1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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(R)
(Exact name of Registrant as specified in its charter)
California 95-4310259
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3420 Ocean Park Blvd., Santa Monica, CA 90405
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (310) 581-8100
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 of 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
----- -----
9,296,708 Shares of Common Stock of the Registrant
were outstanding as of September 30, 1996
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ISOCOR
INDEX TO FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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Part I - Financial Information
Item 1. Financial Statements
ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets
Cash and cash equivalents $13,317 $ 5,880
Marketable securities 12,475
Trade accounts receivable
Customer, net 9,634 8,201
Related party 221 344
Other current assets 1,865 1,629
------- -------
Total current assets 37,512 16,054
Investments, net - 638
Property and equipment, net 2,948 2,434
Other assets 306 368
------- -------
Total assets $40,766 $19,494
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 769 $ 1,051
Other accrued expenses 3,677 3,114
Deferred revenues 2,252 1,440
Product development obligation 531 510
Other current liabilities 348 286
------- -------
Total current liabilities 7,577 6,401
Product development obligation 78 315
Other long term liabilities 191 291
------- -------
Total liabilities 7,846 7,007
Commitments
Shareholders' equity
Redeemable convertible preferred stock, series A,
(liquidation preference $4,688) authorized, issued and
outstanding, 1,875,000 shares at December 31, 1995 - 4,846
Redeemable convertible preferred stock, series B,
(liquidation preference $7,388) authorized 2,066,673 shares,
issued and outstanding, 2,066,655 shares at December 31, 1995 - 8,341
Redeemable convertible preferred stock, series C,
(liquidation preference $3,750) authorized 2,060,000 shares,
issued and outstanding, 857,142 shares at December 31, 1995 - 4,450
Redeemable convertible preferred stock, series D,
(liquidation preference $3,000) authorized 300,000 shares,
issued and outstanding, 150,000 shares at December 31, 1995 - 653
Common stock, authorized 10,000,000 shares,
issued and outstanding 9,296,708 and 1,661,967
shares at September 30, 1996 and December 31, 1995 39,034 601
Notes receivable (26) (45)
Accumulated deficit (5,889) (6,163)
Deferred compensation (224) (280)
Foreign currency translation adjustment 25 84
------- -------
Total shareholders' equity 32,920 12,487
------- -------
Total liabilities and shareholders' equity $40,766 $19,494
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
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ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------- -------
Revenues:
Products:
Customer $5,185 $4,133 $15,310 $11,642
Related parties 28 120 459 131
Services:
Customer 1,175 893 3,545 1,852
Related parties 25 17 74 39
------ ------ ------- -------
Total revenues 6,413 5,163 19,388 13,664
Cost of revenues:
Products 517 563 2,066 1,814
Services 601 416 1,757 938
------ ------ ------- -------
Total cost of revenues 1,118 979 3,823 2,752
------ ------ ------- -------
Gross profit 5,295 4,184 15,565 10,912
------ ------ ------- -------
Operating expenses:
Engineering 2,318 2,028 6,689 5,508
Sales and marketing 2,261 1,818 7,167 4,986
Administration 634 487 1,889 1,444
Agency grants (117) (208) (373) (694)
------ ------ ------- -------
Total operating expenses 5,096 4,125 15,372 11,244
------ ------ ------- -------
Operating income (loss) 199 59 193 (332)
Acquisition costs 182 182
(Income) loss from currency fluctuations (15) 62 49 (72)
Interest income (326) (31) (687) (105)
------ ------ ------- -------
Income (loss) before income taxes and
minority interest 358 28 649 (155)
Provision for income taxes 95 (45) 375 131
------ ------ ------- -------
Income (loss) before minority interest 263 73 274 (286)
------ ------ ------- -------
Minority interest (26) -- -- --
------ ------ ------- -------
Net income (loss) $ 289 $ 73 $ 274 $ (286)
====== ====== ======== =======
Net income (loss) per share $ 0.03 $ 0.01 $ 0.03 $ (0.11)
====== ====== ======== =======
Shares used in per share calculation 10,452 7,318 7,947 2,650
====== ====== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Nine months ended September 30,
-------------------------------
1996 1995
-------- -------
Cash flows from operating activities:
Net income (loss) $ 274 $ (286)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization 975 803
