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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, 1999.
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:
TSI INTERNATIONAL SOFTWARE LTD.
(Exact name of registrant as specified in its charter)
Delaware 06-1132156
(State or other jurisdiction (I.R.S. Employer Identification No.)
of 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
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As of September 30, 1999, Registrant had 25,624,921 outstanding shares of Common
Stock, $.01 par value.
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1
TSI INTERNATIONAL SOFTWARE LTD.
TABLE OF CONTENTS
PAGE
----
PART 1 FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 3-4
Consolidated Statements of Operations for the Three Months Ended
and Nine Months Ended September 30, 1999 (unaudited) and 1998
(unaudited) 5-6
Consolidated Condensed Statements of Cash Flows for the Nine Months
Ended September 30, 1999 (unaudited) and 1998 (unaudited) 7
Notes to Consolidated Financial Statements 8-10
ITEM 2 - Managements' Discussion and Analysis of Financial
Condition and Results of Operations 10-22
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 22
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 23
ITEM 2. Changes in Securities and Use of Proceeds 23
ITEM 3. Defaults Upon Senior Securities 23
ITEM 4. Submission Of Matters To Vote Of Security Holders 24
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 25
2
TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
-------------- -------------
ASSETS (Unaudited) (Audited)
------
Current Assets:
Cash and cash equivalents $ 9,410,300 $15,132,700
Marketable securities, at cost 7,025,600 32,812,100
Accounts receivable, less allowances of $2,311,900 and 33,427,400 17,965,500
$1,897,900
Current portion of investment in licensing contracts
receivable, net of unearned finance income of $53,000
and $68,100 353,200 522,000
Deferred tax assets 2,804,000 2,695,100
Prepaid expenses and other current assets 1,883,800 729,400
------------ -----------
Total Current Assets 54,904,300 69,856,800
Furniture, fixtures and equipment, net 6,117,500 2,699,400
Investment in licensing contracts receivable, net of
unearned finance income of $45,800 and $51,100, less
current portion 210,800 271,300
Goodwill and intangible assets, net 168,108,700 5,155,400
Other assets 289,100 204,400
------------ -----------
Total Assets $229,630,400 $78,187,300
============ ===========
3
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,132,800 $ 1,546,700
Accrued expenses 7,985,800 6,479,900
Current portion of deferred revenue 14,276,000 8,088,000
------------ -----------
Total current liabilities 26,394,600 16,114,600
Other long-term liabilities 15,800 17,500
Deferred tax liability 13,019,700 --
Deferred revenue, less current portion 50,900 156,400
------------ -----------
Total Liabilities 39,481,000 16,288,500
------------ -----------
Stockholders' Equity:
Common stock (70,000,000 shares authorized, par value $.01,
25,624,921 and 21,977,852 shares issued and outstanding,
respectively) 274,800 222,800
Additional paid-in capital 199,880,300 63,845,000
Accumulated deficit (8,623,200) (400,200)
Cumulative foreign currency translation adjustment (366,500) (338,300)
Deferred Compensation (1,016,000) (1,430,500)
------------ -----------
Total Stockholders' Equity 190,149,400 61,898,800
------------ -----------
Total Liabilities and Stockholders' Equity $229,630,400 $78,187,300
============ ===========
See accompanying notes to financial statements.
4
TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues:
Software licensing $14,846,100 $ 7,967,700 $37,193,200 $19,869,600
Service, maintenance and other 11,885,200 4,156,200 30,418,300 10,574,800
----------- ----------- ----------- -----------
Total Revenues 26,731,300 12,123,900 67,611,500 30,444,400
----------- ----------- ----------- -----------
Cost of revenues:
Software licensing 207,000 371,300 1,024,300 1,112,300
Service, maintenance and other 5,472,400 912,600 14,939,400 2,623,400
----------- ----------- ----------- -----------
Total Cost of Revenues 5,679,400 1,283,900 15,963,700 3,735,700
----------- ----------- ----------- -----------
Gross profit 21,051,900 10,840,000 51,647,800 26,708,700
Operating expenses:
Product development 4,144,300 1,520,400 10,072,900 4,171,800
Selling and marketing 11,237,900 6,203,500 27,840,500 15,300,200
General and administrative 2,250,000 1,678,900 6,268,700 4,074,500
Amortization of intangibles 6,934,300 - 16,305,600 -
----------- ----------- ----------- -----------
Total Operating Expenses 24,566,500 9,402,800 60,487,700 23,546,500
----------- ----------- ----------- -----------
Operating Income (3,514,600) 1,437,200 (8,839,900) 3,162,200
Other income, net 118,800 683,900 860,800 1,370,100
----------- ----------- ----------- -----------
Income (loss) before income taxes (3,395,800) 2,121,100 (7,979,100) 4,532,300
Provision for income taxes 71,900 250,000 244,000 564,700
----------- ----------- ----------- -----------
Net income (loss) $(3,467,700) $ 1,871,100 $(8,223,100) $ 3,967,600
=========== =========== =========== ===========
Net income (loss) per share - Basic $ (0.14) $ 0.09 $ (0.33) $ 0.19
Net income (loss) per share - Diluted $ (0.14) $ 0.07 $ (0.33) $ 0.16
Weighted average number of common
and common equivalent shares
outstanding
- Basic 25,624,921 21,924,662 24,612,447 20,811,730
- Diluted 25,624,921 25,253,744 24,612,447 24,256,254
See accompanying notes to financial statements.
