1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: 000-27900
------------------------
ISOCOR
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-4310259
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3420 OCEAN PARK BOULEVARD 90405
SANTA MONICA, CA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 581-8100
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based upon the closing sale price of the Registrant's Common
Stock on the Nasdaq National Market on February 17, 1998 was approximately
$17,100,596. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There were 9,581,192 shares of Registrant's Common Stock issued and
outstanding as of February 17, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the Registrant's 1998 Annual Meeting of Shareholders scheduled to
be held on May 13, 1998 (the "1998 Proxy Statement").
================================================================================
2
INTRODUCTORY STATEMENTS AND REFERENCES
References made in this Annual Report on Form 10-K to "ISOCOR," the
"Company" or the "Registrant" refer to ISOCOR and its subsidiaries. The ISOCOR
name, N-PLEX and Plexlink are registered trademarks of the Company. ISOGATE,
ISOMAIL, ISOPLEX, ISOPRO, ISOTRADE and PLEXLINK Secure are trademarks of the
Company.
This Annual Report on Form 10-K contains forward-looking statements that
are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the
introduction and market acceptance of new products offered by the Company and
its competitors, general changes in the markets in which the Company competes,
the volume and timing of large transactions with customers, the level of product
and price competition, the Company's success in expanding its direct sales force
and indirect distribution channels, the risks related to international
operations, and other risks detailed below and included from time to time in the
Company's other SEC reports and press releases, copies of which are available
from the Company upon request. The Company assumes no obligation to update any
forward-looking statements contained herein.
RISK FACTORS
Significant Fluctuations in Quarterly Results; Limited Operating History
The Company's quarterly operating results have in the past varied
significantly and are likely in the future to vary significantly based upon a
number of factors, including the introduction and market acceptance of new
products offered by the Company and its competitors, general changes in the
markets in which the Company competes, the volume and timing of large
transactions with customers, the level of product and price competition, the
Company's success in expanding its direct sales force and indirect distribution
channels and the risks related to international operations, as well as other
factors. Products are generally shipped as orders are received, and product
revenues are generally recognized as products are shipped. Consequently,
quarterly revenues and operating results depend primarily on the volume and
timing of orders during the quarter, which are difficult to forecast due to the
length of the sales cycle. Further, the Company typically generates a large
percentage of its quarterly revenues during the last few weeks of the quarter. A
significant portion of the Company's operating expenses are relatively fixed in
the short term, and planned expenditures are based on sales forecasts. If
revenue levels are below expectations, operating results are likely to be
materially adversely affected. In particular, net income, if any, may be
disproportionately affected because only a small portion of the Company's
expenses varies with revenue in the short term. There can be no assurance that
the Company will achieve revenue growth in the future or be profitable on an
operating basis in any future period. Due to the foregoing factors, the Company
believes that period-to-period comparisons of its results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Further, it is likely that in some future quarter the Company's revenues or
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected.
The Company was incorporated in February 1991 and recorded its first sales
in the second quarter of 1992. The Company incurred losses through 1994, during
the first two quarters of 1995, during the second quarter of 1996 and for all of
1997. As a result, the Company had an accumulated deficit of $13.6 million as of
December 31, 1997. There can be no assurance that the Company will be profitable
in the future.
Substantial Competition
The markets for the Company's products are intensely competitive and
characterized by rapid changes in technology and evolving standards. The Company
encounters competition from a number of sources, including privately held
companies which specialize in messaging products, computer hardware vendors,
customized solution vendors or systems integrators, and software companies such
as Control Data Systems, Inc., the Lotus Development Corporation subsidiary of
International Business Machines Corporation ("Lotus"), Microsoft
2
3
Corporation ("Microsoft"), Netscape Communications Corporation ("Netscape") and
Worldtalk Corporation. A variety of potential actions by any of the Company's
competitors, including a reduction of product prices, increased promotion,
announcement or accelerated introduction of new or enhanced products, product
giveaways, product bundling or feature integration could have a material adverse
effect on the Company's business, financial condition and results of operations.
Large companies that compete with the Company or that may compete with it in the
future have substantial technical and financial resources that allow them to
develop, enhance or acquire competitive products, and substantial marketing
resources and presence to promote these products aggressively. Moreover, the
Company's current and potential competitors may respond more quickly than the
Company to new or emerging technologies or changes in customer requirements or
distribution methods. Accordingly, it is possible that current or potential
competitors could rapidly gain significant market share. See "Item 1:
Business -- Competition."
Dependence on Commercial Use of the Internet
Particularly in light of the Company's strategic shift of focus away from
X.400-based products to products related to the Internet, the success of the
Company's products will depend in large part on increased commercial use and
acceptance of the Internet. Because commercial use of the Internet is relatively
recent and is evolving rapidly, it is difficult to predict with any assurance
whether the Internet will prove to be a viable marketplace. There can be no
assurance that the infrastructure or complementary products necessary to make
the Internet viable for broad electronic business communications and
transactions will be developed. The flat rate, time-of-day and
volume-independent pricing structure offered by Internet service providers to
organizations is currently favorable. Less favorable pricing structures may have
a material adverse impact on the commercial adoption of the Internet and
therefore on the success of the Company's products and the Company's business
prospects.
Dependence on New Products
The Company has invested significant resources into the development of new
products and expects to continue to make these investments in the future.
Additionally, the Company expects sales of its new products related to the
Internet to comprise an increasing fraction of overall sales. ISOCOR also plans
to continue to enhance its products with new releases that provide additional
features and to make its products available on additional hardware and operating
system platforms. Any quality, reliability or interoperability problems with new
or enhanced products, or any other actual or perceived problems in new or
enhanced products, could have a material adverse effect on market acceptance of
such products. There can be no assurance that such problems or perceived
problems will not arise or, that even in the absence of such problems, the new
or enhanced products will receive market acceptance. A failure of new or
enhanced products to receive market acceptance for any reason would have a
material adverse effect on the Company's business prospects. See "Item 1:
Business -- Products" and "-- Product Development."
Dependence on Expansion of North American Sales and Marketing Efforts
The Company intends to expand further its North American sales and
marketing efforts, which is a critical component of its strategy to expand
Internet-related revenues. In particular, the Company is currently pursuing
plans to increase its North American direct and indirect sales force. There can
be no assurance that the Company will be successful in attracting or retaining
qualified direct and indirect sales personnel, that the expansion of the
Company's sales and marketing efforts will result in increased sales of the
Company's products, that the cost of such expansion will not exceed the revenues
generated thereby, or that the Company's sales and marketing organization will
compete successfully against the larger and better-funded sales and marketing
organizations of the Company's competitors. A failure in any of these areas
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1: Business -- Marketing, Sales
and Distribution."
3
4
Dependence on International Third-Party Distribution
Internationally, the Company relies significantly on resellers for certain
elements of the marketing and for the distribution of its software products. The
agreements in place with these organizations are generally non-exclusive. These
resellers are not within the control of the Company, may distribute products
other than the Company's products and are not obligated to purchase products
from the Company. There can be no assurance that these resellers will place a
high priority on the marketing of the Company's products, and they may give a
higher priority to other products which may include products of the Company's
competitors. This may result in a lower sales effort applied to the Company's
products and a consequent reduction in the Company's operating results. In
addition, because the Company's international sales are made to a large extent
through resellers, the Company often does not enter into product sales contracts
with the international end users of its products. There can be no assurance that
the Company will retain any of its resellers, and there can be no assurance that
the Company will succeed in recruiting replacement or new organizations to
represent the Company's products. Any changes in the Company's distribution
channels may adversely affect sales and consequently may adversely affect the
Company's business, financial condition and results of operations. See "Item 1:
Business -- Marketing, Sales and Distribution."
Ability to Respond to Rapid Technological Change
The Company's future success will depend significantly on its ability to
enhance continually its current software products and develop or acquire and
market new products which keep pace with technological developments and evolving
industry standards as well as respond to changes in customer needs. The market
for electronic directory and messaging infrastructure, Internet and ISO
compliant software products is characterized by rapidly changing technology,
evolving industry standards and customer demands and frequent new product
introductions and enhancements. There can be no assurance that the Company will
be successful in developing or acquiring product enhancements or new products to
address changing technologies and customer requirements adequately, that it will
introduce such products on a timely basis or that any such products or
enhancements will be successful in the marketplace. The Company's delay or
failure in the development or acquisition of technological improvements or the
adaptation of its software products to technological change could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1: Business -- Products" and "-- Product
Development."
The Company's software products are very complex as a result of market
requirements for a high level of functionality, support of diverse operating
environments and the need for interoperability and support for multiple
technological standards. These products may contain undetected errors or
failures when first introduced or as new versions are released. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance. Such
loss or delay could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1:
Business -- Products" and "-- Product Development."
Risk Associated with Software and Hardware and the Year 2000
Much of the computer hardware and software currently deployed experiences
problems handling dates beyond the year 1999. This computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers,
for handling the year 2000. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such changes, which could
have an adverse effect on future results of operations.
4
5
Dependence on International Operations
International revenues accounted for approximately 67% of the Company's
revenues in 1997, while the European revenues accounted for approximately 86% of
the Company's international revenues in 1997. The Company expects that
international sales will continue to account for a significant portion of its
total revenues in future periods. International sales are subject to certain
inherent risks, including unexpected changes in regulatory requirements and
tariffs, longer payment cycles, increased difficulties in collecting accounts
receivable and potentially adverse tax consequences. Fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to end users in a particular country, leading to a reduction in sales
in that country. In addition, sales in Europe are adversely affected in the
third quarter of each year as many customers and end users reduce their business
activities during the summer months. These seasonal factors and currency
fluctuation risks may have an effect on the Company's quarterly results of
operations. Further, because the Company has operations in different countries,
the Company's management must address differences in regulatory environments and
cultures. Failure to address these differences successfully could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Item 1: Business -- Marketing, Sales and
Distribution" and " -- Product Development."
Dependence on Third-party Products
Certain of the Company's products incorporate technology obtained from
third parties, including elements of the Company's directory products. Although
the Company believes that its reliance on third-party products does not pose a
significant business risk, due to the time involved in developing an internal
alternative or licensing such technology from another third party, the Company
is dependent in the short term upon the ability of such third parties to enhance
their current products, to develop new products on a timely and cost-effective
basis to meet changing customer needs, to successfully implement any programming
changes necessary for handling the year 2000 issue and to respond to evolving
industry standards and other technological changes. Although the Company
believes there are alternative sources for such third-party software, there can
be no assurance that the Company would be able to replace the functionality
provided by such third-party software in the event that such software becomes
inaccessible to the Company, obsolete or incompatible with future enhancements
of the Company's software products or that, if the Company could replace such
functionality, that such replacement could be obtained at a reasonable cost. The
absence of or any significant delay in the replacement of that functionality
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1: Business -- Products."
Currency Fluctuations
While the Company's consolidated financial statements are prepared in
United States dollars, a substantial portion of the Company's worldwide
operations have a functional currency other than the United States dollar. In
particular, the Company maintains substantial development operations in Ireland
where the functional currency is the Irish Pound, and in Germany where the
functional currency is the German Mark. A significant portion of the Company's
revenues are also denominated in currencies other than the United States dollar.
Fluctuations in exchange rates may have a material adverse effect on the
Company's results of operations and could also result in exchange losses. The
impact of future exchange rate fluctuations cannot be predicted adequately. To
date, the Company has not sought to hedge the risks associated with fluctuations
in exchange rates, but may undertake such transactions in the future. The
Company does not have a policy relating to hedging. There can be no assurance
that any hedging techniques implemented by the Company would be successful or
that the Company's results of operations will not be materially adversely
affected by exchange rate fluctuations. See "Dependence on International
Operations" and "Item 1: Business -- Marketing, Sales and Distribution."
Risks Associated with Intellectual Property
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
The
5
6
Company generally enters into confidentiality and invention assignment
agreements with its employees and consultants. Additionally, the Company enters
into confidentiality agreements with certain of its customers and potential
customers and limits access to, and distribution of, its proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's technologies without
authorization, or to develop similar technologies independently. Furthermore,
the laws of certain countries in which the Company does business do not protect
the Company's software and intellectual property rights to the same extent as do
the laws of the United States. In its N-PLEX and NetCS Connectivity product
lines, ISOCOR has implemented a license key mechanism which disables use of the
various modules of the product unless proper number keys are provided by the
customer during the installation process. Otherwise, the Company does not
include in its software any mechanisms to prevent or inhibit unauthorized use,
but generally either requires the execution of an agreement that restricts
copying and use of the Company's products or provides for the same in a
break-the-seal license agreement. If unauthorized copying or misuse of the
Company's products were to occur to any substantial degree, the Company's
business, financial condition and results of operations could be materially
adversely affected. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
While the Company has not received claims alleging infringement of the
proprietary rights of third parties that the Company believes would have a
material adverse effect on the Company's business, financial condition or
results of operations, there can be no assurance that third parties will not
claim that the Company's current or future products infringe the proprietary
rights of others. Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all. See "Item 1:
Business -- Proprietary Rights."
Risk of Increased Taxation; Loss or Refund of Grant Aid
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under an incentive tax program due to
terminate in 2010, the Company is taxed in Ireland on its "manufacturing income"
at a 10% rate, which is substantially lower than United States rates. For Irish
tax purposes, most of the Company's operating income earned in Ireland is
considered "manufacturing income." To qualify for this 10% tax rate, the Company
must carry out "software development services" or "technical or consultancy
services" (as defined in the Irish Finance Act 1980) in Ireland and qualify for
an employment grant from the Industrial Authority of Ireland. If the Company
ceases to comply with these qualifications, all or a part of its taxable profits
may be subject to a 36% tax rate on its post disqualification date taxable
profits. Should this occur, or should Irish tax laws be rescinded or changed,
the Company's net income could be materially adversely affected. If the Company
could no longer qualify for this 10% tax rate, or if the Irish tax laws were
rescinded or changed, the Company's net income would be materially adversely
impacted. In addition, if United States or other international tax authorities
were to challenge successfully the manner in which profits are recognized among
the Company and its subsidiaries or if the Company were to transfer funds
relating to income generated in lower tax jurisdictions to the United States,
the Company's effective tax rate could increase, and its business, financial
condition and results of operations could be materially adversely affected.