Amortization of deferred compensation 56 -
Deferred rent (16) 52
(Increase)/decrease in:
Accounts receivable (1,308) (1,460)
Other current assets (157) (587)
Other assets (15) (60)
Increase/(decrease) in:
Accounts payable (286) (48)
Other accrued expenses 635 (230)
Deferred revenues 806 462
Other current liabilities 94 280
Product development obligation (216) 0
Long term liabilities (78) (26)
-------- -------
Net cash provided (used) by operating activities 764 (1,100)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (1,458) (1,413)
Purchase of marketable securities (12,474) -
Sale of minority interest in non-consolidated subsidiary 547 -
-------- -------
Net cash provided (used) by investing activities (13,385) (1,413)
-------- -------
Cash flows from financing activities:
Proceeds from the sale of stock, net 20,153 13
-------- -------
Net cash provided by financing activities 20,153 13
-------- -------
Effect of exchange rate changes on cash (95) (229)
-------- -------
Net increase (decrease) in cash 7,437 (2,729)
Cash and cash equivalents, beginning of year 5,880 5,281
-------- -------
Cash and cash equivalents, end of period $ 13,317 $ 2,552
======== =======
Supplemental schedule of non-cash financing activities:
Common stock issued to shareholders in exchange
for notes receivable, net - $ 11
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by ISOCOR
(the "Company"), pursuant to the regulations of the U.S. Securities and
Exchange Commission. In the opinion of management, the financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to fairly present the consolidated financial position at September
30, 1996 and the consolidated statements of operations and cash flows for the
three and nine month periods ended September 30, 1996 and September 30, 1995.
These interim statements do not include all of the disclosures required by
generally accepted accounting principles for annual statements.
The statements of operations and cash flows for the 1996 interim periods are
not necessarily indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Registration Statement No.
333-606 on Form S-1, as of December 31, 1995, as filed with the Securities and
Exchange Commission on March 14, 1996. Unless otherwise indicated, all
information herein has been restated to reflect the Company's 1 for 2.5 reverse
stock split, which was effected on January 26, 1996.
Concentration of credit risk
At September 30, 1996 the Company had balances held in U.S. banks of
approximately $11,377,000 which exceeded federally insured limits.
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."
Intangibles
In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed," it is the Company's policy to review and evaluate periodically
whether there has been a permanent impairment in the value of intangibles and
other long-lived assets. Factors considered in the valuation include current
operating results, trends and anticipated undiscounted cash flows. The
intangible asset related to the 1995 acquisition of a sales and distribution
company located in Europe 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 financial statements as of September 30, 1996,
net of accumulated amortization of $61,000.
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 after offering costs, underwriting discounts and commissions of
approximately $18,379,000. The Company's shares are traded on the Nasdaq
National Market System under the symbol "ICOR."
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
3. ACQUISITION
Pursuant to the 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 its Common Stock. NetCS is a distributor, integrator and developer of
communication software products for the UNIX arena. NetCS has particular
expertise in the area of ISDN and Internet based communications subsystems
including Internet extensions to wireless messaging systems. As a result of the
Acquisition, NetCS has become a wholly owned subsidiary of ISOCOR B.V. and, in
turn, the Company.
The Acquisition has been accounted for under "pooling of interests" accounting
treatment, and therefore, as required by Accounting Principles Board Statement
No. 16, all financial statements herein have been restated as though the
Acquisition had been effected for all periods presented. Therefore the
Consolidated Statements of Operations in this filing include the operations of
NetCS for the three and nine months ended September 30, 1995 and 1996 and the
Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996
include the financial position of NetCS at those respective dates. A
reconciliation of the Company's previously reported revenue and earnings to
those earnings shown in this filing is provided below.