5
TSI INTERNATIONAL SOFTWARE LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998
------------------- -------------------
Cash flows from operating activities:
Net cash (used in) provided by operating
activities $ (7,111,000) $ 3,345,500
Cash flows from investing activities:
Purchase of furniture fixtures and equipment (3,415,000) (1,312,600)
Cost of Acquisitions, net of cash received (22,820,000) -
Sales (purchases) of marketable securities 25,786,100 (13,983,000)
Other (302,600) -
------------ ------------
Net cash (used in) investing activities (751,500) (15,295,600)
Cash flows from financing activities:
Payments under capital leases (5,200) (18,100)
Proceeds from exercise of options 846,000 89,000
Proceeds from issuance under ESPP 1,267,400 988,600
Proceeds from Secondary offering, Net
Exercise of warrants (4,500) 26,149,600
------------ ------------
Net cash provided by financing activities 2,103,700 27,209,100
Effect of exchange rate changes on cash and
cash equivalents 36,400 37,500
Net change in cash and cash equivalents (5,722,400) 15,296,500
Cash and cash equivalents at beginning of period 15,132,700 10,912,500
------------ ------------
Cash and cash equivalents at end of period $ 9,410,300 $ 26,209,000
============ ============
Supplemental information:
Cash paid for:
Interest $ 17,100 $ 15,300
Income taxes 1,492,100 380,200
Non cash investing and finance activities:
Issuance of stock in connection with the
acquisition of Braid. $ 63,723,500 -
Warrants exercised on a net exercise basis 2,300 -
Issuance of stock in connection with the
acquistion of Novera 56,152,800
See accompanying notes to financial statements.
6
TSI INTERNATIONAL SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated 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 the entire year.
Reference should be made to the Company's 1998 Annual Report on Form 10-K,
which includes audited financial statements for the year ended December 31,
1998.
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.
(2) BUSINESS COMBINATIONS
On September 30, 1999, TSI International Software Ltd. ("TSI") completed the
acquisition of Novera Software, Inc., ("Novera") a Delaware corporation, by
means of a merger (the "Merger") of Natchez Acquisition Corp. ("Merger Sub"), a
Delaware corporation and wholly owned subsidiary of TSI, with and into Novera,
pursuant to the Agreement and Plan of Reorganization (the "Merger Agreement")
dated as of September 30, 1999 by and among TSI, Merger Sub and Novera. As a
result of the Merger, Novera became a wholly owned subsidiary of TSI. The
Merger was effected by the filing of a Certificate of Merger with the Secretary
of State of the State of Delaware on September 30, 1999.
Novera develops, markets and supports Web application integration solutions,
enabling organizations to seamlessly integrate Web-based applications such as
customer self-service, customer relationship management and online retailing
with back-end legacy data.
Pursuant to the terms of the Merger Agreement, TSI purchased all of the
outstanding share capital of Novera. The purchase price included (1) 1,789,916
shares of TSI common stock valued at approximately $46.6 million. (2) the
issuance of options to purchase 369,142 shares of the company's common stock,
with a fair value of approximately $9.6 million in exchange for all outstanding
Novera stock options, the acquisition of net assets of $5.1 million of which
$4.9 million was cash, and approximately $2.0 million in fees and acquisition
related expenses. The transaction was accounted for under the purchase method of
accounting. The excess of the purchase price over the fair value of the assets
is estimated at $53.0 million. Presently the company is performing a valuation
of Novera and will identify the portion of purchase price allocable to net
assets, identifiable intangible assets and goodwill. The intangible assets will
be amortized over a 3 to 5 year period to be determined along with the
valuation. The final valuation could impact the value of the intangibles and
therefore the related goodwill amortization in future periods.
(3) NEWLY ADOPTED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133) which establishes accounting and
reporting standards for
7
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS 137,
(Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the effective date of SFAS no. 133 -- an Amendment of SFAS no. 133) is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. This
statement is not expected to effect the Company as the Company currently does
not have any significant derivative instruments or hedging activities.
On December 15, 1998 the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" which is
effective for transactions entered into in fiscal years beginning after March
15, 1999. SOP 98-9 requires the application of the "residual method" of
recognition for certain components of a multiple element arrangement. Under this
method, the arrangement fee is recognized as follows: (1) the total fair value
of the undelivered elements, as indicated by vendor-specific objective evidence,
is deferred and subsequently recognized in accordance with the relevant sections
of SOP 97-2 and (2) the difference between the total arrangement fee and the
amount deferred for the undelivered elements is to be recognized as revenue. All
other provisions of SOP 97-2 remain in effect. The Company will adopt SOP 98-9
for software transactions in the year which begins on January 1, 2000. The
Company believes that its current accounting policies substantially comply with
SOP 98-9 and therefore does not expect the adoption of SOP 98-9 to have a
material effect on our operations.