During 1996, the Company secured Irish Industrial Development Authority
(the "IDA") grant aid in Ireland in the amount of $793,000 under an incentive
program designed to induce organizations to locate and conduct business in
Ireland. To qualify for this grant aid, the Company must satisfy various
conditions, including that the Company must maintain its current ownership
interest in its Irish subsidiary; the subsidiary must not establish or carry on
similar ventures outside Ireland; and the subsidiary must remain solvent. The
grants include remedy provisions which the IDA employs to pursue partial
revocation of amounts granted in the event the recipient of the grant
substantially vacates its presence in Ireland. While the Company's level of
employment within Ireland in 1997 declined, the Company's plans include a
commitment to a significant continuing presence in Ireland. There can be no
assurance, however, that the IDA will not seek partial revocation of prior
grants, the Company will continue to qualify for this grant aid or be eligible
for future
6
7
grants or that the Company's results of operations will not be materially
adversely affected by the loss of grant aid.
During 1996, the Company also received grant aid from the Technological
Finance Authority -- Berlin, under an incentive program to promote research and
development in small and medium sized German-owned companies located in Berlin.
The Company is no longer eligible to receive these grants.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the continued
contributions of its key management and engineering personnel. The success of
the Company depends to a large extent upon its ability to retain and continue to
attract highly skilled personnel. Competition for employees in the software
industry is intense, and there can be no assurance that the Company will be able
to attract and retain enough qualified employees. If the business of the Company
increases, it may become increasingly difficult to hire, train and assimilate
the new employees needed. The Company's inability to retain and attract key
employees could have a material adverse impact on the Company's business,
financial condition and results of operations.
Fluctuations in Market Price of Common Stock
Announcements of new products by the Company or its competitors and
quarterly variations in financial results could cause the market price of the
Company's Common Stock to fluctuate substantially. In addition, the stock market
has experienced price and volume fluctuations from time to time that have
affected market prices of many technology based companies that are not
necessarily related to the operating performance of such companies. These broad
market fluctuations may adversely affect the price of the Company's Common
Stock.
Blank Check Preferred Stock; Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deterring or preventing a change of control of the Company
without further action by the shareholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no present
plans to issue shares of Preferred Stock. The Company's Articles of
Incorporation and Bylaws provide, among other things, for the elimination of
cumulative voting with respect to the election of directors (effective at the
first annual meeting following the annual meeting at which the Company has 800
or more shareholders of record), the prohibition of actions taken by the
Company's shareholders by written consent and certain other procedures,
including advance notice procedures with regard to the nomination of candidates
for election as directors, other than by or at the direction of the Board of
Directors which could have the effect of making it more difficult for a third
party to effect a change in the control of the Board of Directors. In addition,
these provisions could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company, and may make more
difficult or discourage a takeover of the Company.
7
8
PART I
ITEM 1. BUSINESS
General
ISOCOR was founded and incorporated in California in February 1991. ISOCOR
develops, markets and supports off-the-shelf electronic messaging and directory
infrastructure software products and services that enable businesses to engage
in electronic communications over corporate networks, public telephone networks,
value added networks ("VANs") and the Internet. ISOCOR's products are available
either as a complete, integrated package or as individual components, and they
support the prevailing, market-driven standards for electronic information
exchange -- Internet and International Organization for Standards ("ISO")-based
standards. ISOCOR's products and services are designed to support electronic
information exchange globally in an accurate, cost-effective and secure way,
while operating seamlessly across multiple protocols and architectures.
ISOCOR's business strategy is to provide a focused range of products
offering features and performance to meet the wide range of customers' needs; to
support open architectures and legacy systems by providing solutions that are
hardware and software platform-independent and are based on open standards; to
leverage Internet-based technologies by adding enhanced Internet capabilities to
its message server product line allowing the exchange, switching and management
of traffic formatted in prevailing native Internet-based standards without any
conversions unless that traffic is directed to heterogeneous environments; and
to expand distribution channels primarily to increase its North American direct
sales force to focus on sales to large corporate customers and service
providers.
Products
Initially, the Company licensed software technology to enable it to offer
products to its customers quickly. Thereafter, the Company has developed its own
software technology in order to decrease the amount of time required to respond
to market demand, differentiate its products from those of its competitors in
terms of features and quality, and decrease its dependence on third-party
suppliers. At present, the majority of the Company's products are based upon
internally developed technology.
ISOCOR has designed its software to conform to international standards,
allowing the Company's products to interoperate with many existing products and
services. Conformance with international standards has been achieved through
application of the experience of ISOCOR employees in standards development to
the design and testing of the Company's products.
The ISOCOR solution is implemented through two major product groups:
message servers and directories. Message servers handle the interchange of any
size or type of electronic document or information across and outside of a
customer's computer network and include products that allow leading proprietary
E-mail systems to interoperate. Directory products support enterprise-wide
directory listing, access and navigation, as well as connections to external
networks like the World Wide Web.
Message Server Products
The Company's server software has been designed to provide high performance
while reducing hardware requirements. This has been achieved through a design
methodology that eliminates the overhead of protocol layering, reduces the
number of computer instructions required to perform common operations and
reduces dependence on the mechanical performance of computer peripheral devices
such as disk drives. The design also reduces the risk that messages will be lost
or will not be duplicated in the event of external system breakdowns, such as
loss of power or hardware failures. This promotes high reliability of the
electronic information exchange backbone and allows public carriers to rely upon
the software.
N-PLEX, ISOCOR's Internet server product, provide robust message
management, administrative control and secure message transfer server products
to the SMTP, POP3 and IMAP4 standards. Performance of Internet mail systems has
been enhanced by use of the ISOCOR-developed caching algorithms which
8
9
reduces the use of time-consuming DNS directory accesses over the Internet and
makes full use of Microsoft Windows NT operating system threading facilities for
efficient utilization of multiprocessor computer systems. In addition, N-PLEX
Global has been ported to the Sun Solaris UNIX operating system and is optimized
for high levels of performance. Security holes are eliminated in the proprietary
ISOCOR design, and authentication login facilities have been added using
encryption technology to prevent unauthorized access to the mail systems.
The N-PLEX Management Center is designed to extend normal server management
capabilities to support mixed protocol backbones with Internet service, X.400
and gateways to other mail systems. It manages ISOCOR's message servers and
gateways in an integrated fashion, providing the high level of service necessary
for implementing mission-critical electronic information exchange applications.
The N-PLEX Management Center runs on the Windows NT platform, performing remote
management of components over TCP/IP, thereby allowing the administrator to
manage multiple sites simultaneously from a central management station. The
management facilities provided by the Management Center include remote
configuration, routing configuration, fault notification, performance
monitoring, system management and message tracking.
The proliferation of multiple proprietary electronic messaging systems
within organizations has created isolated islands of communication where users
on one system cannot communicate with users on other systems. To solve this
incompatibility problem, N-PLEX Hub enables users to exchange electronic
information, including attached files such as spreadsheets and word processing
documents, without complex rules or administration. This cross-communication
capability allows the rapid exchange of information across departments or
organizations. N-PLEX Hub also connects proprietary electronic messaging systems
to the ISOCOR message server and directory server products, so that the
proprietary directories reflect the availability of additional external users
via the electronic messaging backbone. N-PLEX Hub supports the exchange of data
between the most popular local mail systems including those provided by Lotus
(cc:Mail and Notes) and Microsoft. ISOGATE products also enable users to connect
to public-based systems with its X.400 and SMTP/MIME (Internet) gateways.
ISOCOR offers application programming interfaces ("APIs") for its N-PLEX
Hub products that can be used to integrate an organization's business
applications. One such application-specific gateway is the ISOTRADE EDI Server
("ISOTRADE"). ISOTRADE links the ISOCOR electronic information exchange backbone
with electronic data interchange ("EDI") translation products, such as those
made by TSI International, Ltd., Harbinger Corporation, and St. Paul Software,
Inc., and also allows the customer to create software that can directly access
the ISOTRADE APIs for electronic commerce applications.
ISOPLEX message servers store and relay messages via the X.400 standard,
allowing them to be implemented over prevailing network protocols including
TCP/IP and X.25. In addition, the Company's ISOPLEX servers run on a variety of
hardware platforms and operating systems. The management system can be used on a
remote basis over a networked set of servers, reducing the personnel required to
manage the ISOPLEX servers.
ISOCOR also offers ISOPLEX ADMD, which provides advanced features in the
areas of mail account tracking, message management and administration and system
control. With ISOPLEX ADMD, large organizations and public carriers can offer
high-end, value-added services unavailable in simpler message management
servers.
Directory Products
As systems increase in size and complexity, organizations increasingly need
to implement a central repository for the information required to communicate
across systems. The Global Directory Server ("GDS"), ISOCOR's directory product,
is designed to store and disseminate such information on both a wide area and
local area basis. This information may include e-mail addresses and
cryptographic material for digital signatures and message confidentiality that
are used invisibly by client software, as well as information that users may
access directly, such as telephone numbers, fax numbers, physical mail addresses
and pictures. The directory allows efficient and rapid updating of this
information for use at diverse locations, reducing errors and
9
10
saving the time and personnel resources required to maintain and distribute this
data. This distributed application architecture allows system managers to
optimize the location of information so that information required locally is on
the local server, while users continue to have transparent access to information
on any other server in the network.
GDS is standards-based and can synchronize stored information, such as
e-mail addresses, among proprietary systems communicating across different
electronic information exchange systems. A number of client applications are
compatible with GDS, including World Wide Web browsers, and Internet clients
through the use of LDAP (Lightweight Directory Access Protocol) which can access
GDS over the wide variety of network connections including dial-up, Internet
TCP/IP and X.25. GDS can serve as an easy-to-access information source, storing
data from other sources such as corporate databases, World Wide Web servers and
other content sources.
As with other ISOCOR applications, GDS is supplemented by an integrated set
of directory tools, called the Global Directory Navigator, that allows an
administrator to exchange information with other databases, collect accounting
information and administer the system either remotely or locally.
In March 1996, the Company entered into an agreement with International
Computers Limited ("ICL") to license a portion of ICL's i500 directory server
product for incorporation with ISOCOR's own communication software technology to
create ISOCOR's Global Directory Server product. This bi-lateral crosslicensing
agreement provides for the payment of royalties by the Company based on sales of
products incorporating the licensed i500 directory server product.
In September 1997, the Company entered into an agreement with Zoomit
Corporation to resell its VIA meta-directory products and tools. This agreement
provides for the payment of royalties by the Company based on the sales of these
specific products and tools.
Marketing, Sales and Distribution
The Company sells its products both directly to end users and indirectly
through resellers, systems integrators and original equipment manufacturers
("OEMs"). In North America, ISOCOR sells its products primarily through a direct
sales organization focused on Fortune 1000 companies and service providers.
Internationally, ISOCOR sells its products primarily through a worldwide network
of resellers.
The Company's international resellers consist primarily of systems
integrators and value added resellers ("VARs"). These resellers typically range
in size from several hundred staff down to half a dozen specialists in some
smaller countries. The Company selects resellers based on general experience in
electronic messaging, data communications and systems integration, and then
trains them on the Company's software products and technologies at ISOCOR's
training centers in the U.S. and Ireland. In addition, ISOCOR sells to major
accounts worldwide, primarily to large telecommunications carriers which prefer
to deal directly with the Company for support. A number of the Company's
international public carrier backbone customers have also begun licensing
ISOCOR's products to end users as customer premises equipment. See "Introductory
Statements and References: Risk Factors -- Dependence on International
Third-party Distribution."
The Company's reseller agreements generally grant resellers non-exclusive
rights to distribute the Company's products in each reseller's defined
geographic market. Each reseller is generally responsible for supporting its
end-user customers, while ISOCOR provides technical support to the reseller. The
Company provides price protection to its resellers such that, if the Company
reduces the price of its products, resellers are entitled to a credit for the
difference between the reduced price and the price they previously paid for
products that are held in the reseller's inventory at the time of the price
reduction and that were purchased within the preceding 30 days. ISOCOR's
resellers typically stock little inventory, but instead obtain products from the
Company on an as-needed basis.
To support its sales efforts, the Company conducts marketing programs which
include direct mail, public relations, advertising (including a World Wide Web
home page on the global Internet (www.isocor.com)), worldwide trade shows and
selected joint marketing programs. The Company also sponsors an annual meeting
for its resellers to provide them additional information and skills to market
the Company's products
10
11
effectively. The sales, support and service functions for the Company's products
are provided principally through the Company's Santa Monica headquarters with
the exception of the European, Middle East and African markets which are
serviced through ISOCOR sales and support offices in Berlin, Bern, Dublin,
London and Paris.
During 1997, international revenues accounted for 67% of the Company's
total revenues. Of these international revenues, 86% resulted from sales to
resellers or customers located primarily in Europe, with the remainder resulting
from sales to resellers or customers located in the rest of the world.
International sales may be subject to government controls and other risks,
including export licenses, federal restrictions on the export of critical
technology, changes in demand resulting from currency exchange fluctuations,
political instability, trade restrictions and changes in tariffs. To date, the
Company has experienced no material difficulties due to these factors. See
"Introductory Statements and References: Risk Factors -- Dependence on
International Operations" and " -- Currency Fluctuations."
Customers
ISOCOR's products are used in a variety of industries. The Company markets
its products primarily to large and medium-sized corporate customers, as well as
service providers. During 1997, no single customer accounted for more than 10%
of the Company's revenues. During 1997, the following categories of revenue
accounted for more than 10% of total revenues: server products accounted for 33%
of total revenues, gateway products accounted for 12% of total revenues,
directory products accounted for 11% of total revenues and services accounted
for 29% of total revenues.
