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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934 for the quarterly period ended September 30,
1997
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: 0-22667
TSI INTERNATIONAL SOFTWARE LTD.
(Exact name of Registrant as specified in its charter)
Delaware 06-1132156
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 Danbury Road, Wilton, CT 06897
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
203-761-8600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 1997, Registrant had outstanding 9,056,542 shares of Common
Stock, $.01 par value.
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1
TSI INTERNATIONAL SOFTWARE LTD.
TABLE OF CONTENTS
PAGE
----
ITEM 1 FINANCIAL INFORMATION (UNAUDITED)
Financial Statements
Balance Sheets as of September 30, 1997 and
December 31, 1996.......................................... 3
Statements of Income for the Three Months and Nine Months
Ended September 30, 1997 and 1996.......................... 4
Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996.......................... 5
Notes to Financial Statements.................................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 8
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 18
SIGNATURES................................................................ 19
2
TSI INTERNATIONAL SOFTWARE LTD.
Balance Sheets
SEPTEMBER 30, DECEMBER 31,
Assets 1997 1996
------ ------------------- -----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 18,229,400 $ 41,300
Marketable securities 2,746,300 -
Accounts receivable, less allowances of (unaudited)
$590,400 and $319,900 5,832,800 4,380,900
Current portion of investment in licensing
contracts receivable, net of unearned finance
income of (unaudited) $75,700 and $84,200 681,900 742,000
Prepaid expenses and other current assets 587,200 388,000
------------------- -----------------
Total current assets 28,077,600 5,552,200
Furniture, fixtures and equipment, net 1,526,000 1,304,400
Investment in licensing contracts receivable, net of
unearned finance income of (unaudited) $36,000 and
$50,100, less current portion 460,800 551,600
Other assets 277,700 113,100
------------------- -----------------
$ 30,342,100 $ 7,521,300
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current liabilities:
Accounts payable $ 771,300 $ 694,800
Accrued expenses 1,428,000 1,486,500
Current portion of deferred maintenance revenue 3,661,800 4,591,200
------------------- -----------------
Total current liabilities 5,861,100 6,772,500
Long-term debt (note 3) - 2,790,100
Other long-term liabilities 24,100 27,400
Deferred maintenance revenue, less current portion 191,500 225,000
------------------- -----------------
Total liabilities 6,076,700 9,815,000
------------------- -----------------
Stockholders' equity (deficiency) (notes 2 and 3):
Convertible preferred stock ($8,219,000 aggregate
liquidation preference) - 8,600
Common stock (20,000,000 shares authorized,
par value $.01) 90,600 30,000
Additional paid-in capital 33,156,700 7,888,800
Accumulated deficit (8,668,000) (10,036,600)
Cumulative foreign currency translation adjustment (249,900) (119,500)
Treasury stock, at cost (64,000) (65,000)
------------------- -----------------
Total stockholders' equity (deficiency) 24,265,400 (2,293,700)
------------------- -----------------
$ 30,342,100 $ 7,521,300
=================== =================
See accompanying notes to financial statements.
3
TSI INTERNATIONAL SOFTWARE LTD.
STATEMENTS OF INCOME
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
------------------------------------------- -------------------------------------------
1997 1996 1997 1996
-------------------- ------------------ ----------------- --------------------
Revenues:
Software licensing $ 3,940,200 $ 2,597,200 $ 9,846,100 $ 6,258,100
Service, maintenance and other 3,060,300 2,448,800 8,817,100 7,112,700
-------------------- ------------------ ----------------- --------------------
Total revenues 7,000,500 5,046,000 18,663,200 13,370,800
-------------------- ------------------ ----------------- --------------------
Cost of revenues:
Software licensing 257,300 128,000 564,000 309,400
Service, maintenance and other 711,300 505,100 1,789,800 1,403,000
-------------------- ------------------ ----------------- --------------------
Total cost of revenues: 968,600 633,100 2,353,800 1,712,400
-------------------- ------------------ ----------------- --------------------
Gross profit 6,031,900 4,412,900 16,309,400 11,658,400
-------------------- ------------------ ----------------- --------------------
Operating expenses:
Product development 1,183,200 882,000 3,313,000 2,492,300
Selling and marketing 3,313,800 2,194,000 8,985,900 6,088,800
General and administrative 1,010,700 761,000 2,796,700 2,117,300
-------------------- ------------------ ----------------- --------------------
Total operating expenses 5,507,700 3,837,000 15,095,600 10,698,400
-------------------- ------------------ ----------------- --------------------
Operating income 524,200 575,900 1,213,800 960,000
Borrowing expenses (21,600) (72,800) (175,300) (221,000)
Interest income 286,500 28,800 346,700 103,400
-------------------- ------------------ ----------------- --------------------
Income before income taxes 789,100 531,900 1,385,200 842,400
Provision for income taxes - 14,000 16,600 17,000
-------------------- ------------------ ----------------- --------------------
Net income $ 789,100 $ 517,900 $ 1,368,600 $ 825,400
==================== ================== ================= ====================
Net income per share $ 0.07 $ 0.08 $ 0.17 $ 0.14
==================== ================== ================= ====================
Weighted average number of common
and common equivalent shares
outstanding 10,724,241 6,185,332 7,914,992 5,931,483
==================== ================== ================= ====================
See accompanying notes to financial statements.
4
TSI INTERNATIONAL SOFTWARE LTD.