Other pronouncements issued by the FASB or other authoritative accounting
standard groups with future effective dates are either not applicable or are not
significant to the financial statements of the Company.
(4) STOCK ACTIVITIES
Effective April 5, 1999, the company completed a 2 for 1 common stock split in
the form of a stock dividend. The accompanying financial statements have been
retroactively adjusted to reflect this common stock split.
On March 26, 1999, the stockholders approved an amendment to the Company's
1997 Equity Incentive Plan. The shares reserved for issuance under the plan
were increased from 2,500,000 to an aggregate of 4,750,000.
(5) COMPREHENSIVE INCOME
The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" during 1998. SFAS 130 requires the Company to report comprehensive
income in its financial statements, in addition to its net income. Comprehensive
income (loss) consists of net income (loss) and foreign currency translation
adjustments. Comprehensive income (loss) was ($8.2 million) and $4.0 million for
the nine months ended September 30, 1999 and 1998 respectively.
(6) EARNINGS PER SHARE
Earnings per share is presented in accordance with the provisions of SFAS No.
128, "Earnings Per Share" (SFAS 128) and SEC staff Accounting Bulletin No. 98.
Under SFAS 128, basic earnings per share ("EPS") excludes dilution for common
stock equivalents and is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
and resulted in the issuance of common stock.
Diluted loss per share has not been presented separately for the three and
nine months ended September 30, 1999, as the outstanding stock options and
warrants are anti-dilutive for each of the periods presented. Antidilutive
potential common
8
shares outstanding were 2,851,801 and 3,181,482 for the three and nine months
ended September 30, 1999, respectively.
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 difference include, but are not limited to, (1)
the effects of rapid technological change and the need to make frequent product
transitions, (2) the potential for software defects, (3) the impact of
competitive products and pricing, (4) less than anticipated growth in the
enterprise resource planning software market and related services, (5)
uncertainties in attracting and retaining needed management, marketing, sales,
professional services and product development personnel, (6) the Company's
ability to manage growth and integrate the operations of its recent
acquisitions, (7) the success of the Company's Mercator product line, (8) the
Company's ability to develop additional distribution channels, and (9) those
discussed in "Factors That Many 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. 333-52007). 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, in December 1998.
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 a future growth in revenues, if any, will be
mainly attributable to its Mercator product line and the acquisition of new
products. In view of the relatively recent introduction of Mercator and the
recent acquisitions of Braid and Novera, the Company believes it cannot
accurately predict the amount of revenues that will be attributable to such
products or other acquired 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: (1) license
fees for the use of the Company's software products and (2) service fees for
maintenance, consulting services and training related to the Company's software
9
products. The Company recognizes revenue from software license fees based on
the following four criteria: persuasive evidence of an agreement exists,
delivery has occurred, the fee is fixed and determinable, and the fee is
collectible. 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. The Company has
increased the scope of its service offerings insofar as they support the sale of
its products. The Company believes that software licensing will continue to
account for a larger portion of its total revenues in the future.
Mercator can be used by IT professionals as well as Value Added Resellers
(VARs), independent software vendors (ISV'S), systems integrators (SI's) or
other third parties who resell, embed or otherwise bundle Mercator with their
products. To date, license fee revenues have been derived principally from
direct sales of software products through the Company's direct sales force.
Although the Company believes that such direct sales will continue to account
for a significant portion of software licensing revenues, the Company intends to
increase its use of distributors and resellers. Furthermore, the Company's
planned expansion of its sales organization is expected to cause sales and
marketing expenses to increase.
The Company markets its products in North America primarily through its direct
sales and telesales organizations. In addition, the Company markets its
products and services outside North America through sales offices located in the
United Kingdom, Germany, France, and, with the acquisition of Braid, through
offices located in Singapore, Australia and Hong Kong, as well as through
indirect channels. International sales are recorded in their local currency and
converted in consolidation. Revenues from international customers were
approximately 28.5% and 9.2% for the nine months ended September 30, 1999 and
1998, respectively. The Company anticipates that revenues from international
customers will continue to represent a larger percentage of total revenue in the
future.
The size of the Company's orders can range from a few thousand dollars to over
$300,000 per order. The loss or delay of large individual orders, therefore,
can have a significant impact on the revenues and other quarterly results of the
Company. In addition, the Company has generally recognized a substantial
portion of its quarterly software licensing revenues in the last month of each
quarter, and as a result, revenue from a limited number of license transactions
could cause significant variations in operating results from quarter to quarter
which may be difficult to predict and could result in significant losses. To the
extent such expenses precede, or are not subsequently followed by, increased
revenue, the Company's operating results could be materially and adversely
affected. As a result of these and other factors, operating results for any
quarter are subject to variation, and 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.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE
MONTHS ENDED SEPTEMBER 30, 1998
REVENUES:
Total Revenues. The Company's total revenues increased 121% to $26.7 million
10
in the third quarter of 1999 from $12.1 million in the comparable period of
1998. This increase resulted primarily from increased license sales as well as
from increased billings for professional services.