Customer and Reseller Support and Services
The Company offers its resellers and end-user customers standard support
and upgrade services. The agreements that provide for these services vary among
end users, resellers and OEMs, but generally provide that for an annual fee the
Company will provide customer support services by electronic communication, fax
or telephone. These agreements also typically provide for software upgrades to
the licensed products as they are generally released by the Company. ISOCOR also
offers training, custom engineering and pre- and post-sale services to end users
and carriers. Professional services include network design consulting, product
installation, administrator training, custom application integration and turnkey
systems implementation. The Company has major customer support centers in Santa
Monica and Dublin. Additionally, local technical support is available at the
Company's regional offices in London, Paris and Bern. In 1997, provision by
ISOCOR of all customer and reseller support and services accounted for 29% of
ISOCOR revenues.
Product Development
The Company has invested significant resources into the development of new
products and expects to continue to make these investments in the future. ISOCOR
also plans to continue to enhance its products with new releases that provide
additional features and to make its products available on additional hardware
and operating system platforms. See "Introductory Statements and References:
Risk Factors -- Dependence on New Products" and " -- Ability to Respond to Rapid
Technological Change."
Much of the computer hardware and software currently deployed experiences
problems handling dates beyond the year 1999. This computer hardware and
software will need to be modified prior to the year 2000 in order to remain
functional. The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers,
for handling the year 2000. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such changes which could
have an
11
12
adverse effect on future results of operations. See "Introductory Statements and
References: Risk Factors -- Risk Associated with Software and Hardware and the
Year 2000".
The Company has development centers located in Berlin, Copenhagen, Dublin
and Santa Monica. The largest such facility is located in Dublin in order to
take advantage of lower costs in Ireland, IDA tax incentives and grants and the
strong Irish educational structure. The presence of development facilities in
the U.S. and Europe enhances access to both American and European markets and
technology. ISOCOR invests substantial management time and resources in quality
assurance testing for all of its products. Quality assurance testing takes place
at the Company's Berlin, Dublin and Santa Monica facilities.
As of December 31, 1997, the Company employed 70 persons in the product
development function. The product development organization consists of separate
product units, each with expertise in specific areas. Engineering expenses were
$7.9 million in 1997.
Competition
The market for the Company's products is intensely competitive and subject
to rapid technological change and evolving standards. The Company believes its
long-term success will depend in part on its ability to be a leader in
developing and offering products that meet emerging industry or market
standards, to offer a broad range of high-performance, multi-platform, messaging
and directory infrastructure products requiring little customization for the
general marketplace, to maintain strong customer support and sufficient
distribution channels and to offer competitively priced products. The Company
believes that its products currently compete favorably with respect to these
factors.
The messaging and directory infrastructure market is fragmented and a
number of companies are participating in this market with a variety of product
offerings featuring varying profiles and business models. The Company's
competition includes privately held companies which specialize in messaging
products such as Data Communications Ltd., Innosoft International, Inc., and
Software.com. ISOCOR's competitors also include customized solution vendors or
systems integrators such as Control Data Systems, Inc. and publicly held
software companies such as Lotus, Microsoft, Netscape, and Worldtalk
Corporation.
Major software providers such as Microsoft, Lotus and Novell, Inc.
("Novell"), have incorporated functionality into their product offerings similar
to that provided by the Company's products. The Company's Global Directory
Server contains elements that compete directly and indirectly with components
and complete products offered by Novell and other developers of X.500 and
directory server-based software products. The Company's gateway products contain
elements that compete directly with components or complete products offered by
Control Data Systems Inc., Innosoft International, Inc., Worldtalk Corporation
and other developers of products for connectivity between dissimilar electronic
information exchange software systems. To the extent such companies provide such
functionality or products, the Company's business, financial condition and
results of operations could be materially adversely affected.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than can the
Company. Increased competition could result in price reductions, reduced
operating margins and loss of market share.
See "Introductory Statements and References: Risk Factors -- Dependence on
New Products,"
"-- Substantial Competition" and "-- Ability to Respond to Rapid Technological
Change."
Proprietary Rights
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third party
nondisclosure agreements and other methods to protect its proprietary rights.
The Company generally enters into confidentiality and invention assignment
agreements with its employees and consultants. Additionally, the Company enters
into confidentiality agreements with its customers and potential
12
13
customers and limits access to, and distribution of, its proprietary
information. In its N-PLEX and NetCS Connectivity product lines, ISOCOR has
implemented a key license mechanism which disables use of the various modules of
the product unless proper number keys are provided by the customer during the
installation process. Otherwise, the Company does not include in its software
any mechanisms to prevent or inhibit unauthorized use, but generally either
requires the execution of an agreement that restricts copying and use of the
Company's products or provides for the same in a shrinkwrap license agreement.
There can be no assurance that the Company's means of protecting its proprietary
rights will be adequate or that the Company's competitors will not independently
develop similar technology. See "Introductory Statements and References: Risk
Factors -- Risks Associated with Intellectual Property."
While the Company has not received claims alleging infringement of the
proprietary rights of third parties which the Company believes would have a
material adverse effect on the Company's business, financial condition and
results of operations, there can be no assurance that third parties will not
claim that the Company's current or future products infringe the proprietary
rights of others. Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all.
Manufacturing
The Company contracts with third parties to manufacture the media
containing its software, which consists of diskette and tape duplication and
printing of manuals and boxes. Assembly is performed by the Company at its
Dublin and Berlin facilities. The raw materials and services associated with
manufacturing the media are generally available through a number of sources.
Finished products are generally shipped from Ireland to customers in Europe, the
Far East, Australia, the Middle East and Africa, and to the Company's United
States facility. The Company's United States facility generally distributes
products to customers in North and South America. The NetCS Connectivity
products are generally shipped directly from Berlin to customers in Germany, and
otherwise to the Company's Irish and United States facilities for further
distribution.
Employees
As of December 31, 1997, the Company employed 215 persons, including 70 in
product development and engineering (including 10 in Berlin, three in
Copenhagen, 43 in Dublin and 14 in Santa Monica), 44 in pre-and post-sales
customer support, 15 in North American sales, 23 in international sales, 21 in
marketing, seven in assembly and 35 in administration. The Company also retains
consultants from time to time, primarily in the area of engineering, to assist
with particular areas of software development for limited periods of time. None
of the Company's employees is currently represented by a labor union, and the
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
ISOCOR's corporate offices are located in Santa Monica, California, where
the Company currently leases approximately 19,000 square feet under a sublease
expiring in 1998. The Company has entered into a new sublease agreement with
respect to the same 19,000 square feet expiring in early 2001. The Company's
Santa Monica facility houses its corporate offices and engineering, sales and
marketing departments. Additionally, the Company leases approximately 2,000
square feet in Vienna, Virginia for a sales office under a sub-lease expiring in
early 1999, and another approximately 7,500 square feet of total space in Berlin
for engineering and sales offices, including an approximately 2,000 square foot
primary space with a lease expiring in 1999, and an approximately 500 foot
satellite space leased month to month. The Company also leases office space for
its major engineering facility in Dublin, consisting of approximately 24,000
square feet under a sublease expiring in 1998. The Company has exercised its
option to extend the lease to mid-1999. In addition, the Company leases
approximately 1,000 square feet each of office facilities in London, Paris,
Copenhagen, Bern and Zurich. The Bern and Zurich facilities are sales offices,
while the offices in London and Paris perform pre-sales marketing and support.
The London, Paris and Zurich leases expire in 2002, 2003 and 2002,
13
14
respectively. The leases for the facilities in Copenhagen and Bern are month to
month leases. The Company believes that these facilities are adequate for the
Company's current needs and that suitable additional space, if needed, should be
available on commercially reasonable terms to accommodate expansion of the
Company's operations. See "Item 8: Financial Statements and Supplementary Data
-- Note 7."
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings in
the normal course of business. The Company is not currently involved in any
litigation which, in management's opinion, would have a material adverse effect
on its business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
INFORMATION
(a) Market Information.
The Company completed an initial public offering of its Common Stock
on March 13, 1996, and the Company's Common Stock is traded on the NASDAQ
Stock Market under the symbol ICOR. As of February 17, 1998, the Company
had approximately 147 shareholders of record.
The following table shows the high and low closing prices of the Company's
Common Stock for each fiscal quarter during the fiscal years ended December 31,
1996 and 1997, as reported by Nasdaq:
1996
------------------
HIGH BID LOW BID
-------- -------
First Quarter (ended 3/31/96).............................. $ 9.750 $7.500
Second Quarter (ended 6/30/96)............................. 20.000 8.750
Third Quarter (ended 9/30/96).............................. 15.000 6.625
Fourth Quarter (ended 12/31/96)............................ 7.375 5.250
1997
------------------
First Quarter (ended 3/31/97).............................. $ 6.750 $3.750
Second Quarter (ended 6/30/97)............................. 3.500 2.000
Third Quarter (ended 9/30/97).............................. 3.625 2.188
Fourth Quarter (ended 12/31/97)............................ 3.625 1.750
Future stock prices may be subject to volatility, particularly on a
quarterly basis. Any shortfall in revenues or net income from amounts expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's stock.
Dividend Policy.
In 1993 and 1994, cash dividends were declared and subsequently paid by
NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in a
transaction accounted for as a "pooling of interests." The Company has not paid
dividends on its Common Stock and has no present plans to do so.
(b) Report of Offering Securities and Use of Proceeds Therefrom.
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-606 (the
"Registration Statement"), which was declared effective by the Commission
on March 13, 1996. The Company registered 2,300,000 shares of its Common
Stock, $0.001 par value per share. The offering commenced on March 14, 1996
and did not terminate until all of the registered shares had been sold. The
aggregate offering price of the registered shares was $20,700,000. The
managing underwriters of the offering were Hambrecht & Quist and Furman
Selz LLP.
The Company incurred the following expenses in connection with the
offering:
Underwriting discounts and commissions................... $1,449,000
Other expenses........................................... 981,000
----------
Total Expenses................................. $2,430,000
All of such expenses were direct or indirect payments to others.
15
16
The net offering proceeds to the Company after deducting the total expenses
above were approximately $18,300,000. From March 14, 1996 to December 31, 1997,
the Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
Purchase and installment of machinery and equipment..... $ 2,414,000
Working capital......................................... 7,655,000
Investment in short-term, interest-bearing
obligations........................................... 6,048,000
Repayment of short-term liabilities..................... 1,368,000
Application to short-term assets........................ 815,000
-----------
Total......................................... $18,300,000
Each of such amounts is a reasonable estimate of the application of the net
offering proceeds. This use of proceeds does not represent a material change in
the use of proceeds described in the prospectus of the Registration Statement.
16
17
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues................................... $ 5,460 $13,541 $20,774 $26,394 $22,018
Gross profit..................................... 3,723 10,720 16,180 21,326 16,351
Income (loss) from operations.................... (2,531) (120) 586 (33) (9,068)
Net income (loss)................................ $(2,791) $ (10) $ 319 $ 483 (7,904)
======= ======= ======= ======= =======
Net income (loss) per share...................... $ (1.88) $ (0.01) $ 0.19 $ 0.06 $ (0.83)
======= ======= ======= ======= =======
Weighted average shares outstanding.............. 1,486 1,567 1,652 7,733 9,485
======= ======= ======= ======= =======
Net income (loss) per share, assuming dilution... $ (1.88) $ (0.01) $ 0.04 $ 0.05 $ (0.83)
======= ======= ======= ======= =======
Weighted average shares outstanding and
dilutive shares............................. 1,486 1,567 7,783 9,808 9,485
======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEETS DATA:
Total assets..................................... $11,482 $12,484 $19,494 $41,298 $34,223
Long-term liabilities............................ 156 110 606 187 133
Total shareholders' equity....................... $ 9,107 $ 8,697 $12,487 $33,204 $25,684
Cash dividends declared per common share (1)..... $ 0.02 $ 0.09 -- -- --
- ---------------
(1) In 1993 and 1994, cash dividends were declared and subsequently paid by
NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in
a transaction accounted for as a "pooling of interests." Therefore, although
the Company has not paid dividends on its Common Stock and has no plans to
pay cash dividends to its shareholders in the near future, due to the
disclosure rules for poolings of interest which require presentation as
though the combination had been consummated for all periods presented, some
cash dividends are shown above.
17
18
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The consolidated financial statements of the Company contained in this
report have been retroactively restated for all periods presented to include the
financial position, results of operations and cash flows of NetCS
Informationstechnik GmbH ("NetCS") in accordance with the pooling-of-interests
method of accounting. In 1997, NetCS Informationstechnik GmbH's legal name was
changed to ISOCOR GmbH.
Revenues. Total revenues were $20.8 million, $26.4 million and $22.0
million in 1995, 1996 and 1997, respectively, representing an increase of 27% in
1996 and a decrease of 17% in 1997. The decline in product revenues in 1997 was
primarily related to the decline in demand for X.400 software solutions and
NetCS connectivity products, partially offset by an increase in demand for
software solutions related to the increased business usage of the Internet.
ISOCOR believes that the major driver for the decline in demand for X.400
software solutions was the rapid emergence and explosion of business use of the
Internet. In 1996, revenues driven by the demand for X.400 solutions were 58% of
product revenues. In 1997, these revenues fell to 31% of product revenues. While
the Company continues to see projects related to X.400 in certain parts of the
world, or in certain specific application areas, the Company believes that this
marketplace will continue to decline slowly throughout 1998.
Product revenues were $17.6 million, $21.3 million and $15.6 million in
1995, 1996 and 1997, respectively, representing an increase of 21% in 1996 and a
decrease of 27% in 1997. The increase from 1995 to 1996 resulted primarily from
increases in the volume of products sold, partially offset by an increase in the
provision for estimated future returns. The decrease from 1996 to 1997 was
mainly due to decreased volumes of, and declining prices for, the Company's
X.400 products and NetCS connectivity products, partially offset by increased
volumes in the Company's products driven by the increased demand for software
solutions as a result of the increased business usage of the Internet, as
discussed above.
On a geographic basis, revenues from North American sources accounted for
18%, 22% and 33% of total revenues, while revenues in the Company's European
marketplace accounted for 66%, 71% and 58% of total revenues in 1995, 1996 and
1997, respectively. Revenues from North American sources increased as a
percentage of revenues during these years largely due to the Company's increased
focus on this market and the growth in demand for the Company's software
solutions driven by the Internet. In 1997, this growth was partially offset by
decreased volumes of, and declining prices for, the Company's X.400 products.