(dollars in thousands)
Revenues Earnings (Loss)
-------- ---------------
1995
----
ISOCOR only, six months ended June 30, 1995 $ 6,619 $(298)
NetCS only, six months ended June 30, 1995 1,882 (61)
------- -----
Combined company six months ended June 30, 1995 $ 8,501 $(359)
Combined company three months ended September 30, 1995 5,163 73
------- -----
Combined company nine months ended September 30, 1995 $13,664 $(286)
======= =====
1996
----
ISOCOR only, six months ended June 30, 1996 $10,354 $ (49)
NetCS only, six months ended June 30, 1996 2,621 34
------- -----
Combined company six months ended June 30, 1996 $12,975 $ (15)
Combined company three months ended September 30, 1996 6,413 289
------- -----
Combined company nine months ended September 30, 1996 $19,388 $ 274
======= =====
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
4. MARKETABLE SECURITIES
Marketable securities at book value, which approximates fair value, as of
September 30, 1996 were (dollars in thousands):
September 30, 1996
------------------
Commercial paper . . . . . . . . . . . . . . . . $ 2,102
Corporate notes . . . . . . . . . . . . . . . . . 6,021
Foreign Government obligations . . . . . . . . . 1,356
U.S. Government obligations . . . . . . . . . . . 2,996
-------
$12,475
=======
5. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of September 30, 1996
and December 31, 1995 were (dollars in thousands):
September 30, 1996 December 31, 1995
------------------ -----------------
Accounts receivable . . . . . . . . . . . . . . . $10,803 $8,787
Less: Allowance for doubtful accounts, returns
and price protection . . . . . . . . . . . . . . (1,169) (586)
------- ------
$ 9,634 $8,201
======= ======
6. OTHER ACCRUED EXPENSES
Other accrued expenses include (dollars in thousands):
September 30, 1996 December 31, 1995
------------------ -----------------
Salaries and related expenses . . . . . . . . . . $1,037 $ 819
Royalties . . . . . . . . . . . . . . . . . . . . 571 336
Commissions . . . . . . . . . . . . . . . . . . . 293 455
Corporate and Sales Taxes . . . . . . . . . . . . 464 714
Other . . . . . . . . . . . . . . . . . . . . . . 1,312 790
------ ------
$3,677 $3,114
====== ======
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
7. INCOME TAXES
The source of income (loss) before income taxes for the three and nine months
ended September 30, 1996 and 1995 is as follows (dollars in thousands):
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
United States $(420) $(568) $(1,389) $(1,189)
Foreign 778 596 2,038 1,034
----- ----- ------- -------
Income (loss) before
income taxes and
minority interest $ 358 $ 28 $ 649 $ (155)
===== ===== ======= =======
On an interim basis, the Company provides for income taxes using its estimated
effective tax rate for the year for foreign and domestic source income. As of
September 30, 1996, no net operating loss carryforwards remain in foreign
jurisdictions. The taxes provided relate primarily to foreign source income.
8. PER SHARE INFORMATION
Net income (loss) per common share is computed using the weighted average
number of shares of Common Stock and common equivalent shares outstanding.
Common equivalent shares related to stock options, warrants and Preferred Stock
are excluded from the computation when their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares, issued at prices below the
public offering price during the 12 months immediately preceding the initial
filing date have been included in the calculations as if they were outstanding
for the 1995 periods presented, using the treasury stock method.
All of the 475,000 common shares of the company issued to effect the business
combination with NetCS have been treated as outstanding for all periods
presented for the computation of the weighted average number of shares
outstanding as required for "pooling of interests" accounting treatment.
9. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended September 30, 1996 and 1995 was
approximately $26,000 and $129,000 respectively relating to product sales and
software maintenance agreements with an affiliate of a shareholder. Revenues
from this same affiliate for the nine months ended September 30, 1996 and 1995
were approximately $292,000 and $155,000 respectively. Included in Accounts
Receivable as of September 30, 1996 was $149,000 relating to this affiliate.