Braid contributed $6.6 million in total revenues for the three month period
ending September 30, 1999.
Software Licensing. Software licensing revenues increased 86% to $14.8
million in the third quarter of 1999 from $8.0 million in the comparable period
of 1998, primarily due to an increase in Mercator license revenues and license
revenues of $3.2 million from Braid.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 186% to $11.9 million in the third quarter of 1999 from $4.2 million
in the comparable period of 1998, primarily due to higher professional services
associated with sales of Mercator, contribution of services and
maintenance from Braid of $3.4 million and, to a lesser extent, an increase in
Mercator maintenance revenue, partially offset by a decrease attributable to
declining 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, 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.
Total Cost of Revenues. Total cost of revenues increased 342% to $5.7 million
in the third quarter of 1999 from $1.3 million in the comparable period of
1998.
Cost of Software Licensing. Cost of software licensing revenues decreased 44%
to $207,000 in the third quarter of 1999 from $371,300 in the comparable period
of 1998. Software licensing gross margin increased to 99% for the third
quarter of 1999 as compared to 95% for the same period in 1998.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 500% to $5.5 million in the third quarter of 1999 from
$912,600 in the comparable period of 1998, primarily due to the acquisition of
Software Consulting Partners and Braid and the related costs, and an increase in
professional services rendered, and therefore higher professional services
personnel costs, particularly Mercator-related services. Service, maintenance
and other gross margin was 54% and 78% for the third quarter of 1999 and 1998,
respectively.
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 173% to $4.1 million in the third quarter
of 1999 from
11
$1.5 million in the third quarter of 1998, primarily due to increased product
development activities related to the Mercator product line. Product development
expenses as a percentage of total revenue increased to 15.5% in the third
quarter of 1999 from 12.5% in the third quarter of 1998. 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 absolute dollar amount of research and development expenses will
increase through at least the remainder of 1999. 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 81% to $11.2 million in the third
quarter of 1999 from $6.2 million in the third quarter of 1998, primarily due
to the increased number of sales and marketing personnel and increased
expenditures for Mercator and the new financial services products, marketing,
and advertising programs. Selling and marketing expenses as a percentage of
total revenues decreased to 42% in the third quarter of 1999 from 51% in the
third quarter of 1998. The Company expects to continue hiring additional sales
and marketing personnel and to increase promotional expenses through the
remainder of 1999 to focus on the expanded product line. The Company anticipates
that sales and marketing expenses will continue to 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 34% to $2.3 million in the
third quarter of 1999 from $1.7 million in the third quarter of 1998,
primarily due to increased administrative costs to support the Company's growth.
General and administrative expenses as a percentage of total revenues decreased
to 8% for the third quarter of 1999 from 14% for the third quarter of 1998. The
Company believes that the absolute dollar amount of its general and
administrative expenses will continue to increase as the Company expands its
administrative staff to support the Company's worldwide expansion.
Amortization of intangibles. The amortization of goodwill and other
intangibles resulting from the acquisition of Software Consulting Partners
("SCP") in November 1998, Braid in March 1999, and Novera in September 1999
was $7.0 million for the three months ended September 30, 1999.
OTHER INCOME (EXPENSE) NET
Other income, net, represents income earned on the Company's cash
balances and interest on term contracts. Net interest income decreased to
$118,800 in the third quarter of 1999 from $683,900 in the comparable period of
1998, due to lower cash balances resulting from the acquisition of Braid Inc.
in March of 1999.
INCOME TAXES
Income tax expense decreased to $71,900 for the third quarter of 1999 from
$250,000 for the third quarter of 1998. The provision for income taxes for the
three months ended September 30, 1999 reflects the anticipated annual effective
tax rate on projected income for the year ended December 31, 1999, which is
affected by the amortization of goodwill which is non deductible for income tax
purposes.
12
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE
MONTHS ENDED SEPTEMBER 30, 1998
REVENUES:
Total Revenues. The Company's total revenues increased 122% to $67.6 million
for the nine months ended June 30, 1999 from $30.4 million in the comparable
period of 1998. This increase primarily resulted from increased license sales as
well as increased billings for professional services. Braid contributed $14.9
million in total revenues for the nine month period ending September 30, 1999.
Software Licensing. Software licensing revenues increased 87% to $37.2
million for the nine months ended September 30, 1999 from $19.9 million in the
comparable period of 1998, primarily due to an increase in Mercator license
revenues and license revenues of $6.6 million from Braid.
Service, Maintenance and Other. Service, maintenance and other revenues
increased 187% to $30.4 million for the nine months ended September 30, 1999
from $10.6 million in the comparable period of 1998, primarily due to higher
professional services associated with sales of Mercator, Braid contribution of
services and maintenance of $8.3 million and, to a lesser extent, an increase in
Mercator maintenance revenue, partially offset by a decrease attributable to
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, 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.
Total Cost of Revenues. Total cost of revenues decreased 327% to $16.0
million for the nine months ended 1999 from $3.7 million in the comparable
period of 1998.