Condensed Statements of Cash Flows
Representing Increases (Decreases) in Cash
(Unaudited)
Nine Months
Ended September 30,
-------------------------------------------
1997 1996
------------------ ------------------
Cash flows from operating activities:
Net cash provided (used) by operating activities $ (982,400) $ 433,000
------------------ ------------------
Cash used by investing activities:
Purchase of furniture, fixtures and equipment (576,600) (577,400)
Purchase of marketable securities (2,746,300) -
------------------ ------------------
Net cash (used) by investing activities (3,322,900) (577,400)
------------------ ------------------
Cash provided (used) by financing activities:
Net borrowings (repayments) under revolving line
of credit (2,790,100) 50,000
Payments under capital leases (29,500) (50,000)
Proceeds from sale of preferred stock (note 2) 993,400 -
Proceeds from exercise of stock options 5,400 -
Proceeds from initial public offering (note 3) 24,321,100 -
------------------ ------------------
Net cash provided by financing activities 22,500,300 -
------------------ ------------------
Effect of exchange rate changes on cash (6,900) 8,500
------------------ ------------------
Net change in cash and cash equivalents 18,188,100 (135,900)
Cash at beginning of period 41,300 142,500
------------------ ------------------
Cash and cash equivalents at end of period $ 18,229,400 $ 6,600
================== ==================
Supplemental information:
Cash paid for:
Interest $ 162,200 $ 206,000
Income taxes 36,000 20,000
Non-cash investing activity --
Acquisition of equipment under capital leases $ 30,000 $ -
================== ==================
See accompanying notes to financial statements.
5
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
TSI International Software Ltd. (the "Company") develops, markets,
licenses and supports computer software and related services which allow
organizations to integrate their business applications within the enterprise and
with outside business partners. The Company's customers are located primarily
throughout the U.S. and Western Europe and represent a broad range of
industries.
(a) Unaudited Interim Financial Statements
The interim financial statements contained herein are unaudited, but,
in the opinion of management, include all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for any subsequent quarter or the entire
fiscal year ending December 31, 1997.
Reference should be made to the Registration Statement on Form S-1 (No.
333-27293) filed in connection with the Company's initial public offering
("IPO") which include its audited financial statements for the year ended
December 31, 1996.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
(b) Revenue Recognition
Software licensing revenues are recognized upon shipment of the product
if there are no significant post-delivery obligations, or at a later date once
such obligations are satisfied. Maintenance contract revenue is recognized
ratably over the term of the contracts, which are generally for one year. The
unrecognized portion of maintenance revenue is classified as deferred
maintenance revenue in the accompanying balance sheets. Consulting and training
revenues are recognized as services are performed.
The Company licenses its KEY/MASTER product on a term-use basis for 15
to 60 month periods. The contracts provide for maintenance and generally do not
have renewal or purchase options. At contract inception, the present value of
the payments to be received under the contract is apportioned between software
licensing revenue and maintenance revenue and recognized as described above. The
present value of the payments to be received are recorded as the investment in
licensing contracts receivable. License interest revenue is recognized over the
term of the contract at a constant rate of return.
(c) Marketable Securities
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified all of its marketable debt securities as held-to-maturity, and
has accounted for these investments at amortized cost. Accordingly, no
adjustment for unrealized holding gains or losses has been reflected in the
Company's financial statements. At September 30, 1997, the Company's held-to-
maturity securities consisted of certificates of deposit and Federal Agency and
corporate debt securities with remaining maturities of less than 1 year. The
carrying amount of these securities approximated market value.
(d) Net Income Per Share
Net income per share is usually calculated using the weighted average
number of common and common equivalent shares outstanding during each period,
after retroactive adjustment for stock splits. In addition, the Securities and
Exchange Commission requires that shares issued or options and warrants granted
within one year of an IPO at prices below the IPO price be shown as outstanding
(using the Treasury Stock method) for all periods presented. Further, in
connection with the IPO, all outstanding preferred stock was converted into
common stock on the basis described in note 6 of the financial statements
included in the Registration Statement on Form S-1, and
6
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO FINANCIAL STATEMENTS-Continued
(Unaudited)
accordingly are shown as outstanding for all periods presented. Following are
the components of common stock used to calculate net income per share:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- ------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Weighted average common shares
outstanding 8,943,664 2,886,822 4,905,869 2,886,822
Increment for shares issued within
one year of the IPO 241,346 232,167 235,225 232,167
Common shares issued
for conversion of preferred stock - 2,609,415 1,739,510 2,609,415
Dilutive effect of stock options 1,539,231 456,928 1,034,388 203,079
----------------- ----------------- --------------- ----------------
Weighted average common and common
equivalent shares outstanding 10,724,241 6,185,332 7,914,992 5,931,483
================= ================= =============== ================
(e) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(2) SALE OF PREFERRED STOCK
On May 15, 1997, the Company sold 50,000 shares of Series E convertible
preferred stock at $20 per share to Mitsui & Co., Ltd. and two other foreign
investors. At the closing of the IPO, these shares were converted into an
aggregate of 150,000 shares of common stock.
(3) Initial Public Offering
The Company completed its initial public offering of common stock, $.01
par value, on July 2, 1997. Pursuant to the IPO, 4,000,000 shares were sold to
the public, of which 3,000,000 were previously unissued shares sold by the
Company and 1,000,000 were sold by certain selling stockholders. The net
proceeds of $24.3 million (net of expenses of $800,000) were used to repay $3.4
million of indebtedness under the Company's bank credit line. The remaining
portion of the proceeds has been added to the Company's working capital and will
be used for general corporate purposes. Pending such use, the funds are invested
in short-term, interest-bearing, investment-grade obligations. In July 1997, the
underwriters exercised their overallotment option and purchased an additional
600,000 shares of Common Stock from the selling stockholders.
On May 8, 1997, the Board of Directors approved, at the closing of the
IPO: (i) an increase in the number of authorized shares of common stock and
preferred stock to 20,000,000 and 5,000,000 shares, respectively; and (ii) a
three-for-one common stock split. The accompanying financial statements have
been retroactively adjusted to reflect this common stock split.
Pursuant to the Company's Certificate of Incorporation, upon the
closing of the IPO all outstanding shares of preferred stock were converted into
an aggregate of 2,759,715 shares of common stock.