Revenues from European sources decreased as a percentage of revenues in 1997
largely due to a continuing shift away from the Company's product lines driven
by a decline in the market for X.400 software solutions and NetCS connectivity
products, partially offset by increased volumes in the Company's products driven
by the increased demand for software solutions as a result of the increased
business usage of the Internet, as discussed above. International revenues from
non-European sources were positively impacted in 1995 by a single sale in Asia
in excess of $1.3 million.
Service revenues were $3.2 million, $5.1 million and $6.4 million in 1995,
1996 and 1997 respectively, representing increases of 60% and 25% in 1996 and
1997, respectively. Service revenues include software support and update fees,
training, custom engineering and installation. The increases during 1996 and
1997 were primarily due to increased volumes of software support and update
service fees.
Cost of Revenues. Cost of revenues includes both cost of product revenues
and cost of service revenues. Cost of product revenues consists primarily of
costs of hardware purchased from third-party vendors, product media duplication,
manuals, packaging materials, and third-party royalties relating to licensed
technology. Cost of service revenues consists primarily of personnel-related
costs of providing software support and update, training, custom engineering and
installation services. Cost of revenues increased year over year from 1996 to
1997 primarily as a result of increased third-party royalties on one of the
Company's product lines associated with the growth in demand driven by the
Internet, increased costs of supporting a higher level of service revenues, and
a $310,000 write-down of third-party prepaid royalties relating to a specific
product technology which the Company believes is non-strategic, which was
partially offset by a reduction in costs relating to hardware purchased from
third-party vendors as a result of decreased sales of these components. Cost of
18
19
revenues increased year over year from 1995 to 1996 primarily as a result of
supporting a higher level of service revenues and increased production costs
associated with higher volumes of products sold, offset by a reduction in
third-party royalties relating to licensed technology.
Gross Profit. Gross profit was $16.2 million, $21.3 million and $16.4
million, representing 78%, 81% and 74% of revenues in 1995, 1996 and 1997,
respectively.
Gross profit from product sales was $14.6 million, $18.6 million and $12.8
million in 1995, 1996 and 1997, respectively, representing 83%, 87% and 82% of
product revenues in 1995, 1996 and 1997, respectively. The absolute decrease in
gross profit from 1996 to 1997 was primarily a result of decreased product
revenues as discussed above, coupled with increased third-party royalties on one
of the Company's product lines associated with the growth in demand driven by
the Internet and a $310,000 write-down of third-party prepaid royalties relating
to a specific product technology which the Company believes is non-strategic.
The absolute increase in gross profit from 1995 to 1996 was primarily a result
of increased sales of the Company's products, coupled with a shift in the
Company's sales primarily toward higher margin products which results primarily
from the Company's decreasing reliance upon technology owned by third parties
and thus, lower royalties paid to third parties.
Gross profit from services was $1.5 million, $2.7 million and $3.6 million
in 1995, 1996 and 1997, respectively, representing 48%, 53% and 56% of services
revenues in 1995, 1996 and 1997, respectively. The increase in gross profit from
services during these years is primarily due to increased services revenues
without a corresponding increase in personnel costs associated with providing
these services.
Engineering. Engineering expenses were $7.5 million, $9.0 million and $7.9
million in 1995, 1996 and 1997, respectively, representing 36%, 34% and 36% of
revenues in 1995, 1996 and 1997, respectively. Engineering expenditures consist
primarily of personnel costs, equipment costs and related costs required to
conduct the Company's development efforts, which include costs related to
engineering, product management, technical writing and quality assurance. The
dollar decrease in engineering expenses in 1997 resulted principally from
decreased levels of personnel involved in these activities, and relate primarily
to the reduction in and stabilization of development of the Company's X.400
products. The dollar increases in engineering expenses in 1996 resulted
principally from increased levels of personnel primarily involved in these
activities, and relate primarily to the continued development and enhancement of
the N-PLEX server product family and the development of the Global Directory
Server product. During 1995, 1996 and 1997, there were approximately 105, 136
and 106 people on average, respectively, involved in engineering activities. To
date, all software development costs have been expensed as incurred, as the
impact of software development costs that qualify for capitalization under
Financial Accounting Standard No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," have been immaterial to the
financial statements. The Company believes that significant investments in
research and development are required for the Company to remain competitive.
While the Company intends to continue to place emphasis on its research and
development efforts in the future to remain competitive, the Company anticipates
it will continue to moderate these expenses, relative to prior periods, during
1998 and that these expenses may not vary directly with the level of revenues
for that same period.
Sales and Marketing. Sales and marketing expenses were $6.8 million, $10.1
million and $14.0 million in 1995, 1996 and 1997, respectively, representing
33%, 38% and 63% of revenues in 1995, 1996 and 1997, respectively. Sales and
marketing expenses include personnel and associated costs relating to selling,
sales support and marketing activities, including marketing programs such as
trade shows and other promotional costs. In 1995, 1996 and 1997, the increases
in sales expenses resulted primarily from expansion of the Company's sales and
support organizations both in the United States and internationally. During
1995, 1996 and 1997, there were approximately 53, 74 and 80 people on average,
respectively, primarily involved in sales activities. In 1997, the Company's
marketing expenditures increased over 1996 primarily due to increased level of
personnel involved with marketing activities on a worldwide basis, as well as an
increase in marketing program costs. In 1996, the Company's marketing
expenditures increased from 1995 primarily due to an increased level of
personnel and marketing programs primarily in North America. The Company intends
to maintain a similar absolute level of spending on sales and marketing in 1998.
19
20
Administration. Administration expenses were $2.1 million, $2.7 million and
$3.0 million in 1995, 1996 and 1997, respectively, representing 10% to 13% of
revenues in each of those years. The dollar increases were primarily due to
higher levels of staffing. During 1995, 1996 and 1997, there were approximately
20, 29 and 38 people on average, respectively, primarily involved in
administrative activities. The Company expects to increase the dollar amount of
its administration expenditures in the future to support potential growth and to
continue to meet the reporting requirements imposed on a public company.
Agency Grants. In 1992, 1994 and 1996 the Company secured grant aid in the
amounts of $750,000, $850,000 and $793,000, respectively, from the Industrial
Development Authority of Ireland under an incentive program designed to induce
organizations to locate and conduct business in Ireland. These grants are for
six years each and are primarily dependent upon the creation and fulfillment of
new jobs within the Company in Ireland. The Company reflected as reductions of
operating expenses $712,000, $413,000 and $69,000 relating to these grants in
1995, 1996 and 1997, respectively. The Company has decreased its level of
employment in Ireland in 1997, however, the Company is committed to retaining a
significant and continuing presence in Ireland. The Company also received grant
aid from the Technological Finance Authority -- Berlin under an incentive
program to promote research and development in small and medium-sized
German-owned companies located in Berlin. The Company reflected as reductions in
operating expenses $124,000, $87,000 and $0 relating to these grants in 1995,
1996 and 1997, respectively. As of August 31, 1996, the Company is no longer
eligible to receive grants from the Technological Finance Authority -- Berlin.
The Company expects the level of grant aid it receives from differing sources to
vary from year to year, primarily dependent upon its employment level in
Ireland.
Severance Costs. Severance costs of $681,000 in 1997 represent the costs
accrued with respect to 35 terminated employees due to the restructuring
activities completed in 1997. The total severance costs incurred were $364,000
for engineering, $190,000 for sales and marketing, and $127,000 for
administration.
Acquisition Costs. Acquisition costs of $227,000 in 1996 represent the
direct costs, primarily legal and accounting, of the business combination of
NetCS Informationstechnik GmbH and ISOCOR.
Provision for Loss on Investment. Provision for loss on investment of
$100,000 in 1995 represents the Company's estimate of a one-time loss related to
the sale of a 15% interest in a UK company, which interest the Company had held
since 1992 and subsequently liquidated in January 1996. This investment was made
to provide access to technology that is no longer strategic to the Company as a
result of the Company's internal technology development efforts.
Income (Loss) from Currency Fluctuations. Income (loss) from currency
fluctuations was $72,000, $(82,000) and $39,000 in 1995, 1996 and 1997,
respectively. The differences resulted primarily from changes in foreign
currency rates.
Interest Income. Interest income was $104,000, $1 million and $1.2 million
in 1995, 1996 and 1997, respectively. The increase in 1996 was primarily a
result of increased interest income on the Company's increased cash equivalents
and marketable securities related to the Company's initial public offering in
March 1996. The increase in 1997 resulted primarily from interest earned for the
full twelve months of 1997 on those cash equivalents and marketable securities,
partially offset by declining cash equivalents and marketable securities
balances in 1997.
Provision for Income Taxes. During 1995 and 1997, the Company did not
generate taxable income in the United States. In 1996, the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States, which resulted in a significant reduction in income tax expense
for that year. Included in provision for income taxes in 1995 is $278,000
relating to income taxes withheld by a foreign government relating to a
substantial sale in that country made from the United States. The Company also
utilized foreign operating loss carryforwards to offset $941,000 of income
otherwise subject to foreign taxation in 1995. The Company has significant
operations and generates a substantial portion of its taxable income in Ireland.
Under a tax holiday due to terminate in 2010, the Company is taxed in Ireland on
its "manufacturing income" at a 10% rate. For Irish tax purposes, most of the
Company's operating income earned in Ireland is considered "manufacturing
income." To qualify for this 10% rate, the Company must carry out "software
20
21
development services" or "technical or consultancy services" (as defined in the
Irish Finance Act 1980) in Ireland and qualify for an employment grant from the
Industrial Development Authority of Ireland. If the Company ceases to comply
with these qualifications, all or a part of its taxable profits may be subject
to a 36% tax rate on its post disqualification date taxable profits. Should this
occur, or should Irish tax laws be rescinded or changed, the Company's net
income could be materially adversely affected. Because the Company utilized tax
loss carryforwards to offset income otherwise taxable in Ireland in 1995, this
reduced tax rate has not resulted in significant reductions in income tax
expense for those years.
Liquidity and Capital Resources
Prior to the Company's initial public offering in March 1996, the Company
financed its operations primarily through private sales of equity securities.
The Company received net proceeds of approximately $3.2 million and $1.8 million
in 1995 and 1996, respectively, from the private sale of equity securities. In
March 1996, the Company completed a public offering and sale of 2,300,000 shares
of its Common Stock, resulting in net proceeds to the Company of approximately
$18.4 million. Funds from the Company's equity financings continue to be used to
fund the expansion of the Company's infrastructure and internal operations,
including purchases of capital equipment and the hiring of additional personnel.
The Company generated (used) cash from operating activities of $(565,000),
$446,000 and $(4,718,000) in 1995, 1996 and 1997, respectively. Operating cash
flows in 1997 relative to 1996 were affected by a significantly increased
operating loss (net of adjustments due to depreciation and amortization and the
provision for doubtful accounts, returns and price protection), partially offset
by a decrease in accounts receivable as a result of the Company's increased
collections of accounts receivable and decreased level of revenues. Operating
cash flows in 1996 relative to 1995 were affected by increases in deferred
revenues, offset by a substantial increase in accounts receivable as a result of
the Company's increased level of revenues and a decrease in product development
obligation. Cash flow from operations can vary significantly from quarter to
quarter depending upon the timing of operating cash receipts and payments,
especially accounts receivable and accounts payable. In addition, the Company
typically generates a large percentage of its quarterly revenues during the last
few weeks of the quarter, which when coupled with payment terms in excess of 90
days on some of the larger sales tends to give rise to increases in accounts
receivable. These factors have been offset in 1997 by the Company's decreased
revenues versus 1996, yielding a decreased level of accounts receivable at
December 31, 1997. However, these same factors when coupled with the Company's
increased revenues in 1996 versus 1995, gave rise to an increase in the accounts
receivable balances at December 31, 1996. The Company expects that certain of
the Company's larger sales will continue to have longer payment terms, thus
slowing the cash flow cycle. The Company does not believe these longer payment
terms are likely to have a material adverse effect on the collectibility of the
related receivables.
The Company currently anticipates that the Company's available cash, cash
equivalents and marketable securities resources ($20.5 million as of December
31, 1997), will be sufficient to meet its working capital and capital
expenditure requirements through at least the end of 1999.
Recent Accounting Pronouncements
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This accounting standard is effective
for fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The statement will require additional disclosures for
all periods presented, but will not impact reported amounts of net income (loss)
of the Company.