Cost of Software Licensing. Cost of software licensing revenues decreased 10%
to $1.0 million in the first nine months of 1999 from $1.1 million in the
comparable period of 1998. Software licensing gross margin was 97.2% and 94.4%
for the nine months ended September 30, 1999 and 1998, respectively.
Cost of Service, Maintenance and Other. Cost of service, maintenance and
other revenues increased 469% to $14.9 million for the first nine months of 1999
from $2.6 million in the comparable period of 1998, primarily due to the
acquisition of Software Consulting Partners and Braid and the related costs, and
an increase in professional services rendered, and therefore higher professional
services personnel costs, particularly Mercator-related services. Service,
maintenance and other gross margin was 50.9% and 75.2% for the nine months ended
September 30, 1999 and 1998, respectively.
OPERATING EXPENSES
Product Development. Product development expenses include expenses associated
with the development of new products and enhancements to existing products and
13
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 141% to $10.1 million for the nine months
ended September 30, 1999 from $4.2 million in the comparable period of 1998,
primarily due to increased product development activities related to the
Mercator, and financial services product line. Product development expenses as a
percentage of total revenue increased to 14.9% in the first nine months of 1999
from 13.7% in the first six months of 1998. 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 the remainder of 1999, with the added focus on the Novera
acquisition. 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 82% to $27.8 million in the nine months
ended September 30, 1999 from $15.3 million in the comparable period of 1998,
primarily due to the increased number of sales and marketing personnel and
increased expenditures for Mercator and financial services related marketing and
advertising programs. Selling and marketing expenses as a percentage of total
revenues decreased to 41% in the first nine months of 1999 from 50% in the first
nine months of 1998. The Company expects to continue hiring additional sales and
marketing personnel and to increase promotional expenses through the remainder
of 1999 to focus on the Mercator product line and the newly acquired Novera
products. The Company anticipates that sales and marketing expenses will
continue to 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 58% to $6.3 million in the nine
months ended September 1999 from $4.1 million in the comparable period of 1998,
primarily due to increased administrative costs to support the Company's growth.
General and administrative expenses as a percentage of total revenues decreased
to 9.3% for the first nine months of 1999 from 13.4% for the comparable period
of 1998. The Company believes that the dollar amount of its general and
administrative expenses will continue to increase as the Company expands its
administrative staff to support the Company's worldwide expansion.
Amortization of intangibles. The amortization of goodwill and other
intangibles in September 1999 resulting from the acquisition of SCP in November
1998, Braid in March 1999, and Novera in September 1999 was $16.3 million for
the nine months ended September 30, 1999.
OTHER INCOME (EXPENSE) NET
Other income, net, represents income earned on the Company's cash
balances and interest on term contracts. Net interest income decreased to
$860,800 in the nine months ended September 30, 1999 from $1.4 million in
the comparable period of 1998, primarily due to the cash used for acquisitions.
14
INCOME TAXES
Income tax expense decreased to $244,000 for the nine months ending September
30, 1999 from $564,700 for the comparable of 1998. The provision for income
taxes for the nine months ended 1999 reflects the anticipated effective tax rate
on projected income for the year ended December 31, 1999 which is effected by
the amortization of goodwill which is non deductible for income tax purposes.
The provision for income taxes for the nine months ended September 30, 1999 has
been reduced by the release of the valuation allowance related to $1.0 million
in research and development tax credits as the Company determined that it was
more likely than not that these credits will be utilized in the year ended
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1999, the Company had net working capital of $28.5 million,
which included cash and marketable securities of $16.4 million.
Operating activities (used) provided by net cash of ($7.1 million) and $3.3
million during the nine months ended September 30, 1999 and 1998, respectively.
The cash provided in the nine months ended September 30, 1999 was due to changes
in accounts receivable and the timing of payments to certain vendors.
Investing activities (used) net cash of ($751,500) during the nine months
ended September 30, 1999. The reduction in cash was due to the acquisition of
Braid Ltd., offset by the sale of marketable securities. Investing activities
(used) cash of ($15.3 million) during the nine months ended September 30, 1998
due primarily to the purchase of marketable securities during the year.
Financing activities provided net cash of $2.1 million and $27.2 million for
the nine months ended September 30, 1999 and 1998, respectively. The cash
provided for 1999 was due to proceeds from sale of stock through employee stock
option exercises and employee stock purchase plan purchases, and for 1998 from
the proceeds from a secondary offering of the Company's stock.
Net accounts receivable was $33.4 million at September 30, 1999 compared to
$18.0 million at September 30, 1998. The number of days sales in accounts
receivables was 113 at September 30, 1999 compared to 101 at September 30, 1998.
The increase in days sales outstanding is the result of sales being recongized
towards the end of the quarter.
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 operation. As of September 30, 1999, the
Company had no material commitments for capital expenditures.
The Company believes that its current cash and cash equivalent balances and
any 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 three months. Thereafter, if cash balances generated by
operations are insufficient to satisfy the Company's operating requirements, the
Company may seek additional debt or equity financing. There can be no assurance
that such financing will be available on terms acceptable to the Company and the
Company's stockholders. As was the case with the Braid acquisition, a portion
of the Company's cash could also be used to acquire or invest in complementary
businesses or products or otherwise to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business, the
Company evaluates potential acquisitions of such businesses, products or
technologies.