Upon completion of the IPO, certain outstanding warrants were exercised
into an aggregate of 296,827 shares of Common Stock, on a net exercise basis.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
This report contains or may contain certain forward-looking statements and
information that are based on beliefs of, and information currently available
to, the Company's management as well as estimates and assumptions made by the
Company's management. When used in this report, words such as "anticipate,"
"believe," "estimate," "expect," "future," "intend," "plan," and similar
expressions as they relate to the Company or the Company's management, identify
forward-looking statements. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to, (i)
the effects of rapid technological change and the need to make frequent product
transitions, (ii) the potential for software defects, (iii) the impact of
competitive products and pricing, (iv) less than anticipated growth in the
market for the SAP R/3 system and related services, (v) uncertainties in
attracting and retaining needed management, marketing, sales, professional
services and product development personnel, (vi) the Company's ability to manage
growth, (vii) the success of the Company's Mercator product line, (viii) the
Company's ability to develop additional distribution channels, and (ix) those
discussed in "Factors That May Affect Future Results" contained herein and in
the Company's other filings with the Securities and Exchange Commission,
including but not limited to those discussed under the heading "Risk Factors" in
the Company's Registration Statement on Form S-1 (File No. 333-27293). Should
one or more of these risks or uncertainties materialize, or should the
underlying estimates or assumptions prove incorrect, actual results or outcomes
may vary significantly from those anticipated, believed, estimated, expected,
intended or planned.
OVERVIEW
The Company was incorporated in Connecticut in 1985 and reincorporated in
Delaware in September 1993. In June 1991, the Company began developing its
Mercator product and in December 1993 released Version 1.0 of Mercator. The
Company released the latest version of Mercator, Release 1.4, in August 1997 and
released its Mercator for R/3 product in June 1996.
Historically, the Company has derived a majority of its revenues from
products other than Mercator, primarily its Trading Partner family of products
and its KEY/MASTER product. However, revenue related to Mercator has grown
significantly in each of the last three years and has increased as a percentage
of total revenues. The Company believes that future growth in revenues, if any,
will be mainly attributable to its Mercator product line. In view of the
relatively recent introduction of Mercator, the Company believes it cannot
accurately predict the amount of revenues that will be attributable to such
products or the life of such products. To the extent the Company's Mercator
products do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially and adversely affected.
The Company's revenues are derived principally from two sources: (i)
license fees for the use of the Company's software products and (ii) service
fees for maintenance, consulting services and training related to the Company's
software products. The Company generally recognizes revenue from software
license fees upon shipment, unless the Company has significant post-delivery
obligations, in which case revenues are recognized when such obligations are
satisfied. The Company's KEY/MASTER product is licensed under term-use
contracts rather than for a one-time license fee, and the Company recognizes
revenue from such arrangements on a present-value basis at the inception of the
contract. Revenues from consulting and training are recognized as services are
performed, and maintenance revenues are recognized ratably over the maintenance
period, typically one year. The Company does not actively market new contracts
for KEY/MASTER but continues to receive KEY/MASTER related revenues, which are
principally maintenance revenues. As a result, KEY/MASTER accounts for a
larger proportion of maintenance revenues than license revenues and increases
the percentage of the Company's total revenues represented by services,
maintenance and other revenue. The Company intends to increase the scope of its
service offerings with the goal of increasing license revenues from sales of its
products. The Company does not believe that the mix of software licensing and
service, maintenance and other revenues will change substantially in the future.
8
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1996
Revenues:
Total Revenues. The Company's total revenues increased 39% to $7.0 million
in the third quarter of 1997 from $5.0 million in the comparable period of 1996.
Software Licensing. Software licensing revenues increased 52% to $3.9
million in the third quarter of 1997 from $2.6 million in the comparable period
of 1996, primarily as a result of an increase in Mercator license revenues and
an increase in Trading Partner PC revenues from an EDI enablement program for a
large computer company.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 25% to $3.1 million in the third quarter of 1997 from $2.4 million in
the comparable period of 1996, mainly as a result of an increased amount of
professional service fees associated with sales of Mercator and, to a lesser
extent, an increase in Mercator maintenance revenue, partially offset by a
decrease in KEY/MASTER maintenance revenues.
Cost of Revenues. Cost of software licensing revenues consists primarily
of media, manuals, distribution costs and the cost of third-party software that
the Company resells. Cost of service, maintenance and other revenues consists
primarily of personnel-related costs in providing maintenance, technical
support, and professional services (consulting and training) to customers.
Gross margin on software licensing revenues is higher than gross margin on
service, maintenance and other revenues, reflecting the low materials, packaging
and other costs of software products compared with the relatively high personnel
costs associated with providing maintenance, technical support, consulting and
training services. Cost of service, maintenance and other revenues also varies
based upon the mix of maintenance, technical support, consulting and training
services.
Cost of Software Licensing. Cost of software licensing revenues increased
101% to $257,000 in the third quarter of 1997 from $128,000 in the comparable
period of 1996, primarily due to increased sales of software licenses, increased
sales of third-party software and increased purchases of software documentation
due to the latest release of Mercator. Software licensing gross margin
decreased to 93% in the third quarter of 1997 from 95% in the third quarter of
1996.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 41% to $711,000 in the third quarter of 1997 from
$505,000 in the comparable period of 1996, primarily due to increased
professional services rendered, particularly Mercator-related services. Service,
maintenance and other gross margin was 77% and 79% for the third quarter of 1997
and 1996, respectively due to the higher proportion of service, maintenance and
other revenues attributable to service revenues.
Operating Expenses
Product Development. Product development expenses include expenses
associated with the development of new products and enhancements to existing
products and consist primarily of salaries, recruiting and other personnel-
related expenses, depreciation of development equipment, supplies, travel and
allocated facilities and communications costs. Product development costs
increased 34% to $1.2 million in the third quarter of 1997 from $882,000 in the
third quarter of 1996 due to increased product development activities related to
the Mercator product line, including the latest version, Release 1.4. Product
development expenses as a percentage of total revenue was 17% in the third
quarters of both 1997 and 1996. The Company believes that a significant level of
research and development expenditures is required to remain competitive.
Accordingly, the Company anticipates that it will continue to devote substantial
resources to research and development. The Company expects that the dollar
amount of research and development expenses will increase through at least the
remainder of 1997. To date, all research and development expenditures have been
expensed as incurred.