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and requires
21
22
restatement of earlier periods presented. The Company is currently evaluating
the requirements of SFAS No. 131.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions and is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company is currently evaluating the
requirements of SOP 97-2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets................................. 23
Consolidated Statements of Operations....................... 24
Consolidated Statements of Shareholders' Equity............. 25
Consolidated Statements of Cash Flows....................... 26
Notes to Consolidated Financial Statements.................. 27
22
23
ISOCOR
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES)
ASSETS
DECEMBER 31,
------------------
1996 1997
------- -------
Current assets:
Cash and cash equivalents................................. $13,374 $10,784
Marketable securities..................................... 11,739 9,677
Trade accounts receivable
Customer, net.......................................... 11,160 9,054
Related party.......................................... 74 46
Other current assets...................................... 1,618 1,993
------- -------
Total current assets.............................. 37,965 31,554
Property and equipment, net................................. 2,990 2,405
Other assets................................................ 343 264
Total assets...................................... $41,298 $34,223
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 819 $ 839
Accrued expenses.......................................... 3,677 3,667
Deferred revenues......................................... 2,730 3,678
Product development obligation............................ 380 --
Other current liabilities................................. 301 222
------- -------
Total current liabilities......................... 7,907 8,406
Other long-term liabilities............................... 187 133
------- -------
Total liabilities................................. 8,094 8,539
Commitments and contingencies
Shareholders' equity:
Preferred Stock, undesignated, authorized 2,000,000
shares, none issued or outstanding..................... -- --
Common stock, authorized 50,000,000 shares, issued and
outstanding 9,315,241 and 9,551,931 shares at December
31, 1996 and 1997, respectively........................ 39,047 39,359
Notes receivable from shareholders........................ (26) (56)
Accumulated deficit....................................... (5,680) (13,584)
Deferred compensation..................................... (205) (130)
Cumulative foreign currency translation adjustment........ 68 95
------- -------
Total shareholders' equity........................ 33,204 25,684
------- -------
Total liabilities and shareholders' equity........ $41,298 $34,223
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
23
24
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
Revenues:
Products:
Customer............................................... $17,200 $20,785 $15,525
Related parties........................................ 381 503 95
Services:
Customer............................................... 3,122 5,045 6,340
Related parties........................................ 71 61 58
------- ------- -------
Total revenues.................................... 20,774 26,394 22,018
Cost of revenues:
Products.................................................. 2,938 2,663 2,863
Services.................................................. 1,656 2,405 2,804
------- ------- -------
Total cost of revenues............................ 4,594 5,068 5,667
------- ------- -------
Gross profit................................................ 16,180 21,326 16,351
------- ------- -------
Operating expenses:
Engineering............................................... 7,522 9,041 7,867
Sales and marketing....................................... 6,843 10,142 13,973
Administration............................................ 2,065 2,676 2,967
Agency grants............................................. (836) (500) (69)
Severance costs........................................... -- -- 681
------- ------- -------
Total operating expenses.......................... 15,594 21,359 25,419
------- ------- -------
Income (loss) from operations............................... 586 (33) (9,068)
Acquisition costs......................................... -- (227) --
Provision for loss on investment.......................... (100) -- --
Income (loss) from currency fluctuations.................. 72 (82) 39
Interest income........................................... 104 1,010 1,170
------- ------- -------
Income (loss) before income taxes......................... 662 668 (7,859)
Provision for income taxes................................ 343 185 45
------- ------- -------
Net income (loss)........................................... $ 319 $ 483 $(7,904)
======= ======= =======
Net income (loss) per share, assuming no dilution........... $ 0.19 $ 0.06 $ (0.83)
======= ======= =======
Weighted average shares outstanding......................... 1,652 7,733 9,485
======= ======= =======
Net income (loss) per share, assuming dilution.............. $ 0.04 $ 0.05 $ (0.83)
======= ======= =======
Weighted average shares outstanding and dilutive shares..... 7,783 9,808 9,485
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
24
25
ISOCOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT NUMBERS OF SHARES)
SERIES A SERIES B SERIES C SERIES D
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- -------------------- ------------------ -----------------
NUMBER OF NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- -------- ------- -------- ------
Balances, December 31, 1994............ 1,875,000 $ 4,846 2,036,997 $ 8,156 457,142 $ 1,951
Issuance of preferred stock, net of
offering costs:
Series B preferred stock.............. 29,658 185
Series C preferred stock.............. 400,000 2,499 150,000
Series D preferred stock.............. 653
Issuance of common stock...............
Repurchase of common stock.............
Deferred compensation..................
Payment of notes receivable............
Net income.............................
Currency translation...................
---------- ------- ---------- ------- -------- ------- -------- -----
Balances, December 31, 1995............ 1,875,000 4,846 2,066,655 8,341 857,142 4,450 150,000 653
Initial public offering (IPO), net of
offering costs of $2,430..............
Conversion of preferred stock to common
stock at IPO.......................... (1,875,000) (4,846) (2,066,655) (8,341) (857,142) (4,450) (150,000) (653)
Issuance of common stock...............
Deferred compensation..................
Payment of notes receivable............
Net income.............................
Currency translation...................
---------- ------- ---------- ------- -------- ------- -------- -----
Balances, December 31, 1996............ -- -- -- -- -- -- -- --
Issuance of common stock...............
Deferred compensation..................
Payment of notes receivable............
Net loss...............................
Currency translation...................
---------- ------- ---------- ------- -------- ------- -------- -----
Balances, December 31, 1997............ -- $ - -- $ - -- $ - -- $ -
========== ======= ========== ======= ======== ======= ======== =====
COMMON STOCK FOREIGN
------------------- CURRENCY
NUMBER OF NOTES DEFERRED ACCUMULATED TRANSLATION
SHARES AMOUNT RECEIVABLE COMPENSATION DEFICIT ADJUSTMENT TOTAL
--------- ------- ---------- ------------ ----------- ----------- -------
Balances, December 31, 1994............ 1,625,947 $ 238 $(54) $ (6,482) $ 42 $ 8,697
Issuance of preferred stock, net of
offering costs:
Series B preferred stock.............. 185
Series C preferred stock.............. 2,499
Series D preferred stock.............. 653
Issuance of common stock............... 90,520 58 (26) 32
Repurchase of common stock............. (54,500) (20) 20 0
Deferred compensation.................. 325 (280) 45
Payment of notes receivable............ 15 15
Net income............................. 319 319
Currency translation................... 42 42
--------- ------- ---- ----- -------- ---- -------
Balances, December 31, 1995............ 1,661,967 601 (45) (280) (6,163) 84 12,487
Initial public offering (IPO), net of
offering costs of $2,430.............. 2,300,000 18,270 18,270
Conversion of preferred stock to common
stock at IPO.......................... 5,007,130 18,290 0
Issuance of common stock............... 346,144 1,886 1,886
Deferred compensation.................. 75 75
Payment of notes receivable............ 19 19
Net income............................. 483 483
Currency translation................... (16) (16)
--------- ------- ---- ----- -------- ---- -------
Balances, December 31, 1996............ 9,315,241 39,047 (26) (205) (5,680) 68 33,204
Issuance of common stock............... 236,690 312 312
Deferred compensation.................. (30) (30)
Payment of notes receivable............ 75 75
Net loss............................... (7,904) (7,904)
Currency translation................... 27 27
--------- ------- ---- ----- -------- ---- -------
Balances, December 31, 1997............ 9,551,931 $39,359 $(56) $(130) $(13,584) $ 95 $25,684
========= ======= ==== ===== ======== ==== =======
The accompanying notes are an integral part of these consolidated financial
statements.
25
26
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- -------
Cash flows from operating activities:
Net income (loss)......................................... $ 319 $ 483 $(7,904)
Adjustments to reconcile income (loss) to net cash (used)
provided by operating activities:
Provision for doubtful accounts, returns and price
protection........................................... 279 1,026 (4)
Depreciation and amortization............................. 938 1,304 1,373
Amortization of deferred compensation..................... 45 75 75
Provision for loss on investment.......................... 100 -- --
Deferred rent............................................. 47 (21) (26)
(Increase)/decrease in:
Accounts receivable.................................... (4,375) (3,577) 1,185
Other current assets................................... (643) 104 (538)
Other assets........................................... 71 (81) (5)
Increase/(decrease) in:
Accounts payable....................................... 270 (220) 105
Other accrued expenses................................. 606 615 467
Deferred revenues...................................... 705 1,220 1,176
Product development obligation......................... 825 (445) (224)
Other current liabilities.............................. 199 34 (380)
Long-term liabilities.................................. 49 (71) (18)
------- -------- -------
Net cash (used) provided by operating
activities...................................... (565) 446 (4,718)
------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment........................ (1,612) (1,782) (952)
Purchase of marketable securities......................... -- (11,739) (13,669)
Sale of Marketable Securities............................. -- -- 1,000
Marketable Securities at Maturity......................... -- -- 14,731
Investments, at cost...................................... (240) -- --
Sale of minority interest in non-consolidated
subsidiary............................................. -- 547 --
------- -------- -------
Net cash (used) provided by investing
activities...................................... (1,852) (12,974) 1,110
Cash flows from financing activities:
Proceeds from the sale of stock, net...................... 3,199 22,595 285
------- -------- -------
Costs related to initial public offering.................. -- (2,430) --
------- -------- -------
Net cash provided by financing activities......... 3,199 20,165 285
------- -------- -------
Effect of exchange rate changes on cash..................... (183) (143) 733
------- -------- -------
Net increase (decrease) in cash................... 599 7,494 (2,590)
Cash and cash equivalents, beginning of year................ 5,281 5,880 13,374
------- -------- -------
Cash and cash equivalents, end of year...................... $ 5,880 $ 13,374 $10,784
======= ======== =======
Supplemental disclosure of cash flow information:
Income taxes paid......................................... $ 32 279 $ 100
Supplemental schedule of non-cash financing activities:
Series B Preferred Stock issued for acquisition........... $ 185 -- --
Deferred compensation..................................... $ 325 -- --
Common stock issued to shareholders in exchange for notes
receivable, net........................................ $ 6 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
26
27
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ISOCOR (the "Company") develops, markets and supports off-the-shelf
electronic messaging and directory infrastructure software products and services
that enable businesses to engage in electronic communications over corporate
networks, public telephone networks, value added networks and the Internet.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of intercompany accounts and
transactions. Investments in excess of 50% of the outstanding common stock of
the investee are consolidated. The Company has no investments of less than 50%
of investee common stock.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
these instruments approximates market value because of their short maturity.
Marketable securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
Government obligations all with maturities of one year or less. All of the
Company's marketable securities have been classified as "available-for-sale"
securities and are reported at fair value based on quoted market prices as
required by Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities."
Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents and
accounts receivable. The Company's accounts receivable are derived from sales
directly to customers and indirectly through resellers, systems integrators and
OEMs. The Company performs ongoing credit evaluations of its customers before
granting uncollateralized credit and to date has not experienced any unusual
credit related losses. At December 31, 1996 and 1997, United States, Ireland and
Other Europe represented 29%, 56% and 15% and 53%, 34% and 13%, respectively, of
the Company's net accounts receivable. At December 31, 1996 and 1997, the
Company had balances held in U.S. banks of approximately $2,754,000 and
$1,486,000 respectively, which exceeded federally insured limits. Cash
equivalents are managed by major investment firms in accordance with the
Company's investment policy.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of three to five years. Maintenance and repairs are expensed as incurred,
while renewals and betterments are capitalized. Upon the sale or retirement of
property
27
28
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and equipment, the accounts are relieved of the cost and the related accumulated
depreciation, and any resulting gain or loss is included in operations.
Foreign currency translation
Results of operations for foreign entities are translated using the average
exchange rates during the period. Foreign entities' assets and liabilities are
translated to U.S. dollars using the exchange rates in effect at the balance
sheet date, and resulting translation adjustments are recorded in a separate
component of shareholders' equity. Actual gains or losses incurred on currency
transactions in other than the entities' functional currencies are included in
income in the current period.
Revenue recognition
The Company derives revenue from two principal and related sources:
software licenses and services. Software license revenues, designated in the
Company's financial statements as product revenues, are generated from licensing
to end users, distributors and resellers. The Company generates service revenues
primarily from software maintenance, training, support and custom engineering.
The Company generally recognizes product revenues upon shipment, net of
allowances for estimated future returns and price protection, provided that no
significant obligations of the Company remain and that collection of the
resulting receivable is deemed probable. Upon shipment, the Company accrues the
cost of any insignificant performance obligations. The Company recognizes
service revenues from customer support and maintenance fees ratably over the
term of the service period, which is typically 12 months. Payments for
maintenance fees are generally made in advance. The Company generally recognizes
service revenues from custom engineering which is separately contracted for and
priced from the software license fees, as specific milestones are met in the
respective agreements. Where customer engineering is essential to the
functionality of the software, the Company does not recognize revenue on the
underlying software until the requirements of the specific development
arrangement are satisfied. Deferred revenues represent the difference between
amounts invoiced and amounts recognized as revenues under software development
and maintenance agreements. The Company recognizes service revenues from
training activities as the services are provided. Amounts received in connection
with a product development arrangement (See Note 12) under which the Company is
committed to specific efforts are recognized as reductions in associated product
development costs as those costs are incurred.
Agency grants
Agency grants are recognized as reductions in operating expenses as earned
under the respective terms of the agreements.
Software development costs
Costs related to the conceptual formulation and design of software products
are expensed as engineering expense. Based on the Company's development process,
technological feasibility is established upon completion of a working model. To
date, costs incurred by the Company between completion of the working model and
the point at which the product is ready for general release have been
immaterial.
Excess of cost over assets acquired
The excess of cost over net assets acquired is amortized over the estimated
useful life of one to five years using the straight line method. The Company
periodically reviews and evaluates whether there has been a permanent impairment
in the value of intangibles. Factors considered in the evaluation include
current operating results, trends and anticipated undiscounted cash flows.
28
29
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense represents the
tax payable in connection with the current period operations plus or minus the
change during the period in deferred tax assets and liabilities. (See Note 11).
Computation of net income (loss) per common share
The Company has adopted SFAS No. 128, "Earnings Per Share" for the year
ended December 31, 1997, and has restated earnings per common share for all
periods presented in accordance with the new standard. Basic net income (loss)
per common share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during the period. Diluted
net income per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding plus the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. Potential common shares related to
stock options and preferred stock are excluded from the computation when their
effect is antidilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the years ended
December 31, 1995, 1996 and 1997 (in thousands).
1995 1996 1997
------ ------ -------
NUMERATOR:
Net Income (loss)numerator for basic and diluted
EPS................................................ $ 319 $ 483 $(7,904)
DENOMINATOR:
Denominator for basic EPS-weighted average shares..... 1,652 7,733 9,485
Effect of dilutive securities:
Stock options.................................... 957 989 --
Preferred Stock.................................. 5,174 1,086 --
------ ------ -------
Denominator for diluted EPS-adjusted weighted average
shares and assumed conversions........................ 7,783 9,808 9,485
Securities that could potentially dilute basic EPS in the future that were
not included in the computation of diluted EPS because to do so would have been
antidilutive were -0-, -0- and 2,050,265 shares in 1995, 1996 and 1997,
respectively.
All per share information has been given retroactive effect for the 1 for
2.5 reverse stock split which occurred on January 26, 1996 for all outstanding
shares of common and preferred stock. All of the 475,000 common shares of the
Company issued to effect the business combination with NetCS have been fully
weighted for all periods presented for the computation of the weighted average
number of shares outstanding as required for "pooling of interests" accounting
treatment.
Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform with the 1996 and 1997 presentation.