15
YEAR 2000 READINESS
Awareness: The Company is aware of the issues associated with the
programming code in existing computer systems as the millennium ("Year 2000")
approaches. Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates because such systems may have been developed using two digits rather than
four to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures, generation of
erroneous data or miscalculations causing disruption of operations, including
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced to comply with
such Year 2000 requirements. The Year 2000 problem is pervasive and complex.
Significant uncertainty exists in the software industry concerning the potential
impact of Year 2000 problems. Demand for certain of the Company's products may
be generated by customers who are replacing or upgrading computer systems to
accommodate the Year 2000 date change. The Company is assessing the potential
overall impact of the impending century change on the Company's business,
financial condition and results of operations.
State of Readiness: Based on the Company's assessment to date, the Company
believes the current versions of its software products and services are "Year
2000 ready" that is, they are capable of adequately distinguishing twenty-first
century dates from twentieth century dates. New products are being designed to
be Year 2000 ready. Although the Company's products have undergone the
Company's normal quality testing procedures, there can, however, be no assurance
that the Company's products will contain all necessary date code changes.
Furthermore, use of the Company's products in connection with other products
which are not Year 2000 compliant, including non-compliant hardware, software
and firmware may result in the inaccurate exchange of dates and result in
performance problems or system failure. In addition, OEM derivative versions of
older products may not be year 2000 ready. Any failure of the Company's
products to perform, including system malfunctions associated with the onset of
Year 2000, could result in claims against the Company. However, the success of
the Company's Year 2000 readiness efforts may depend on the success of its
customers in dealing with the Year 2000 issue. We have issued disclosure
statements to all our existing customers and have posted these statements on our
website.
Although the Company has not been a party to any litigation or arbitration
proceeding to date that involves Year 2000 compliance issues with its products
or services, it could be required to defend its products or services in such
proceedings, or to negotiate resolutions of claims based on Year 2000 issues.
The costs of defending and resolving Year 2000-related disputes, regardless of
the merits of such disputes, and any liability of the Company for Year 2000-
related damages, excluding consequential damages, could have a material adverse
effect on the Company's business.
In addition, the Company believes that the purchasing patterns of customers
and potential customers of the Company may be affected by Year 2000 compliance
issues as organizations expend significant resources to correct their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funding available to such entities for other information technology
purchases, such as those products and services offered by the Company.
Furthermore, customers and potential customers may defer information technology
purchases until early in the next millennium to avoid Year 2000 compliance
problems. As a result, demand for some of the Company's products may diminish as
the Year 2000 arrives, which could negatively impact the Company's revenue
growth rate. Any such deferral of purchases by the Company's customers or
potential
16
customers could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company's business depends on numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:
hardware and software systems used by the Company to deliver products and
services to its customers (including software supplied by third parties);
communications networks such as the wide area network and local area networks
upon which the Company depends to communicate product orders to its
manufacturing and distribution operations and to develop products; the internal
systems of the Company's customers and suppliers; software products sold to
customers; the hardware and software systems used internally by the Company in
the management of its business; and non-information technology systems and
services used by the Company in the management of its business, such as power,
telephone systems and building systems.
The Company has currently evaluated its information technology infrastructure
in order to identify and modify any products, services or systems that are not
Year 2000 compliant. Based on its analysis of the systems potentially impacted
by conducting business in the twenty-first century, the Company has applied a
phased approach to making such systems, and accordingly, the Company's
operations, ready for Year 2000. Beyond awareness of the issues and scope of
systems involved, the phases of activities in process include: an assessment of
specific underlying computer systems, programs and hardware; renovation or
replacement of Year 2000 non-compliant technology; validation and testing of
critical systems certified by third-party suppliers to be Year 2000 compliant;
and implementation of Year 2000 compliant systems. The table below describes
the status and timing of such phased activities:
Impacted Systems Targeted
Assessment Activity Completion
---------- -------- ----------
Software products sold to customers
- -----------------------------------
Existing Products Software products Q3 1998
tested and available (completed)
for distribution
New Products Ongoing testing Q4 1999
complete before release
Hardware and software
- ---------------------
Systems used to deliver Assessment Q1 1999
products and services (completed)
Communication networks used Assessment Q1 1999
to carry products and (completed)
provide services
Hardware and software Assessment Q1 1999
systems used to manage the (completed)
company's business
Hardware and software Validation Q3 1999
systems used to deliver and testing (completed)
products and services (in process)
Communication networks used Validation Q3 1999
17
to carry products and and testing (completed)
provide services (in process)
Hardware and software Validation Q3 1999
systems used to manage and testing (completed)
the Company's business (in process)
Hardware and software Remediation Q3 1999
systems Used to deliver (completed)
and services Products
Communication networks Remediation Q3 1999
used to carry products (completed)
and provide services
Hardware and software Remediation Q3 1999
systems used to manage (completed)
the Company's business
Non-information technology Systems upgraded Q3 1999
systems and services or replaced as appropriate, (completed)
Testing and implementation
Extensive Year 2000 Testing has been conducted on all systems considered
critical to the Company. The Company did not encounter any material problems in
this regard with its computer systems or any other equipment that might be
subject to such problems.