Selling and Marketing. Selling and marketing expenses consist of sales and
marketing personnel costs, including sales commissions, recruiting, travel,
advertising, public relations, seminars, trade shows, product descriptive
literature and allocated facilities and communications costs. Selling and
marketing costs increased 51%
9
to $3.3 million in the third quarter of 1997 from $2.1 million in the third
quarter of 1996, primarily due to the increased number of sales and marketing
personnel and increased expenditures for Mercator-related marketing programs.
Selling and marketing expenses as a percentage of total revenues rose to 47% in
the third quarter of 1997 from 43% in the third quarter of 1996 due to the
increase in sales and marketing personnel and higher Mercator-related marketing
costs. The Company has hired additional sales personnel during the third
quarter. The Company typically experiences a significant time lag between the
date sales personnel are hired and the date such personnel become productive.
The Company expects to continue hiring additional sales and marketing personnel
and to increase promotional expenses through at least the remainder of 1997 to
address Mercator marketing opportunities and anticipates that sales and
marketing expenses will increase in absolute dollar amount.
General and Administrative. General and administrative expenses consist
primarily of salaries, recruiting and other personnel-related expenses for the
Company's administrative, executive and finance personnel as well as outside
legal and audit costs. General and administrative expenses increased 33% to
$1.0 million in the third quarter of 1997 from $761,000 in the third quarter of
1996, primarily due to increased administrative costs to support the Company's
growth. General and administrative expenses as a percentage of total revenues
decreased slightly to 14% in the third quarter of 1997 from 15% in the third
quarter of 1996. The Company believes that the dollar amount of its general and
administrative expenses will increase as the Company expands its administrative
staff and incurs additional costs (including directors' and officers' liability
insurance, investor relations programs and increased professional fees) related
to being a public company.
Other Income (Expense), Net
Interest income represents interest earned on the Company's term-use
contracts and its invested cash balances purchased with the proceeds of the
initial public offering. Interest income for the third quarter of 1997 was
$287,000 compared to $28,800 in the third quarter of 1996 due to the interest
earned on its invested cash and short-term investments. Borrowing expenses
were $22,000 in the third quarter of 1997 as compared to $73,000 in the third
quarter of 1996 due to the repayment of its bank debt with the proceeds of the
initial public offering.
Provision for Income Taxes
Due to the utilization of net operating loss carryforwards, the provisions
for income taxes for the quarters ended September 30, 1997 and 1996 were not
significant.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues:
Total Revenues. The Company's total revenues increased 40% to $18.7
million in the first nine months of 1997 from $13.4 million in the comparable
period of 1996.
Software Licensing. Software licensing revenues increased 57% to $9.8
million in the first nine months of 1997 from $6.3 million in the comparable
period of 1996, primarily as a result of an increase in Mercator license
revenues and an increase in Trading Partner PC revenues from an EDI enablement
program for a large computer company.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 24% to $8.8 million in the first nine months of 1997 from $7.1 million
in the comparable period of 1996, mainly as a result of higher professional
services associated with sales of Mercator and, to a lesser extent, an increase
in Mercator maintenance revenue, partially offset by a decrease in KEY/MASTER
maintenance revenues. Maintenance revenues attributable to KEY/MASTER were $3.2
million and $3.5 million for the first nine months of 1997 and 1996,
respectively. The Company expects that KEY/MASTER maintenance revenues will
continue to decline.
10
Cost of Revenues
Cost of Software Licensing. Cost of software licensing revenues increased
82% to $564,000 in the first nine months of 1997 from $309,000 in the comparable
period of 1996, primarily due to increased sales of software licenses, resale of
third-party software and increased purchases of software documentation due to
the latest release of Mercator. Software licensing gross margins remained
relatively constant at 94% and 95% in the first nine months of 1997 and 1996,
respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 28% to $1.8 million in the first nine months of 1997
from $1.4 million in the comparable period of 1996, primarily due to increased
professional services rendered, particularly Mercator-related services. Service,
maintenance and other gross margins were 80% each for the first nine months of
1997 and 1996.
Operating Expenses
Product Development. Product development costs increased 33% to $3.3
million in the first nine months of 1997 from $2.5 million in the comparable
period of 1996 due to increased product development related to the Mercator
product line, including the latest version, Release 1.4. Product development
expenses as a percentage of total revenue decreased to 18% in the first nine
months of 1997 from 19% in the first nine months of 1996 due to the large
increase in revenues, as compared to a smaller increase in product development
costs.
Selling and Marketing. Selling and marketing costs increased 48% to $9.0
million in the first nine months of 1997 from $6.1 million in the first nine
months of 1996, primarily due to the increased number of sales and marketing
personnel. Selling and marketing expenses as a percentage of total revenues
rose to 48% in the first nine months of 1997 from 46% in the first nine months
of 1996 due to the increase in sales and marketing personnel and higher
Mercator-related marketing costs.
General and Administrative. General and administrative expenses increased
32% to $2.8 million in the first nine months of 1997 from $2.1 million in the
comparable period of 1996, primarily due to increased administrative costs to
support the Company's growth. General and administrative expenses as a
percentage of total revenues decreased to 15% in the first nine months of 1997
from 16% in the comparable period of 1996.
Other Income (Expense), Net
Interest income was $347,000 for the first nine months of 1997 compared to
$103,000 for the first nine months of 1996 due to investment earnings on its
cash balances offset by lower amounts of interest earned on its term contracts.
Borrowing expenses were $175,000 in the first nine months of 1997 as compared to
$221,000 in the comparable period of 1996 due to the repayment of its bank debt
with the proceeds of the initial public offering.
Provision for Income Taxes
Due to the utilization of net operating loss carryforwards, the provisions
for income taxes for the nine-month periods ended September 30, 1997 and 1996
were not significant.
LIQUIDITY AND CAPITAL RESOURCES
On July 2, 1997, the Company completed its initial public offering of
4,000,000 shares of Common Stock. The net proceeds to the Company of the
offering of $24.3 million (net of expenses of $800,000) were used to repay
11
$3.4 million of indebtedness under the Company's bank credit line and the
remainder of the proceeds was added to the Company's working capital and were
invested in short-term, interest-bearing, investment-grade debt obligations.