29
30
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent Accounting Pronouncements
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This accounting standard is effective
for fiscal years beginning after December 15, 1997 and requires additional
disclosures for all periods presented, but will not impact reported amounts of
net income (loss) of the Company.
On June 30, 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented. The Company is currently evaluating the requirements
of SFAS No. 131.
On October 27, 1997, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
supersedes SOP 91-1, "Software Revenue Recognition." SOP 97-2 provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions and is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company is currently evaluating the
requirements of SOP 97-2.
2. INITIAL PUBLIC OFFERING
In March 1996, the Company completed the public offering and sale of
2,300,000 shares of its common stock at $9 per share resulting in net proceeds
to the Company of approximately $18,270,000 after offering costs, underwriting
discounts and commissions. The Company's shares are traded on the Nasdaq Stock
Market under the symbol "ICOR."
3. MARKETABLE SECURITIES
The Company held the following positions as of December 31, 1996 and 1997
(dollars in thousands):
1996 1997 MATURITIES
------- ------ -------------
Corporate notes.......................... $ 8,098 $8,182 1 - 10 months
U.S. Government obligations.............. 3,641 1,495 1 - 6 months
------- ------
$11,739 $9,677
======= ======
Realized gains and losses are based on the book value of the specific
securities sold and were immaterial during the years ended December 31, 1996 and
1997. At December 31, 1996 and 1997, the difference between cost and market
value of the Company's marketable securities was not material. In 1995, the
Company had no marketable securities.
30
31
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of December 31,
1996 and 1997 were (dollars in thousands):
1996 1997
------- -------
Accounts receivable...................................... $12,807 $10,563
Less: Allowance for doubtful accounts, returns and price
protection............................................. (1,647) (1,509)
------- -------
$11,160 $ 9,054
======= =======
As of December 31, 1996 and 1997, approximately 72% and 56% of the
Company's trade accounts receivable were from customers located in Europe,
respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 consisted of the
following (dollars in thousands):
1996 1997
------ ------
Computer equipment......................................... $4,785 $5,180
Office equipment and furniture............................. 2,010 1,876
------ ------
6,795 7,056
Less accumulated depreciation.............................. (3,805) (4,651)
------ ------
$2,990 $2,405
====== ======
For the years ended December 31, 1995, 1996 and 1997, depreciation expense
was $925,000, $1,276,000 and $1,362,000, respectively.
6. ACQUISITIONS
In October 1995, the Company acquired a 60 percent interest in a sales and
distribution company located in Europe for 29,658 shares of Series B Preferred
stock and $279,000 in cash. The transaction was recorded as a purchase and,
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based upon fair market value. The $355,000 paid in excess of the net
assets acquired is being amortized using the straight line method over an
estimated useful life of five years and is included in Other Assets in the
accompanying Consolidated Balance Sheets as of December 31, 1996 and 1997, net
of accumulated amortization of $72,000 and $122,000, respectively. At December
31, 1996 and 1997, the related 40 percent minority interest was $79,000. The
Company is required to purchase the remaining 40 percent of this sales and
distribution company within four years from the date of purchase, at a price
approximating net revenues for the year preceding the purchase of the Company's
initial 60 percent interest, subject to various adjustments and maximums. The
results of operations for this investment have been included in the Consolidated
Statements of Operations for the periods subsequent to the acquisition and were
insignificant prior to the acquisition.
Pursuant to a Stock Purchase Agreement dated August 29, 1996 by and among
ISOCOR B.V., a wholly owned subsidiary of the Company, NetCS Informationstechnik
GmbH, a corporation organized under the laws of the Federal Republic of Germany
("NetCS") and the stockholders of NetCS (the "Purchase Agreement"), the Company
acquired (the "Acquisition") all of the outstanding quota interests (shares) in
NetCS in exchange for an aggregate of 475,000 shares of the Company's common
stock. The Acquisition has been accounted for under "pooling of interests"
accounting treatment, and therefore, as required by
31
32
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting Principles Board Statement No. 16, all financial statements herein
have been restated as though the Acquisition had been effected for all periods
presented. A reconciliation of the Company's previously reported revenue and
earnings to the earnings shown in these financial statements follows (dollars in
thousands):
REVENUES NET INCOME (LOSS)
-------- -----------------
Year Ended December 31, 1995
ISOCOR only...................................... $16,501 $314
NetCS only....................................... 4,273 5
------- ----
Consolidated ISOCOR........................... $20,774 $319
======= ====
Six Months Ended June 30, 1996
ISOCOR only...................................... $10,354 $(49)
NetCS only....................................... 2,621 34
------- ----
Consolidated ISOCOR........................... $12,975 $(15)
======= ====
7. COMMITMENTS AND CONTINGENCIES
The Company leases its offices and operating facilities under various
operating leases which expire at various dates through 2002. Certain leases
contain free rent periods and renewal options and provisions to increase monthly
rentals at specified intervals. The consolidated statements of operations
reflect rent expense on a straight-line basis over the term of the respective
leases.
Total rental expense for the years ended December 31, 1995, 1996 and 1997
was $1,042,000, $1,128,000 and $1,418,000, respectively.
Future minimum rental commitments under operating leases are as follows
(dollars in thousands):
For the year ending
1998................................................ $1,455
1999................................................ 1,125
2000................................................ 686
2001................................................ 291
2002................................................ 83
------
$3,640
======
As more fully described in Note 6, the Company is committed to purchase the
remaining 40 percent interest not already owned by the Company of a sales and
distribution company located in Switzerland.
From time to time, the Company is involved in various legal proceedings in
the normal course of business. The Company is not currently involved in any
litigation which, in management's opinion, would have a material adverse effect
on its business, operating results, financial condition or cash flows.
The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers
for handling the year 2000. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased
32
33
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
costs associated with, the implementation of such changes, which could have an
adverse effect on future results of operations.
8. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 were (dollars in thousands):
1996 1997
------ ------
Salaries and related expenses.............................. $1,196 $1,197
Royalties.................................................. 556 499
Commissions................................................ 440 464
Corporate and sales taxes.................................. 347 184
Other...................................................... 1,138 1,323
------ ------
$3,677 $3,667
====== ======
9. LONG-TERM LIABILITIES
Long term liabilities at December 31, 1996 and 1997 were (dollars in
thousands):
1996 1997
---- ----
Minority interest........................................... $ 79 $ 79
Deferred rent............................................... 27 6
Deferred tax liability...................................... 81 48
---- ----
$187 $133
==== ====
10. SEVERANCE COSTS
In June and October 1997, the Company approved and completed a
restructuring of its United States and European operations pursuant to which
certain employees were terminated. A total of $681,000 in severance costs were
charged to operating expenses in 1997 of which $364,000 relates to engineering,
$190,000 to sales and marketing, and $127,000 to administration. The total
number of employees terminated was 35.
11. INCOME TAXES
The sources of income (loss) before income taxes for years ended December
31, 1995, 1996 and 1997 were as follows (dollars in thousands):
1995 1996 1997
------ ----- -------
United States............................................ $ (881) $(182) $(1,881)
Foreign.................................................. 1,543 850 (5,978)
------ ----- -------
Income (loss) before income taxes........................ $ 662 $ 668 $(7,859)
====== ===== =======
33
34
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes for the years ended
December 31, 1995, 1996 and 1997 were as follows (dollars in thousands):
1995 1996 1997
---- ---- ----
Current:
U.S. Federal.............................................. $ -- $ 18 $ --
State..................................................... 1 5 1
Foreign................................................... 374 254 52
---- ---- ----
375 277 53
Deferred-foreign.......................................... (32) (92) (8)
---- ---- ----
Total............................................. $343 $185 $ 45
==== ==== ====
The Company's provision for income taxes is primarily attributable to
taxable income in foreign jurisdictions, as the Company did not generate taxable
income in the United States in 1995 and 1997, and in 1996 the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States. The Company also utilized foreign operating loss carryforwards to
offset $941,000 of income subject to foreign taxation in 1995. Included in
provision for income taxes in 1995 is $278,000 relating to income taxes withheld
by a foreign government relating to a substantial sale in that country made from
the United States.
The components of the Company's net deferred taxes as of December 31, 1996
and 1997 were as follows (dollars in thousands):
1996 1997
------- -------
Deferred tax assets:
Allowance for inventory, sales returns and doubtful
accounts............................................ $ 302 $ 320
Accrued vacation....................................... 71 63
Deferred revenues...................................... 476 954
Property and equipment................................. 131 194
Net operating loss carryforward........................ 1,533 1,258
Other.................................................. 45 36
------- -------
Total deferred tax assets...................... 2,558 2,825
Valuation allowance...................................... (2,484) (2,825)
------- -------
Net deferred tax assets........................ 74 --
Deferred tax liability, property, equipment and computer
software............................................... (81) (48)
------- -------
Net deferred taxes............................. ($ 7) ($ 48)
======= =======
The valuation allowance on deferred tax assets increased by $434,000,
$67,000 and $341,000 in 1995, 1996 and 1997, respectively.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that management evaluate a variety of factors in reaching a
conclusion regarding whether a valuation allowance against deferred tax assets
is required. The Company has considered a number of factors which impact the
likelihood that the deferred tax assets will be recovered, including the
Company's history of operating losses for federal and state tax reporting
purposes and the likelihood that U.S. operations will generate taxable income
during the carryforward period for unused net operating loss carryforwards.
Management is unable to project significant taxable income from U.S. operations
during the next two years and beyond and has therefore concluded, based upon a
weighting of all available evidence, that it is more likely than not that
deferred tax assets will not be realized. Accordingly, the Company has
established a full valuation allowance against its U.S. federal deferred tax
assets. Management evaluates on a quarterly basis the recoverability of the
34
35
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
deferred tax assets and the level of valuation allowance. At such time as it is
determined more likely than not that deferred tax assets are realizable, the
valuation allowance would be appropriately reduced.
As of December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $4.9
million and $2.3 million, respectively, and none remaining in foreign
jurisdictions. These carryforwards, if unused, expire in various periods from
1998 to 2010.
The overall effective tax rate differed from the statutory tax rate for the
years ended December 31, 1995, 1996 and 1997 as follows:
% OF PRETAX INCOME
-----------------------
1995 1996 1997
----- ----- -----
Tax provision (benefit) based on the federal statutory
rate...................................................... 34.0% 34.0% 34.0%
U.S. loss not providing current tax benefit................. (34.0) (31.3) (34.0)
Foreign taxes, net.......................................... 51.8 25.0 .6
----- ----- -----
Effective tax rate.......................................... 51.8% 27.7% .6%
===== ===== =====
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under a tax holiday due to terminate in 2010,
the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. To
qualify for this 10% tax rate, the Company must carry out "software development
services" or "technical or consultancy services" (as defined in the Irish
Finance Act 1980) in Ireland and qualify for an employment grant from the
Industrial Development Authority of Ireland. If the Company ceases to comply
with these qualifications, all or a part of its taxable profits may be subject
to a 36% tax rate on its post disqualification date taxable profits. Should this
occur, or should Irish tax laws be rescinded or changed, the Company's net
income could be materially adversely affected. Because the Company utilized loss
carryforwards to offset income otherwise taxable in Ireland in 1995, this
reduced tax rate did not result in significant reductions in income tax expense
for that year.
12. SHAREHOLDERS' EQUITY
Preferred Stock
At December 31, 1997 the Company had 2,000,000 shares of undesignated
Preferred Stock but none issued or outstanding. On March 14, 1996, the date of
effectiveness of the Company's initial public offering, all outstanding shares
of the Company's Series A, B, C and D Preferred Stock were canceled upon their
automatic conversion to Common Stock.
The Series A, B, C and D Preferred Stock had stated annual dividend rates
of $.22500, $.32175, $.39375 and $.90 per share, respectively. No dividends were
ever declared or paid.
The Series A, B, C and D Preferred Stock had a $2.50, $3.575, $4.375 and
$10.00 liquidation preference over shares of Common Stock, respectively, and
were redeemable anytime after July 19, 1998, upon written consent to redemption
of a majority of the holders, at liquidation preference, plus declared and
unpaid dividends, if any.
In connection with the issuance of Series C Preferred Stock in November
1993, the Company provided the investor an option to purchase equity securities
of the Company under certain conditions associated with sales by the investor
and its affiliates of the Company's products in excess of specified minimum
levels. The investor exercised that option and purchased 39,942 shares of Common
Stock upon the closing of the initial public offering on March 14, 1996 at 80%
of the per share price of such offering.
In December 1995, the Company entered into a Series D Preferred Stock
Purchase Agreement with a strategic investor. The agreement provided for total
consideration to the Company of $3,000,000, of which $1,500,000 was received in
1995 in exchange for 150,000 shares of the Company's Series D Preferred Stock
35
36
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and the Company's commitment to product development efforts estimated to cost
$825,000. These costs were accrued with the remaining proceeds of $653,000, net,
attributed to the Company's Series D Preferred Stock. Per the terms of the
agreement, the number of shares of Common Stock issued upon automatic conversion
at the initial public offering date of this Series D Preferred Stock was
calculated to provide effective per share pricing to this investor of 80% of the
price per share of Common Stock paid by the public on that date. The investor
was also committed to acquire and did acquire under the terms of the agreement,
additional shares of the Company's Series D Preferred Stock with an aggregate
purchase price of $1,500,000 at the initial public offering date of March 14,
1996. These shares also automatically converted into Common Stock such that the
effective price per share of the Common Stock was the same as the Price to
Public in the initial public offering on March 14, 1996.
13. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost other than that required to be
recognized by APB 25 for the difference between the fair value of the Company's
Common Stock at the grant date and the exercise price of the options has been
recognized. Had compensation cost for the Company's two stock option plans been
determined based on the fair value at the grant date for awards in 1995, 1996
and 1997 consistent with the provisions of SFAS 123, the Company's net earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below (amounts in thousands except per share amounts):
1995 1996 1997
----- ------ --------
Net earnings (loss) as reported......................... $ 319 $ 483 $ (7,904)
Net loss, pro forma..................................... $ 311 $ (584) $(11,068)
Net earnings (loss) per share as reported............... $0.19 $ 0.06 $ (0.83)
Net loss per share, pro forma........................... $0.19 $(0.08) $ (1.17)
Net earnings (loss) per share assuming dilution, as
reported.............................................. $0.04 $ 0.05 $ (0.83)
Net loss per share assuming dilution, pro forma......... $0.04 $(0.08) $ (1.17)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997.