Costs to Address Year 2000 Issues: The total cost of these Year 2000
compliance activities has not been, and is not anticipated to be, material to
the Company's business, results of operations and financial condition. These
costs and the timing in which the Company plans to complete its Year 2000
modification and testing processes are based on management's estimates.
However, there can be no assurance that the Company will timely identify and
remedy all significant Year 2000 problems that remediation efforts will not
involve significant time and expense, or that such problems will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Contingency Plans: The Company does not presently have a contingency plan for
handling Year 2000 problems that are not detected and corrected prior to their
occurrence. Any failure of the Company to address any unforeseen Year 2000
issue could adversely affect the Company's business, financial condition and
results of operations.
CONVERSION TO A SINGLE EUROPEAN CURRENCY
The Company has sales in a number of foreign countries, but at the present
time they are not significant and the conversion to a single European currency
has not had a material impact on the Company's financial results. With the
acquisition of Braid Ltd. and increased selling efforts in international
markets, conversion impact will increase during 1999.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Market acceptance of the Company's product line may not increase or remain at
current levels. The Company may not be able to successfully market the Mercator
product line and develop extensions and enhancements to these product lines 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 Company's products, demand for the
18
Company's products and services would likely decline. A decline in demand for,
or market acceptance of, the Company's products as a result of competition,
technological change or other factors would have a material adverse effect on
the Company's business.
TSI Software depends on ERP 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 use with ERP Systems and related services.
The Company believes that its future revenue growth, if any, will also depend in
significant part upon continued sale of Mercator for use in ERP System
implementations. The Company has devoted and must continue to devote
substantial resources to identifying potential customers in the ERP market,
building strategic relationships and attracting and retaining skilled technical,
sales and professional services personnel with expertise in ERP systems.
Personnel with expertise in the ERP 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 R/3 systems
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 or 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.
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. The Company may not be able to
successfully identify such applications, systems or platforms. Also, these
applications, systems or platforms will have to achieve commercial acceptance or
the Company may not realize a sufficient return on its investment.
19
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.
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 (or VARs), Independent Software
Vendors (or ISVs), Systems Integrators (or SIs) and distributors. Although
VAR's, 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. TSI Software may not be successful in expanding the
number of indirect distribution channels for its products. Furthermore, any new
VARs, ISV's, SIs or distributors may offer competing products, or have no
minimum purchase requirements of the Company's products. These third parties
also may not provide adequate levels of services and technical support. The
inability of the Company to enter into additional indirect distribution
arrangements, the failure of these 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. The Company's planned
efforts to expand its use of VARs, ISVs, SIs and distributors may not 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. Therefore revenue to the
Company for each such sale will be less than if the Company had licensed the
same product to the customer directly.
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 also 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 customer, resellers may also come into conflict with each other.
Although the Company has attempted to manage its distribution channels to avoid
potential conflicts, channel conflicts could 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.
Management growth. 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.
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 and controls and to hire additional
administrative personnel. TSI Software may not 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
20
growth could have a material adverse effect on the Company's business. To
promote growth in the Company's sales and operations, the Company will also
continue 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. The Company may not be
successful in these endeavors.
Risks associated with International expansion. With its recent acquisition of
Braid, the Company has expanded its administrative, sales and marketing
resources outside of the United States, which will require significant
management attention and financial resources. The Company also expects to commit
additional time and development resources to customizing its products for
selected international markets and developing international sales and support
channels. International operations involve a number of additional risks,
including the impact of possible recessionary environments in economies outside
the United States, longer receivables collections periods and greater difficulty
in accounts receivable collection, unexpected changes in regulatory
requirements, dependence on independent resellers, reduced protection for
intellectual property rights in some countries, tariffs and other trade
barriers, foreign currency exchange rate fluctuations, difficulties in staffing
and managing foreign operations, the burdens of complying with a variety of
foreign laws, potentially adverse tax consequences and political and economic
instability.
To the extent the Company's international operations continue to expand, the
Company expects that an increasing portion of its international license and
service and other revenues will be denominated in foreign currencies, subjecting
the Company to fluctuations in foreign currency exchange rates. The Company
does not currently engage in foreign currency hedging transactions. However, as
the company continues to expand its international operations, exposures to gains
and losses on foreign currency transactions may increase. The Company may
choose to limit such exposure by the purchase of forward foreign exchange
contracts or similar hedging strategies. There can be no assurance that any
currency exchange strategy would be successful in avoiding exchange-related
losses. There can be no assurance that the foregoing factors will not have a
material adverse effect on the Company's future international revenue and, the
Company believes that its growth will require expansion of its sales in the
foreign market. There can be no assurance that the Company will be able to
sustain or increase revenue derived from international sources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
TSI is exposed to market risk primarily through its investments in marketable
securities. TSI's investment policy calls for investment in short term, low
risk instruments. As of September 30, 1999, investments in marketable
securities were $7.0 million. Due to the nature of these investments, any
decrease in rates would not have material impact on the Company's financial
statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 30, 1999, the Company completed its acquisition of Novera by
means of a merger (the "Merger") of Natchez Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of the Company ("Merger Sub"), with and
into Novera, pursuant to the Agreement and Plan of Reorganization dated as of
September 30, 1999 (the "Merger Agreement") by and among the Company, Merger Sub
and Novera. As a result of the Merger, Novera became a wholly owned subsidiary
of the Company. The Merger was effected by the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware on September 30,
1999.