At September 30, 1997, the Company had $21 million in cash and marketable
securities due to the proceeds from the initial public offering in July 1997.
Prior to its initial public offering, the Company funded its operations
primarily through private sales of equity securities and its $4.0 million bank
line of credit and cash generated through operations. On May 15, 1997, the
Company raised $1.0 million through the sale of Preferred Stock to Mitsui & Co.,
Ltd. and two other foreign investors. Operating activities provided (used) net
cash of $(982,000) and $433,000 during the first nine months of 1997 and 1996,
respectively. The increased use of cash was primarily due to the higher level of
accounts receivable described below.
Investing activities (used) net cash of $(3.3 million) and $(577,000)
during the first nine months of 1997 and 1996, respectively, primarily to fund
capital expenditures needed to support expansion of the Company's business and,
in 1997, due to the purchase of marketable securities with the proceeds of the
initial public offering. Financing activities generated net cash of $22.5
million for the first nine months of 1997 due to the proceeds from the initial
public offering and the sale of Preferred Stock described above. Financing
activities for the nine months ended September 30, 1996 generated no cash as the
small increase in borrowings under the bank line of credit was offset by
repayments of capital lease obligations. Since December 31, 1996, the Company
experienced an increase in accounts receivable from $4.4 million at December 31,
1996 to $5.8 million at September 30, 1997. The Company experienced an increase
in days sales outstanding from December 31, 1996 to September 30, 1997 from
approximately 70 days to approximately 75 days. This ratio decreased from the
March 31, 1997 and June 30, 1997 levels of approximately 86 and 79 days,
respectively.
Capital expenditures have been, and future capital expenditures are
anticipated to be, primarily for facilities, equipment and computer software to
support expansion of the Company's operations. As of September 30, 1997, the
Company had no material commitments for capital expenditures. The Company's
bank line of credit generally limits capital expenditures to $400,000 per
quarter.
The Company's bank line of credit remained in effect after the IPO and the
maximum amount that can be borrowed under the bank line of credit is $4.0
million, with borrowings limited to a percentage of eligible accounts receivable
and term contracts. The Company had no borrowings outstanding as of September
30, 1997 and does not anticipate making additional borrowings in the forseeable
future. The Connecticut Development Authority had previously guaranteed up to
$600,000 of the Company's borrowings under this line of credit. This guarantee
was not renewed in August 1997. The bank line of credit expires in November
1998. Borrowings may take the form of prime rate loans (which bear interest at
the bank's prime rate plus 1.0%) or LIBOR rate loans (which bear interest at the
applicable LIBOR rate plus 3.0%). The Company's obligation under this credit
line is secured by substantially all of the Company's assets. The bank line of
credit contains certain financial covenants and also prohibits cash dividends,
mergers and acquisitions. The Company is currently in compliance with these
covenants. As of September 30, 1997, the Company had $69,000 of capital lease
obligations.
The Company believes that the proceeds from the IPO, together with its
current cash and cash equivalent balances, its line of credit and net cash
generated by operations, will be sufficient to meet its anticipated cash needs
for working capital, capital expenditures and business expansion for at least
the next 12 months. Thereafter, if cash generated by operations is insufficient
to satisfy the Company's operating requirements, the Company may seek additional
debt or equity financing.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risk of Fluctuations in Operating Results. The Company's quarterly and
annual operating results have varied significantly in the past and are expected
to do so in the future. Accordingly, the Company believes that period to
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance. The
Company's revenues and results of operations are difficult to forecast and could
be adversely affected by many factors, including, among others: the size, timing
and terms of
12
individual license transactions; the sales cycle for the Company's products;
demand for and market acceptance of the Company's products and related services
(particularly its Mercator products); the number of businesses implementing the
SAP R/3 system as well as the number of such businesses requiring third party
business application integration software and related services; the Company's
ability to expand, and market acceptance of, its professional services business;
the timing of expenditures by the Company in anticipation of product releases or
increased revenue; the timing of product enhancements and product introductions
by the Company and its competitors; market acceptance of enhanced versions of
the Company's existing products and of new products; changes in pricing policies
of the Company and its competitors; variations in the mix of products and
services sold by the Company; the mix of channels through which products and
services are sold; the success of the Company in penetrating international
markets; the buying patterns and budgeting cycles of customers; personnel
changes, the Company's ability to attract and retain qualified sales,
professional services and research and development personnel and the rate at
which such personnel become productive; and general economic conditions. In
particular, the ability of the Company to achieve growth in the future will
depend on its success in adding a substantial number of sales, professional
services and research and development personnel. Competition for such personnel
is intense and there can be no assurance the Company will be able to attract and
retain these personnel.
Licensing of the Company's software products historically has accounted for
a substantial portion of the Company's revenues, and the Company anticipates
that this trend will continue for the foreseeable future. Software license
revenues are difficult to forecast for a number of reasons. The Company
typically does not have a material backlog of unfilled orders, and revenues in
any quarter are substantially dependent on orders booked and shipped in that
quarter. The length of the sales cycles for the Company's products can vary
significantly from customer to customer and from product to product and, in
certain instances, can be as long as nine months or more. Furthermore, the terms
and conditions of individual license transactions, including prices and
discounts, may be negotiated based on volumes and commitments, and may vary
considerably from customer to customer. In addition, the Company has generally
recognized a substantial portion of its quarterly software licensing revenues in
the last month of each quarter. Accordingly, the cancellation or deferral of
even a small number of purchases of the Company's products has in the past and
could in the future have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's future revenues will also be difficult to predict and the
Company has, in the past, failed to achieve its revenue expectations for certain
periods. The Company's expense levels are based, in part, on its expectation of
future revenues, and expense levels are, to a large extent, fixed in the short
term. The Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. If revenue levels are below
expectations for any reason, operating results are likely to be materially and
adversely affected. Net income may be disproportionately affected by a reduction
in revenue because a large portion of the Company's expenses is related to
headcount that cannot be easily reduced without adversely affecting the
Company's business. In addition, the Company currently intends to increase its
operating expenses by expanding its research and product development staff,
particularly research and development personnel to be devoted to the Company's
Mercator product line, increasing its professional services and sales and
marketing operations, expanding distribution channels and hiring personnel in
other operating areas. The Company expects to experience a significant time lag
between the date professional services, sales and technical personnel are hired
and the date such personnel become fully productive. The timing of such
expansion and the rate at which new technical, professional services and sales
personnel become productive as well as the timing of the introduction and
success of new distribution channels could cause material fluctuations in
quarterly results of operations. Furthermore, to the extent such increased
operating expenses precede or are not subsequently followed by increased
revenues, the Company's business, operating results and financial condition
could be materially and adversely affected.