1996 1997
---- ----
Risk free interest rate................................ 6.10% 6.13%
Expected lives (years)................................. 4 4
Expected volatility.................................... 70% 117%
Expected dividends..................................... 0 0
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Option Plan") permits the
grant of both "incentive stock options" designed to qualify under IRC Section
422 and non-qualified stock options. A total of 2,600,000 shares of Common Stock
has been reserved for issuance under the 1992 Stock Option Plan. Incentive stock
options may only be granted to employees of the Company whereas non-qualified
stock options may be granted to employees and consultants. Each option, once
vested, allows the optionee the right to purchase one share of the Company's
Common Stock. The Board of Directors determines the exercise price of the
options based on the fair market value of such shares on the date of grant;
options granted to date generally vest ratably over four years and expire ten
years from the date of the grant. Compensation expense equal to the difference
between the assumed fair value of the Company's Common Stock at the grant date
and the exercise price of the options, if any, is recognized ratably over the
vesting period.
36
37
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1996 Directors' Stock Option Plan
In 1996, the Company adopted the 1996 Directors' Stock Option Plan (the
"Directors' Plan"). A total of 150,000 shares of Common Stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for the
grant of nonstatutory stock options to nonemployee directors of the Company
("outside directors"), including an option to purchase 10,000 shares of Common
Stock on the date on which the optionee first becomes a nonemployee director of
the Company or January 18, 1996 with respect to the Company's then current
nonemployee directors ("First Option"). Each First Option granted vests in
installments cumulatively as to 25% of the shares subject to the First Option on
each of the first, second, third and fourth anniversaries of the date of grant
of the First Option. Thereafter, each outside director will be automatically
granted an option to purchase 2,500 shares of Common Stock on the first calendar
day of the Company's fiscal year commencing in or after 1997 if, on such date,
the optionee shall have served on the Company's Board of Directors for at least
six months ("Subsequent Option"). Each Subsequent Option shall vest on the
fourth anniversary of the date of grant, subject to continued service as an
outside director. The exercise price per share of all options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option.
The following table summarizes certain information relative to the 1992
Option Plan and 1996 Directors' Stock Option Plan.
WEIGHTED AVERAGE
EXERCISE PRICE WEIGHTED AVERAGE FAIR VALUE AT
SHARES RANGE EXERCISE PRICE GRANT DATE
--------- ---------------- ---------------- ----------------
Outstanding at December 31,
1994....................... 655,400 $.3750 to $.6250 $0.52
Granted
Option price = Grant date
market price............ 510,403 $.6250 to $7.50 $1.86 $1.03
Exercised.................... (30,530) $.3750 to $.6250 $0.48
Canceled or expired.......... (83,886) $.3750 to $.6250 $0.60
---------
Outstanding at December 31,
1995....................... 1,051,387 $.3750 to $7.50 $0.83
=========
Granted
Option price = Grant date
market price............ 1,219,700 $6.44 to $12.50 $7.06 $4.96
Exercised.................... (139,554) $.3750 to $5.00 $0.49
Canceled or expired.......... 123,945 $.3750 to $12.50 $5.13
---------
Outstanding at December 31,
1996....................... 2,007,588 $.3750 to $12.50 $1.96
=========
Granted
Option price = Grant date
market price............ 683,000 $2.313 to $5.50 $2.86 $2.27
Option price < Grant date
market price............ 119,500 $2.625 $2.63
Exercised.................... (143,497) $.3750 to $2.625 $0.90
Canceled or expired.......... (616,326) $.3750 to $8.00 $5.75
---------
Outstanding at December 31,
1997....................... 2,050,265 $.3750 to $8.00 $2.23
=========
37
38
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the stock options at
December 31, 1995, 1996 and 1997:
1995 1996 1997
--------- ------- -------
Options exercisable.......................... 345,872 504,769 817,517
Options available for future grant........... 116,083 270,328 384,154
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 1997:
WEIGHTED
NUMBER AVERAGE WEIGHTED
OPTIONS OUTSTANDING OUTSTANDING AS OF REMAINING AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ ----------------- ---------------- --------------
$0.00 to $1.99................. 576,024 5.5 $0.66
$2.00 to $3.99................. 1,436,741 8.2 $2.71
$4.00 to $5.99................. 7,500 9.0 $5.50
$6.00 to $8.00................. 30,000 8.0 $8.00
---------
2,050,265 7.4 $2.23
=========
NUMBER WEIGHTED
OPTIONS EXERCISABLE EXERCISABLE AS OF AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 EXERCISE PRICE
------------------------ ----------------- --------------
$0.00 to $1.99................................. 477,150 $0.62
$2.00 to $3.99................................. 332,867 $2.63
$4.00 to $5.99................................. -- $ --
$6.00 to $8.00................................. 7,500 $8.00
-------
817,517 $1.50
=======
Effective April 1, 1997 (the "Grant Date") all optionees under the 1992
Stock Option Plan holding stock options with exercise prices in excess of the
fair market value of the Company's Common Stock received one-for-one repricing
of their then-existing unexercised stock options with a new exercise price set
at $2.625 per share, the closing sales price and fair market value of the
Company's Common Stock on the Grant Date. The number of stock options affected
was 1,235,065. Other than the change in the exercise price, the affected options
remained the same.
1996 Employee Stock Purchase Plan
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 250,000 shares of Common Stock has been reserved
for issuance under the Purchase Plan. The Purchase Plan enables eligible
employees to purchase Common Stock at 85% of the lower of the fair market value
of the Company's Common Stock on the first day or the last day of each six-month
purchase period. As of December 31, 1996 and 1997, there were zero and 96,901
shares, respectively, issued under the Purchase Plan.
401(k) Salary Reduction Plan and Trust
In 1992, the Company adopted the ISOCOR 401(k) Salary Reduction Plan and
Trust (the "Plan") for all qualified employees electing participation in the
Plan. Employees can contribute 2%-15% of eligible earnings to the Plan, subject
to Internal Revenue Service limitations. No Company contributions were made to
the Plan for the years ended December 31, 1995, 1996 and 1997.
38
39
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. GEOGRAPHICAL AREA INFORMATION
The Company operates in a single industry segment, the development,
marketing and support of off-the-shelf electronic messaging and directory
infrastructure software. The Company's operations consist of engineering, sales
and marketing, administration and support in both the United States and Europe.
Revenues and operating income for the years ended December 31, 1995, 1996,
and 1997 and identifiable assets as of December 31, 1995, 1996 and 1997,
classified by the major geographical areas in which the Company operates, were
as follows (dollars in thousands):
1995 1996 1997
------- ------- -------
REVENUES:
United States................................. $ 7,942 $10,927 $11,077
Ireland....................................... 12,067 15,932 13,382
Other Europe.................................. 5,173 7,226 8,245
Intercompany elimination...................... (4,408) (7,691) (10,686)
------- ------- -------
$20,774 $26,394 $22,018
======= ======= =======
OPERATING INCOME (LOSS):
United States................................. $(1,298) $(1,361) $(3,384)
Ireland....................................... 1,929 1,177 (4,182)
Other Europe.................................. (45) 151 (1,502)
------- ------- -------
586 (33) (9,068)
Provision for loss on investment.............. (100) -- --
Other income.................................. 176 701 1,209
------- ------- -------
Income before income taxes.................... $ 662 $ 668 $(7,859)
======= ======= =======
IDENTIFIABLE ASSETS:
United States................................. $ 8,878 $29,304 $26,123
Ireland....................................... 7,591 9,146 5,393
Other Europe.................................. 3,025 2,848 2,707
------- ------- -------
Total............................... $19,494 $41,298 $34,223
======= ======= =======
The Company's transfers between geographical areas are accounted for using
methods designed to approximate comparable arms-length transactions. Such
transfers are eliminated in the consolidated financial statements. Export sales
from the United States and Ireland for the years ended December 31, 1995, 1996
and 1997 were $3,464,000, $2,131,000 and $2,086,000, respectively. The majority
of these sales were made to Asia and South America.
The Company currently relies significantly on resellers in Europe for
certain elements of marketing and distribution of its software products. In the
event the Company is unable to retain its resellers, there is no assurance that
the Company will succeed in replacing them. Any changes in the Company's
distribution channel could have a significant impact on sales and adversely
affect operating results.
39
40
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS
In 1991, the Company entered into a software OEM agreement with a United
Kingdom based software company in connection with a license to use their
software products. In 1992, the Company purchased 15% of this company for
$737,668 which investment was subsequently divested in early 1996. A provision
for loss on divestiture of this investment of $100,000 was recorded in the 1995
Consolidated Statement of Operations as the terms for liquidation of the
Company's position were substantially agreed to in December 1995. During 1995
when this software company was a related party, royalty payments totaling
approximately $355,000 were made under the agreement. The Company's cost of
sales in 1995 included $210,000 of royalty costs associated with this
arrangement.
The Company made rental payments of approximately $100,000 for the year
ended December 31, 1995 to an affiliate of a shareholder in connection with the
lease of the Company's previous California offices.
Included in related party revenues for the years ended December 31, 1995,
1996 and 1997 was approximately $83,000, $272,000 and $95,000, respectively,
relating to software license and maintenance agreements with a shareholder.
Included in revenue for the year ended December 31, 1995, 1996 and 1997 was
approximately $369,000, $292,000 and $58,000 respectively relating to a software
license and maintenance agreement with an affiliate of a shareholder. Included
in accounts receivable as of December 31, 1996 and 1997 was $74,000 and $46,000,
respectively, relating to this distributor. Included in accounts payable as of
December 31, 1996 and 1997 was $0 and $96,000, respectively, relating to
consulting services.
Gross margins on related party revenues approximate those realized in
transactions with non-affiliates.
During 1996 and 1997, the Company reflected as a reduction of operating
expenses $445,000 and $380,000, respectively, relating to product development
efforts committed to and performed by the Company under the Series D Preferred
Stock Purchase Agreement discussed in Note 12 above.
16. AGENCY GRANTS
During 1992, 1994 and 1996, the IDA approved grant agreements with one of
the Company's international subsidiaries for approximately $750,000, $850,000
and $793,000, respectively, over six years. The Company reflected as reduction
of operating expenses $712,000, $413,000 and $69,000 relating to these grants
for the years ended December 31, 1995, 1996 and 1997, respectively. These grants
are based upon the Company's creation and fulfillment of new jobs in Ireland and
include remedy provisions employed by the IDA to pursue partial revocation of
amounts granted in the event the recipient of the grant substantially vacates
its presence in Ireland during a period of five to seven years from date of
grant. While the Company's level of employment within Ireland in 1997 has
declined, the Company's plans include a commitment to a significant continuing
presence in Ireland. There can be no assurance that the IDA will not seek
partial revocation of prior grants, that the Company will continue to qualify
for this grant aid or be eligible for future grants or that the Company's
results of operations will not be materially adversely affected by the loss of
grant aid. During 1993, the IDA purchased 20,000 shares of the Company's Common
Stock.
The Economic and Technological Finance Authority -- Berlin ("Authority")
makes grants to promote research and development in small and medium-sized
German-owned companies located in Berlin. The grants are paid quarterly based
upon actual development costs, including salaries, and depend upon the work
being carried out in Berlin. The Company reflected as a reduction of operating
expenses $124,000, $87,000 and $0 relating to these grants for the years ended
December 31, 1995, 1996 and 1997, respectively. Although remedy provisions exist
for the recoverability of such grants if certain conditions are not met, the
Company has been assured by the Authority that no recovery of the grants made to
NetCS is contemplated, and accordingly, no liability has been recognized in the
financial statements for this contingency. As of August 31, 1996, the Company
was no longer eligible to receive these grants in Germany.
40
41
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated financial statements and the financial
statement schedule of ISOCOR and subsidiaries listed in the index on page 45 of
this Form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ISOCOR and
subsidiaries as of December 31, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
Los Angeles, California
February 18, 1998
41
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file its 1998 Proxy Statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A as promulgated by the U.S.
Securities and Exchange Commission for its Annual Meeting of Shareholders to be
held May 13, 1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company, and their ages
as of December 31, 1997, are as follows:
NAME AGE POSITION
---- --- --------
Andrew De Mari............. 58 Chairman of the Board of Directors
Paul Gigg.................. 44 President, Chief Executive Officer and
Director
C. Raomal Perera........... 40 Senior Vice President, Engineering
Janine M. Bushman.......... 43 Vice President, Finance and Administration,
Chief Financial Officer and Director
Alex Lazar................. 40 Vice President, North American Sales
Robert Lewin............... 54 Vice President, Marketing
John B. Stephensen......... 45 Vice President, Technology
William M. Wolfe........... 46 Vice President, Business Development
Barry Wyse................. 36 Vice President, Engineering
Jean-Michel Barbier 51 Director
(1)(2)...................
Dennis Cagan............... 53 Director
Alexandra Giurgiu (1)...... 38 Director
G. Bradford Jones (2)...... 41 Director
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Andrew De Mari is a founder of the Company, was elected Chairman of the
Board of Directors in November 1997 and has been a member of the Board of
Directors since the Company's inception in 1991. Prior to becoming Chairman, Dr.
De Mari served as the Company's President and Chief Executive Officer since its
founding in 1991. Dr. De Mari was previously a founder and the Chairman and
Chief Executive Officer of Retix from its inception in 1985 to November 1990.
Retix develops, manufactures, markets and supports telecommunications software
through Vertel Corporation, its principal operating subsidiary. Prior to 1985,
he was Senior Vice President of Research and Development and Engineering at
Compucorp, a manufacturer of office automation products. Dr. De Mari holds
M.S.E.E. and Ph.D. degrees in Electrical Engineering from the California
Institute of Technology and Dott. Ing. Electrical Engineering from the
Politecnico di Torino, Italy.
