common Stock could be materially
adversely affected. In addition, the stock market from time to time has
experienced significant price and volume fluctuations that have particularly
affected the market prices of technology company stocks. These types of broad
market fluctuations may adversely affect the market price of the Company's
Common Stock. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
initiated against such company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect upon the Company's business, operating results, and
financial condition. In this regard, in late 1996, two lawsuits on behalf of
certain of the Company's shareholders were filed against the Company and various
of its officers and directors. In late September 1997, a class action lawsuit
was filed in U.S. Federal Court on behalf of certain shareholders against the
Company and various of its officers and directors. The state actions allege
violations of state securities laws during 1995 and 1996, and the federal action
alleges violations of the federal securities laws. On May 5, 1999, the Company
reached settlements in one state action, and the federal action subject to court
approval.
On October 20, 1999, the federal action, to which one state action is
related, was dismissed with prejudice. With regard to the remaining state
action, the parties recently reached a preliminary settlement of the action. The
preliminary settlement 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 this matter 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, 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 believes its products are Year 2000 compliant.
The Company believes that its costs associated with implementing these
procedures will not have a material adverse effect on the results of operations
or financial condition of the Company. However, there can be no assurance that
unexpected delays or increased costs associated with implementation will not
have an adverse effect on the Company's operations. In addition, there can be
no assurance that the Company's software contains all date code changes
necessary to prevent processing errors potentially arising from calculations
using the Year 2000 date. Any disruptions in product development or other
operations of the Company as a result of Year 2000 noncompliance would
materially adversely affect the Company's business, financial condition and
results of operations.
22
<PAGE>
TCSI CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Continued)
TCSI believes that the purchasing patterns of customers and potential
customers may also be affected by Year 2000 issues as companies expend
significant resources to upgrade their current software systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products such as those offered by the Company. Furthermore, there can
be no assurance that the Company's customers and suppliers are or will be Year
2000 compliant. Failure of the Company's customers and suppliers to address the
Year 2000 issues at all, sufficiently, or in a timely manner, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. As of September 30, 1999, 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.
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<PAGE>
TCSI CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
On November 4, 1996, a purported class action complaint was filed in the
Superior Court of the State of California, Alameda County, by Albert J.
Copperstone and Joseph Siciliano against the Company, certain of its officers
and directors, and certain underwriters (the "Copperstone State Action"). The
complaint in the Copperstone State Action alleges that during a purported class
period of October 11, 1995 to September 25, 1996, defendants made materially
false and misleading statements concerning the Company's business condition and
prospects, in violation of California law. The plaintiffs in the Copperstone
State Action seek damages of an unspecified amount. On July 23, 1997,
plaintiffs voluntarily dismissed the underwriter defendants without prejudice.
On September 24, 1997, a purported class action complaint was filed in the
United States District Court for the Northern District of California by
Copperstone and Siciliano against the Company and certain of its officers and
directors (the "Copperstone Federal Action"). The complaint in the Copperstone
Federal Action contains virtually identical factual allegations as the
Copperstone State Action, and alleges violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5. The plaintiffs in the
Copperstone Federal Action seek damages of an unspecified amount. On April 20,
1998, the Court ordered plaintiffs to certify a class. Plaintiffs sent notice
to the class and the opt out period has expired.
On May 5, 1999, the Company announced that it had reached a preliminary
settlement of the Copperstone State Action and the Copperstone Federal Action.
On October 20, 1999, pursuant to the settlement agreement, the United States
District Court for the Northern District of California dismissed the Copperstone
Federal Action with prejudice. The settlement involved payment of an amount
comprised of proceeds from the Company's Director and Officer insurance
policies. Neither the Company nor the individuals involved contributed to the
settlement of the actions.
On November 20, 1996, a purported derivative action complaint was filed in
the Superior Court of the State of California, Alameda County, by Mike Tinkler
against the Company's Board of Directors and the Company as a nominal defendant
(the "Tinkler Derivative Action"). The second amended complaint in the Tinkler
Derivative Action alleged that as a result of the facts alleged in the
Copperstone State Action, defendants breached their fiduciary duties. On
December 9, 1998, defendants answered the second amended complaint. The parties
have reached a preliminary settlement of the Tinkler Derivative Action. The
settlement involves payment of an amount comprised of proceeds from the
Company's Director and Officer insurance policies and a contribution by the
Company. The settlement is not expected to have a material adverse effect on
TCSI's financial position or on its financial results of operations. The
settlement is subject to court approval.
No trial is scheduled in the Tinkler Derivative Action. The Company
believes it has meritorious defenses to the action, and intends to defend it
vigorously. The Company is also a party as a defendant in various lawsuits,
contractual disputes, and other legal claims, the results of which are not
presently determinable. In the opinion of management, resolution of these legal
actions is not expected to have a material adverse effect on the financial
position of the Company. However, depending on the amount and timing, an
unfavorable resolution of any of these matters could materially affect the
Company's future results of operations or cash flows in future periods.
24
<PAGE>
TCSI CORPORATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
25
<PAGE>
TCSI CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 15, 1999.
TCSI CORPORATION
(Registrant)
By /s/ Arthur H. Wilder
-------------------------------
Arthur H. Wilder
Chief Financial Officer, Secretary, and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
26
<PAGE>
TCSI CORPORATION
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 19,022 19,022
<SECURITIES> 15,876 15,876
<RECEIVABLES> 13,903 13,903
<ALLOWANCES> 400 400
<INVENTORY> 0 0
<CURRENT-ASSETS> 55,695 55,695
<PP&E> 31,168 31,168
<DEPRECIATION> 22,053 22,053
<TOTAL-ASSETS> 69,163 69,163
<CURRENT-LIABILITIES> 6,979 6,979
<BONDS> 0 0
0 0
0 0
<COMMON> 2,269 2,269
<OTHER-SE> 59,915 59,915
<TOTAL-LIABILITY-AND-EQUITY> 69,163 69,163
<SALES> 0 0
<TOTAL-REVENUES> 7,286 27,510
<CGS> 0 0
<TOTAL-COSTS> 12,627 38,047
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (4,765) (8,802)
<INCOME-TAX> 58 445
<INCOME-CONTINUING> (4,823) (9,247)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,823) (9,247)
<EPS-BASIC> (0.21) (0.41)
<EPS-DILUTED> (0.21) (0.41)
</TABLE>