Due to the foregoing factors, it is likely that in some future quarter the
Company's revenue or operating results will not meet the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected.
Dependence on Mercator Product Line. The Company introduced its Mercator
products in 1993. In recent years, a significant portion of the Company's
revenue has been attributable to licenses of its Mercator products and related
services, and the Company expects that represent an increasing portion of the
Company's total revenue for the foreseeable future. The development and
marketing of its Mercator product line as required the Company to,
13
among other things, focus its attention and resources away from some of its
traditional products, market its products to a different customer base and shift
a large portion of its development efforts to the Mercator product line.
Accordingly, the Company's future operating results are highly dependent on the
market acceptance and growth of its Mercator product line and enhancements
thereto. There can be no assurance that market acceptance of the Mercator
product line will increase or remain at current levels or that the Company will
be able to successfully market the Mercator product line and develop extensions
and enhancements to this product line on a long-term basis. In the event the
Company's current or future competitors release new products that provide, or
are perceived as providing, more advanced features, greater functionality,
better performance, better compatibility with other systems or lower prices than
the Mercator product line, demand for the Company's products and services would
likely decline. See "-- Risks Associated with Technological Change, Product
Enhancements and New Product Development" and "-- Competition." A decline in
demand for, or market acceptance of, the Mercator product line as a result of
competition, technological change or other factors would have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence on SAP R/3 System Implementations. A substantial portion of the
Company's sales of its Mercator products and related services has been
attributable to sales of Mercator for R/3 and related services. The Company
believes that its future revenue growth, if any, will also depend in part upon
continued sales of Mercator for R/3 and related services. The Company has
devoted and must continue to devote substantial resources to identifying
potential customers in the R/3 market, building strategic relationships and
attracting and retaining skilled technical, sales and professional services
personnel with expertise in R/3 systems. Personnel with expertise in the R/3
system are in high demand and as such are typically difficult to hire and
retain. Regardless of the investments the Company makes in pursuing this new
market, there can be no assurance that the Company will be successful in
implementing a sales and marketing strategy appropriate for this market or in
attracting and retaining the necessary skilled personnel.
Demand for and market acceptance of Mercator for R/3 and related services
will be dependent on the continued market acceptance of the SAP R/3 system. As a
result, any factor adversely affecting demand for or use of SAP's R/3 system
could have a material adverse effect on the Company's business, operating
results and financial condition. Implementation of the SAP R/3 system is a
costly and time-consuming process and there can be no assurance that businesses
will choose to purchase such systems. Furthermore, there can be no assurance
that businesses which may implement such systems will wish to commit the
additional resources required to implement Mercator for R/3. In addition, SAP
could in the future introduce business application integration solutions
competitive with Mercator for R/3 and related services. Moreover, any changes in
or new versions of SAP's R/3 system could materially and adversely affect the
Company's business, operating results and financial condition if the Company
were not able to successfully develop or implement any related changes to
Mercator for R/3 in a timely fashion. The Company will also be required to
maintain ALE, EDI and DMI certifications for Mercator for R/3. In order to
maintain such certification, the Company's product must adhere to SAP's
technical specifications which are updated by SAP from time to time, and the
Company has no control over whether and when such specifications will be
changed. Any material change by SAP in such specifications could require the
Company to devote significant development resources to updating this product to
comply with such specifications. In such event, there can be no assurance that
the Company would be able to successfully modify Mercator for R/3 on a timely
basis, if at all, and any failure to do so could materially and adversely affect
the Company's business, operating results and financial condition.
Risks Associated with Technological Change, Product Enhancements and New
Product Development. The market for the Company's products and services is
characterized by extremely rapid technological change, frequent new product
introductions and enhancements, evolving industry standards, and rapidly
changing customer requirements. The introduction of products incorporating new
technologies and the emergence of new industry standards could render existing
products obsolete and unmarketable. Accordingly, the life cycles of the
Company's products are difficult to estimate. The Company's future success will
depend in part upon its ability to anticipate changes and enhance its current
products and develop and introduce new products that keep pace with
technological advancements and address the increasingly sophisticated needs of
its customers. The Company's products may be rendered obsolete if the Company
fails to anticipate or react to change. Development of enhancements to existing
products and new products depends, in part, on the timing of releases of new
versions of applications systems by vendors, the introduction of new
applications, systems or computing platforms, the timing of changes in
platforms,
14
the release of new standards or changes to existing standards, and changing
customer requirements, among other factors. There can be no assurance that the
Company will be successful in developing and marketing product enhancements or
new products that respond to technological change, evolving industry standards
and changing customer requirements, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or product enhancements, or that
its product enhancements or new products will adequately meet the requirements
of the marketplace and achieve any significant degree of market acceptance. The
Company has in the past experienced delays in the introduction of product
enhancements and new products and may experience such delays in the future.
Furthermore, as the number of applications, systems and platforms supported by
the Company's products increases, the Company could experience difficulties in
developing on a timely basis product enhancements which address the increased
number of new versions of applications, systems or platforms served by its
existing products. Failure of the Company, for technological or other reasons,
to develop and introduce product enhancements or new products in a timely and
cost-effective manner or to anticipate and respond adequately to changing market
conditions, as well as any significant delay in product development or
introduction, could cause customers to delay or decide against purchases of the
Company's products, which could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company may, in the future, seek to develop and market enhancements to
existing products or new products which are targeted for applications, systems
or platforms which the Company believes will achieve commercial acceptance.