Paul R. Gigg joined ISOCOR in January 1993. He became General Manager,
Europe in October 1995, was elected Vice President, European Marketing and Sales
in October 1996, was elected Chief Operating Officer in April 1997 and was
elected to the Board of Directors and as President and Chief Executive Officer
in November 1997. For more than five years prior to joining ISOCOR, Mr. Gigg was
Director of Marketing and Engineering at Dowty Communications (formerly Case
Communications), a developer and supplier of networking products. Mr. Gigg holds
a B.S.E.E. degree from the University of Wales, United Kingdom.
C. Raomal Perera is a founder of the Company and has had overall
responsibility for the Irish operations of ISOCOR since June 1991. He was
elected as an officer of ISOCOR in November 1992 and currently holds
42
43
the position of Senior Vice President Engineering and General Manager ISOCOR
Ireland. Prior to that, he was the Software Research and Development Manager for
Artist Graphics, a manufacturer of computer peripherals, from September 1990 to
June 1991. For two years prior to that, Mr. Perera was employed by Retix as
Associate Vice President, OSI Technology Unit and prior to that, Director of
Engineering and Software Development Manager of Retix's Research and Development
Centre in Ireland. Mr. Perera holds a B.S.E.E. degree from the University of
Wales, United Kingdom.
Janine M. Bushman joined the Company in April 1993. She became the Vice
President of Operations of the Company in October 1994, was elected to the Board
of Directors in July 1995 and was elected Chief Financial Officer and Vice
President, Finance and Administration in November 1995. For almost six years
prior to joining the Company, Ms. Bushman was Controller and Corporate Secretary
for Interactive Systems Corporation, a developer and supplier of UNIX operating
systems software. Ms. Bushman holds an M.B.A. from Loyola Marymount University
and a B.S. in Accounting from the California State University at Northridge.
Alex Lazar joined the Company in November 1993 and was elected to the
position of Vice President, North American Sales in July 1997. Prior to joining
the Company, Mr. Lazar was Vice President, Sales and Support and a founder of
Isicad, a network management software company, which position he held from 1987
to 1993. Mr. Lazar holds a B.S. from DePaul University.
Robert Lewin joined the Company in December 1997 as Vice President,
Marketing. For one and a half years prior to joining ISOCOR, Mr. Lewin was
Director/Principal Analyst for the Collaborative Computing market segment for
GartnerGroup/Dataquest. For two years prior to that, he was Vice President of
Marketing and Sales for Enterprise Solutions Limited, and previous to that, was
Vice President of Marketing Operations with X/Open Company Limited for five
years. Mr. Lewin holds an M.B.A. from the University of Santa Clara and a
B.S.E.E. degree from the University of California.
John B. Stephensen joined the Company in October 1993 and became Vice
President, Technology in November 1997. Previously he was Vice President,
Product Management from July 1994 to that date. He was a co-founder of Retix
where he was Senior Vice President, Technology from June 1988 until joining the
Company. Prior to becoming Senior Vice President, Technology, Mr. Stephensen
served Retix in a number of capacities including, most recently, Vice President,
Engineering. Prior to joining Retix, Mr. Stephensen served as Director of
Systems Engineering at Compucorp, a manufacturer of office automation products.
Mr. Stephensen studied Electrical Engineering at the University of California at
Santa Barbara.
William M. Wolfe joined the Company in January 1995 as a Vice President and
currently serves as Vice President, Business Development. He was with Infonet
Services Corporation, a telecommunications firm, from November 1989 to December
1994, where he last held the position of General Manager of Enhanced Services.
Mr. Wolfe graduated with a B.S. from the University of Milwaukee.
Barry Wyse joined ISOCOR B.V. in May 1995 and became Vice President,
Engineering of the Company in December 1997. Prior to joining the Company, Mr.
Wyse served as Software Manager for Microsoft B.V., a subsidiary of Microsoft
Corporation, a commercial software provider, from April 1994 to May 1995 and as
Principal Engineer for Lotus B.V., a subsidiary of Lotus Development
Corporation, which was subsequently acquired by IBM, from December 1992 to
February 1994. Mr. Wyse holds an M. S. degree in Computer Science from
University College, Dublin, Ireland.
Jean-Michel Barbier is Directeur General of Thomson-CSF Ventures, a
corporate venture capital investor, with which he has been associated since
1987. He was elected to the Board of Directors of the Company in November 1993.
He also serves on the Board of Directors of the following companies: Geris
Consultants, Optim, Info Radio Interactive Services, Financial Architecture
Research and Resources, Thomnet, Aonix, Virtual IO, Inc., Virtual Prototypes,
Inc. and Era A.S.
Dennis Cagan has been President of CaganCo, Inc., a management consulting
firm, since 1981 and also serves as Chairman and Chief Executive Officer of
HumanRace, Inc., an Internet showcased travel adventure event. Mr. Cagan was
elected to the Board of Directors of the Company in August 1997 and currently
also
43
44
serves as a consultant to the Company. Mr. Cagan also serves as a member of the
Board of Directors of Intervista Software, Inc.
Alexandra Giurgiu is President of Olivetti Management of America, Inc., an
investment subsidiary of Ing. C. Olivetti & C., S.p.A., a manufacturer of
information processing systems, which position she has held since 1991. Ms.
Giurgiu has also been a Managing Director and Executive Officer of 4C Ventures,
L.P., a venture capital partnership, since 1994. From 1984 to 1985, she was
Director of International Operations for Lifeboat Associates, a software
distribution and publishing company. She became a member of the Company's Board
of Directors in May 1993. Additionally, she currently serves on the Board of
Directors of Object Design, Wireless Access, Hands-On Technology and Alacrity
Systems.
G. Bradford Jones is a general partner in the venture capital firm of
Brentwood Venture Capital, which he joined in 1981. He became a member of the
Company's Board of Directors in July 1991. Mr. Jones also serves on the Board of
Directors of Interpore International and Onyx Acceptance Corporation.
Further information regarding Registrant's directors will be set forth
under the caption "Election of Directors -- Nominees" in the Registrant's 1998
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Compensation of
Executive Officers" in the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Company's 1998
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Certain
Relationships and Related Transactions" in the Company's 1998 Proxy Statement.
44
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a) (1) Consolidated Financial Statements:.......................... 22
(2) Financial Statement Schedule:............................... S-1
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item
601 of Regulation S-K):
NUMBER DESCRIPTION
------ -----------
2.1* Stock Purchase Agreement by and among Registrant, NetCS and
the stockholders of NetCS dated August 29, 1996.
2.2* Escrow Agreement dated August 29, 1996.
3.1+ Amended and Restated Articles of Incorporation of
Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
3.3 Certificate of Amendment to Bylaws of Registrant dated
November 5, 1997.
10.1+ 1992 Stock Option Plan and forms of option agreements
thereunder.
10.2+ 1996 Directors' Stock Option Plan and form of option
agreement thereunder.
10.3+ 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4+ Form of Indemnification Agreement.
10.5+ Lease dated November 11, 1994 between ISOCOR and Telos
Corporation.
10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas.
10.7+ Rights Agreement dated December 29, 1995 among the
Registrant, its Preferred shareholders and certain of its
Common shareholders, as amended.
10.8+++ International Reseller Agreement dated May 11, 1993 between
the Registrant and Syseca S.A.
10.9+ Source Code Access License Agreement dated September 15,
1993 and Amendment to the Source Code Access License
Agreement dated May 1, 1995, between the Registrant and
Syseca S.A.
10.10+++ Report of Discussions between the Registrant and Syseca S.A.
dated September 27, 1994 (translated) and Affidavit of
Translations by Abbey Translations dated January 25, 1996.
10.11+++ Master Binary License Agreement dated September 30, 1994
between the Registrant and Lir S.A.
10.12+++ Master Binary License Agreement dated December 28, 1994,
Amendment to the Master Binary Agreement dated March 2, 1995
and Amendment to the Master Binary License Agreement dated
December 28, 1995, between the Registrant and Syseca S.A.
10.13+ Product Loan Agreement between the Registrant and Syseca
S.A. dated November 1, 1995.
10.14+ Employment Agreement between the Registrant and C. Raomal
Perera dated September 9, 1992.
10.15+++ Series D Preferred Stock Purchase Agreement dated December
29, 1995 between the Registrant and Intel Corporation and
related Statement of Work and Product Requirements.
10.16 Lease dated March 3, 1998 between the Registrant and Spieker
Properties.
10.17 Letter Agreement dated December 3, 1997 between ISOCOR B.V.
and Forfas.
10.18 Agreement between Andrew De Mari and the Registrant dated
November 5, 1997.
10.19 Letter Agreement between the Registrant and Paul Gigg dated
December 9, 1997.
10.20 Consultancy Agreement between the Registrant and Cagan Co.
Inc., dated September 1, 1997 and related work orders dated
September 1, 1997 and February 11, 1998.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 47).
27.1 Financial Data Schedules
45
46
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
- ---------------
* Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K dated August 29,
1996.
+ Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
amendments thereto (File No. 333-606) which became effective on March 13,
1996.
+ Incorporated by reference to exhibits filed in response to Item 8, "Exhibits,"
of the Registrant's Registration Statement on Form S-8, dated July 10, 1997.
++ Confidential treatment granted by order effective March 13, 1996.
46
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1998 ISOCOR
By: /s/ PAUL GIGG
------------------------------------
Paul Gigg,
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul Gigg and Janine M. Bushman, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ANDREW DE MARI Chairman of the Board of March 31, 1998
- ----------------------------------------------------- Directors
(Andrew De Mari)
/s/ PAUL GIGG President, Chief Executive March 31, 1998
- ----------------------------------------------------- Officer and Director
(Paul Gigg) (Principal Executive
Officer)
/s/ JANINE M. BUSHMAN Vice President, Finance and March 31, 1998
- ----------------------------------------------------- Administration, Chief
(Janine M. Bushman) Financial Officer and
Director (Principal
Financial and Accounting
Officer)
Director March
- ----------------------------------------------------- ,1998
(Jean Michel Barbier)
/s/ DENNIS CAGAN Director March 31, 1998
- -----------------------------------------------------
(Dennis Cagan)
/s/ ALEXANDRA GIURGIU Director March 31, 1998
- -----------------------------------------------------
(Alexandra Giurgiu)
/s/ G. BRADFORD JONES Director March 31, 1998
- -----------------------------------------------------
(G. Bradford Jones)
47
48
ISOCOR
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
ACCOUNT DESCRIPTION ---------- ---------- ---------- ----------
Year ended December 31, 1995
Allowance for doubtful accounts, returns, and price
protection....................................... $ (294) $ (557) $ 265 $ (586)
Year ended December 31, 1996
Allowance for doubtful accounts, returns, and price
protection....................................... $ (586) $(2,771) $ 1,710 $(1,647)
Year ended December 31, 1997
Allowance for doubtful accounts, returns, and price
protection....................................... $(1,647) $(2,916) $ 3,054 $(1,509)
S-1
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* Stock Purchase Agreement by and among Registrant, NetCS and
the stockholders of NetCS dated August 29, 1996.............
2.2* Escrow Agreement dated August 29, 1996......................
3.1+ Amended and Restated Articles of Incorporation of
Registrant..................................................
3.2+ Amended and Restated Bylaws of Registrant...................
3.3 Certificate of Amendment to Bylaws of Registrant dated
November 5, 1997............................................
10.1+ 1992 Stock Option Plan and forms of option agreements
thereunder..................................................
10.2+ 1996 Directors' Stock Option Plan and form of option
agreement thereunder........................................
10.3+ 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder........................................
10.4+ Form of Indemnification Agreement...........................
10.5+ Lease dated November 11, 1994 between ISOCOR and Telos
Corporation.................................................
10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas....
10.7+ Rights Agreement dated December 29, 1995 among the
Registrant, its Preferred shareholders and certain of its
Common shareholders, as amended.............................
10.8+++ International Reseller Agreement dated May 11, 1993 between
the Registrant and Syseca S.A. .............................
10.9+ Source Code Access License Agreement dated September 15,
1993 and Amendment to the Source Code Access License
Agreement dated May 1, 1995, between the Registrant and
Syseca S.A. ................................................
10.10+++ Report of Discussions between the Registrant and Syseca S.A.
dated September 27, 1994 (translated) and Affidavit of
Translations by Abbey Translations dated January 25, 1996...
10.11+++ Master Binary License Agreement dated September 30, 1994
between the Registrant and Lir S.A. ........................
10.12+++ Master Binary License Agreement dated December 28, 1994,
Amendment to the Master Binary Agreement dated March 2, 1995
and Amendment to the Master Binary License Agreement dated
December 28, 1995, between the Registrant and Syseca S.A....
10.13+ Product Loan Agreement between the Registrant and Syseca
S.A. dated November 1, 1995.................................
10.14+ Employment Agreement between the Registrant and C. Raomal
Perera dated September 9, 1992..............................
10.15+++ Series D Preferred Stock Purchase Agreement dated December
29, 1995 between the Registrant and Intel Corporation and
related Statement of Work and Product Requirements..........
10.16 Lease dated March 3, 1998 between the Registrant and Spieker
Properties.
10.17 Letter Agreement dated December 3, 1997 between ISOCOR B.V.
and Forfas..................................................
10.18 Agreement between Andrew De Mari and the Registrant dated
November 5, 1997............................................
10.19 Letter Agreement between the Registrant and Paul Gigg dated
December 9, 1997............................................
10.20 Consultancy Agreement between the Registrant and Cagan Co.
Inc., dated September 1, 1997 and related work orders dated
September 1, 1997 and February 11, 1998.....................
21.1+ Subsidiaries of Registrant..................................
50
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Independent Accountants..........................
24.1 Power of Attorney (see page 47).............................
27.1 Financial Data Schedules....................................
- ---------------
* Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K dated August 29,
1996.
+ Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
amendments thereto (File No. 333-606) which became effective on March 13,
1996.
+Incorporated by reference to exhibits filed in response to Item 8, "Exhibits,"
of the Registrant's Registration Statement on Form S-8, dated July 10, 1997.
++ Confidential treatment granted by order effective March 13, 1996.