Pursuant to the terms of the Merger Agreement, upon the effective time of
the Merger, (i) each outstanding share of common stock, par value $.01 per
share, of Novera ("Novera Common Stock"), and (ii) each outstanding share of
Series A Convertible Preferred Stock, par value $.01 per share, Series B
Convertible Preferred Stock, par value $.01 per share, and Series C Convertible
Preferred Stock, par value $.01 per share, of Novera (collectively "Novera
Preferred Stock"), was converted into the right to receive 0.204983 shares of
common stock, par value $.01 per share, of the Company ("TSI Common Stock")
(subject to payment of cash in lieu of any fractional shares). Each holder of
Novera Common Stock and Novera Preferred Stock who is otherwise entitled to a
fraction of a share of TSI Common Stock will receive cash in lieu thereof, equal
to such fraction multiplied by $24.5469.
As a result of the Merger, the former stockholders of Novera will receive
an aggregate of 1,789,916 shares of TSI Common Stock and $680.93 in cash in lieu
of fractional shares of TSI Common Stock in exchange for all of the shares of
Novera Common Stock and Novera Preferred Stock issued and outstanding at the
effective time of the Merger. Pursuant to and in accordance with the terms and
conditions of the Merger Agreement and an Escrow Agreement dated as of September
30, 1999 (the "Escrow Agreement") by and among TSI, Novera, the Indemnification
Representative (as defined therein) and The Bank of New York, as escrow agent,
an aggregate of 178,992 of such shares will be placed in an escrow account to
secure certain indemnification obligations of the former stockholders of Novera
to TSI under Article IX of the Merger Agreement.
The shares of TSI Common Stock issued in connection with the Merger were
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance upon the exemption from registration provided under Rule 506
of the Securities Act. As a result, all such shares are subject to restrictions
on transfer under the applicable provisions of the Securities Act and will carry
a legend reflecting such restrictions. Under Article X of the Merger Agreement,
the Company has granted the former stockholders of Novera rights to register
under the Securities Act the shares of TSI Common Stock received in connection
with the Merger.
Also, pursuant to the terms of the Merger Agreement, upon the effective
time of the Merger, TSI assumed Novera's obligations under Novera's 1996 Stock
Option Plan and all stock options of Novera, whether vested or unvested,
outstanding as of the effective time of the Merger. The shares of Novera Common
Stock subject to such stock options were converted into shares of TSI Common
Stock at the rate of 0.204983 shares of TSI Common Stock for each share of
Novera Common Stock or an aggregate of 369,142 shares of TSI Common Stock.
The terms of this transaction and the consideration received by Novera's
stockholders were the result of arm's-length negotiations between the
representatives of the Company and Novera and took into account various factors
concerning the relative valuations of the businesses and the common stock of the
Company and Novera. The terms of the Merger and the exchange of Novera Common
Stock and Novera Preferred Stock for TSI Common Stock are more fully described
in the Merger Agreement and the Escrow Agreement. Copies of the Merger
Agreement and the Escrow Agreement are filed as Exhibits 2.1 and 2.2,
respectively, to the Company's Current Report on Form 8-K dated September 30,
1999 filed with the Securities and Exchange Commission on October 15, 1999 and
are incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Quarterly Report on Form
1O-Q
2.1 Agreement and Plan of Reorganization dated as of September 30,
1999 by and among TSI International Software Ltd., Natchez
Acquisition Corp. and Novera Software, Inc. (filed as Exhibit 2.1
to the Company's Current Report on Form 8-K dated September 30,
1999 and incorporated herein by reference)
2.2 Escrow Agreement dated as of September 30, 1999 by and among TSI
International Software Ltd., Novera Software, Inc., the
Indemnification Representative (as defined therein) and The Bank
of New York, as escrow agent (filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K dated September 30, 1999 and
incorporated herein by reference)
10.1 Employment Agreement dated September 30, 1999 between TSI
International Software Ltd. and David Power
10.2 Employment Agreement dated September 30, 1999 between TSI
International Software Ltd. and Herbert Rush
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
(1) The Company filed a report under item 2 of form 8-K in October, 1999
with respect to the Company's acquisition of Novera on September 30, 1999.
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 12, 1999 /s/ Constance F. Galley
-------------------------------------------
Constance F. Galley
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 /s/ Ira A. Gerard
-------------------------------------------
Ira A. Gerard
Vice President, Finance and Administration
Chief Financial Officer and Secretary
(Principal Financial Officer)
22