These efforts could require the Company to devote significant development and
sales and marketing personnel as well as other resources to such efforts which
would otherwise be available for other purposes. There can be no assurance that
the Company will be able to successfully identify such applications, systems or
platforms, or that such applications, systems or platforms will achieve
commercial acceptance or that the Company will realize a sufficient return on
its investment. Failure of these targeted applications, systems or platforms to
achieve commercial acceptance or the failure of the Company to achieve a
sufficient return on its investment could have a material adverse effect on the
Company's business, operating results and financial condition.
In addition, the introduction or announcement by the Company, or by one or
more of its current or future competitors, of products embodying new
technologies or features could render the Company's existing products obsolete
or unmarketable. There can be no assurance that the introduction or announcement
of enhanced or new product offerings by the Company or its current or future
competitors will not cause customers to defer or cancel purchases of existing
Company products. Such deferment or cancellation of purchases could have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence Upon Development of Distribution Channels. An integral part of
the Company's strategy is to expand both its direct sales force and its indirect
sales channels such as Value-Added Resellers ("VARs"), Independent Software
Vendors ("ISVs"), Systems Integrators ("SIs") and distributors. Although VARs,
ISVs, SIs and distributors have not accounted for a substantial percentage of
the Company's total revenues historically, the Company is increasing resources
dedicated to developing and expanding its indirect distribution channels. There
can be no assurance that the Company will be successful in expanding the number
of indirect distribution channels for its products. Furthermore, any new VARs,
ISVs, SIs or distributors may offer competing products, or have no minimum
purchase requirements of the Company's products. There can also be no assurance
that such third parties will provide adequate levels of services and technical
support. The inability of the Company to enter into additional indirect
distribution arrangements, the failure of such third parties to perform under
agreements with the Company and to penetrate their markets, or the inability of
the Company to retain and manage VARs, ISVs, SIs and distributors with the
technical and industry expertise required to market the Company's products
successfully could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company's planned efforts to expand its use of VARs, ISVs, SIs and distributors
will be successful. To the extent that the Company is successful in increasing
its sales through indirect sales channels, it expects that those sales will be
at lower per unit prices than sales through direct channels, and revenue to the
Company for each such sale will be less than if the Company had licensed the
same product to the customer directly.
15
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements may
be hindered. The Company's strategy of marketing its products directly to end-
users and indirectly through VARs, ISVs, SIs and distributors may result in
distribution channel conflicts. The Company's direct sales efforts may compete
with those of its indirect channels and, to the extent different resellers
target the same customers, resellers may also come into conflict with each
other. Although the Company has attempted to manage its distribution channels to
avoid potential conflicts, there can be no assurance that channel conflicts will
not materially and adversely affect its relationships with existing VARs, ISVs,
SIs or distributors or adversely affect its ability to attract new VARs, ISVs,
SIs and distributors.
The Company markets its products and services outside of North America through
a sales office located in the United Kingdom and through indirect channels.
Revenues from international customers were approximately 10% and 9% of the
Company's total revenues for the quarter and nine months ended September 30,
1997, respectively.
The Company has hired additional sales personnel in the third quarter. The
Company expects to continue hiring additional sales personnel through at least
the remainder of 1997. The Company's future success will depend in part upon the
ability of the Company to attract, integrate, train, motivate and retain new
sales personnel. There can be no assurance that the Company's efforts to expand
its direct sales force will be successful or that the cost of such efforts will
not exceed the revenue generated. In addition, the Company expects to experience
a significant time lag between the date sales personnel are hired and the date
such personnel become fully productive. The Company's inability to manage its
sales force expansion effectively could have a material adverse effect on the
Company's business, operating results and financial condition.
Dependence on Key Personnel; Need to Attract and Retain Sales, Professional
Services and Technical Personnel. The Company's future success depends in large
part on the continued service of its key technical, professional services and
sales personnel, as well as senior management. The loss of the services of any
of one or more of the Company's key employees could have a material adverse
effect on the Company's business, operating results and financial condition. All
employees are employed at-will and the Company has no fixed-term employment
agreements with its employees. The Company's future success also depends on its
ability to attract, train and retain highly qualified sales, technical,
professional services and managerial personnel, particularly sales, professional
services and technical personnel with expertise in the SAP R/3 system. An
increase in the Company's sales staff is required to expand both the Company's
direct and indirect sales activities and to achieve revenue growth. Competition
for such personnel is intense, particularly for personnel with expertise in the
SAP R/3 system, and there can be no assurance that the Company can attract,
assimilate or retain such personnel. The Company has at times experienced and
continues to experience difficulty in recruiting qualified technical and sales
personnel, and anticipates such difficulties in the future. The Company has in
the past experienced and in the future expects to continue to experience a
significant time lag between the date technical, professional services and sales
personnel are hired and the date such personnel become fully productive. If the
Company is unable to hire and train on a timely basis and subsequently retain
such personnel in the future, the Company's business, operating results and
financial condition could be materially and adversely affected.
Management of Growth. The Company's business has grown in recent periods,
with total revenues increasing from $13.9 million in 1994 to $16.1 million in
1995 and $19.0 million in 1996 and increasing from $5.0 million for the third
quarter of 1996 to $7.0 million for the comparable period of 1997. The growth of
the Company's business has placed, and is expected to continue to place, a
strain on the Company's administrative, financial, sales and operational
resources and increased demands on its systems and controls. In particular, the
Company noted an increase in days sales outstanding from December 31, 1996 to
September 30, 1997 from approximately 70 days to approximately 75 days, and an
increase in total accounts receivable from $4.4 million to $5.8 million. The
Company believes this increase resulted from the impact of implementing a new
financial accounting system and from a lack of sufficient collections resources
in light of the Company's increased sales levels.
To deal with these concerns, the Company has implemented or is in the process
of implementing and will be required to implement in the future a variety of new
and upgraded operational and financial systems, procedures
16
and controls and to hire additional administrative personnel. There can be no
assurance that the Company will be able to complete the implementation of these
systems, procedures and controls or hire such personnel in a timely manner. The
failure of the Company or its management to respond to, and manage, its growth
and changing business conditions, or to adapt its operational, management and
financial control systems to accommodate its growth could have a material
adverse effect on the Company's business, operating results and financial
condition. To promote growth in the Company's sales and operations, the Company
will also have to expand its sales and marketing organizations, expand and
develop its distribution channels, fund increasing levels of product development
and increase the size of its training, professional services and customer
support organization to accommodate expanded operations, and there can be no
assurance that the Company will be successful in these endeavors.
Competition. The market for the Company's products and services is extremely
competitive and subject to rapid change. Because there are relatively low
barriers to entry in the software market, the Company expects additional
competition from other established and emerging companies. The Company believes
that the competitive factors affecting the market for the Company's products and
services include product functionality and features; quality of professional
services offerings; product quality, performance and price; ease of product
implementation; quality of customer support services; customer training and
documentation; and vendor and product reputation. The relative importance of
each of these factors depends upon the specific customer environment. Although
the Company believes that its products and services currently compete favorably
with respect to such factors, there can be no assurance that the Company can
maintain its competitive position against current and potential competitors.
In the business application integration market, the Company's Mercator
products and related services compete primarily against solutions developed
internally by individual businesses to meet their specific business application
integration needs. As a result, the Company must educate prospective customers
as to the advantages of the Company's products and services as opposed to
internally developed solutions and there can be no assurance that the Company
will be able to adequately educate potential customers to the benefits provided
by the Company's products and services. In the EDI market, the Company's Trading
Partner products compete with products offered by companies offering proprietary
Value-Added Network ("VAN") services as part of their EDI solution and the
Company's PC-based Trading Partner products also compete with PC-based products
offered by a number of other EDI software vendors.
Many of the Company's current and potential competitors have longer operating
histories, significantly greater financial, technical, product development and
marketing resources, greater name recognition and larger customer bases than
the Company. The Company's present or future competitors may be able to develop
products comparable or superior to those offered by the Company, adapt more
quickly than the Company to new technologies, evolving industry trends or
customer requirements, or devote greater resources to the development, promotion
and sale of their products than the Company. Accordingly, there can be no
assurance that the Company will be able to compete effectively in its markets,
that competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. The Company's competitors may
engage in pricing practices that reduce the average selling prices of the
Company's products and related services. To offset declining average selling
prices, the Company believes that it must successfully introduce and sell
enhancements to existing products and new products on a timely basis and develop
enhancements to existing products and new products that incorporate features
that can be sold at higher average selling prices. To the extent that
enhancements to existing products and new products are not developed in a timely
manner, do not achieve customer acceptance or do not generate higher average
selling prices, the Company's gross margins may decline, and such decline could
have a material adverse effect on the Company's business, operating results and
financial condition.
17
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) On July 1, 1997, the Company's Registration Statement on Form S-1 (File
No. 333-27293) was declared effective by the Securities and Exchange Commission
which registration statement related to the Company's initial public offering of
common stock. The managing underwriters of this offering were Robertson,
Stephens & Company LLC, SoundView Financial Group, Inc. and Wessels, Arnold &
Henderson, L.L.C. Of the 4,000,000 shares registered, 3,000,000 were sold by
the Company and 1,000,000 were sold for the account of certain selling
stockholders. All of the shares of common stock were sold at a public offering
price of $9.00 per share, for an aggregate offering price of $36,000,000. The
amount of offering expenses were $3,309,000, including underwriting discount of
$2,520,000 ($1,890,000 was borne by the Company and $630,000 was borne by the
selling stockholders) and other offering expenses of $789,000, for net proceeds
to the Company of $24,321,000. The selling stockholders received aggregate
proceeds of $8,370,000 (net of $630,000 in underwriting discounts).
As of September 30, 1997, the net proceeds to the Company have been applied as
follows:
i) $3.4 million for repayment of outstanding indebtedness under
the Company's bank line of credit with the Bank of New York.
ii) $2.7 million in marketable securities (see Note 1(c)).
iii) $18.2 million for working capital.
ITEM 5. OTHER INFORMATION
The Company has been selected by SAP as its partner to build interfaces
between SAP's BAPIs and the integration specifications of the Open Applications
Group. SAP has certified Mercator for R/3 for both EDI and Data Migration
Interfaces (DMI) to R/3, making Mercator for R/3 the first product to become
certified for all three interfaces (ALE, EDI and DMI). These new certifications
may expand the role Mercator for R/3 plays in assisting customers reduce the
time, cost and effort of R/3 implementation.
In August 1997 the Company and Price Waterhouse LLP announced an alliance to
use Mercator for R/3 to increase the speed and lower the cost of implementing
SAP's R/3. Price Waterhouse will incorporate Mercator for R/3 into its Global
Center curriculum and is now a worldwide re-seller of Mercator for R/3. In
addition, Price Waterhouse will incorporate the use of Mercator for R/3 into its
industry Templates for R/3.
The Company's Mercator software has been added to Logicon's I-CASE contract
with the federal government. Mercator is now available to solve the
government's application integration needs through Logicon's Indefinite
Delivery/Indefinite Quantity (ID/IQ) contract. Mercator is now part of
Logicon's schedule of approved software, hardware and integrated software
development environments.
In August 1997 the Company released the latest version of Mercator, Release
1.4. This release provides automated support for designing and managing entire
networks of application-to-application data transformations. Major features of
Release 1.4 include graphical design and development of transaction workflow
between applications (System Editor), support for real-time execution of data
transformations based on time and event triggers (Launcher Engine) and
facilities for embedding data transformations within user applications.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report on Form
10-Q:
11.1 Computation of Earnings Per Share
27.01 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the three-
month period ended September 30, 1997.
18
SIGNATURES
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.
TSI INTERNATIONAL SOFTWARE LTD.
Date: November 13, 1997 /s/ Constance F. Galley
------------------------------------------
Constance F. Galley
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1997 /s/ Ira A. Gerard
------------------------------------------
Ira A. Gerard
Vice President, Finance and Administration
Chief Financial Officer and Secretary
(Principal Financial Officer)
19