Included in revenues for the three months ended September 30, 1996 and 1995 was
approximately $27,000 and $8,000 respectively, relating to software license and
maintenance agreements with a shareholder. Revenues from this shareholder for
the nine months ended September 30, 1996 and 1995 were approximately $241,000
and $15,000 respectively. Included in Accounts Receivable as of September 30,
1996 was $72,000 relating to this affiliate.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains forward-looking statements. The
Company wishes to alert readers that the factors set forth in the section
entitled "Risk Factors" in the Company's Prospectus dated March 14, 1996, which
was filed with the U.S. Securities and Exchange Commission in connection with
its Registration Statement on Form S-1 (No. 333-606) on March 13, 1996 could in
the future affect, and in the past have affected, the Company's results. The
Company's results for future quarters could differ materially from those
expressed in any forward looking statements made by or on behalf of the
Company.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Total revenues were $6,413,000 and $5,163,000 for the three
months ended September 30, 1996 and 1995, respectively, representing an
increase in 1996 of 24% over the same period one year ago. Revenues from
domestic sources accounted for approximately 27% and 22% of total revenues in
the three months ended September 30, 1996 and 1995, respectively. This
increase in the percentage of revenues from domestic sources is due to an
increased Company focus on that marketplace, and a single large sale to a
customer in the telecommunications industry for in excess of $650,000 during
the three months ended September 30, 1996. The Company's European revenues
accounted for 94% and 89% of the Company's international revenues in the three
months ended September 30, 1996, and 1995 respectively.
Product revenues were $5,213,000 and $4,253,000 for the three months
ended September 30, 1996 and 1995, respectively. The 23% increase from 1995 to
1996 was mainly due to increased volumes of the Company's products sold.
Service revenues were $1,200,000 and $910,000 for the three months
ended September 30, 1996 and 1995, respectively. The 32% increase from 1995 to
1996 resulted primarily from increased volumes of training and installation,
and increased software support and update service fees both increases relating
to the Company's increased product sales.
Cost of Revenues. Cost of product revenues consists primarily of
hardware purchased from third party vendors, costs of media duplication,
manuals and packaging materials, and third party royalties relating to licensed
technology. The decrease in cost of product revenues as a percent of product
revenues between the three months ended September 30, 1996 and the same period
of 1995, was primarily due to the continuing shift in sales toward products
containing little or no technology owned by third parties, resulting in lower
royalties paid.
Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, training and installation, and custom
engineering services. The increase in cost of service revenues as a percentage
of service revenues between the three months ended September 30, 1996 and the
same period of 1995, resulted primarily from custom localization work performed
by subcontractors in the 1996 quarter.
Gross Profit. Gross profit was $5,295,000 and $4,184,000 for the
three months ended September 30, 1996 and 1995, respectively, representing
82.6% and 81.0% of revenues for those same periods, respectively.
Gross profit from product sales was $4,696,000 and $3,690,000 for the
three months ended September 30, 1996 and 1995, respectively, representing
90.1% and 86.8% of product sales for those same periods, respectively.
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Gross profit from services was $599,000 and $494,000 the three months
ended September 30, 1996 and 1995, representing 49.9% and 54.3% of services
revenues for those same periods, respectively.
Engineering. Engineering expenses were $2,318,000 and $2,028,000 for
the three months ended September 30, 1996 and 1995, respectively, representing
36.1% and 39.3% of revenues for those same periods, respectively. The absolute
increase in engineering expenses resulted principally from labor related
expenses arising from increased numbers of engineering personnel, which grew
from 108 at September 30, 1995 to 148 at September 30, 1996.
Sales and Marketing. Sales and marketing expenses were $2,261,000 and
$1,818,000 for the three months ended September 30, 1996 and 1995,
respectively, representing 35.3% and 35.2% of revenues for those same periods,
respectively. The absolute increase in sales and marketing expenses resulted
principally from labor related expenses arising from increased levels of
personnel.
Administration. Administration expenses were $634,000 and $487,000
for the three months ended September 30, 1996 and 1995, respectively,
representing 9.9% and 9.4% of revenues for those same periods, respectively.
The absolute increase resulted from the hiring of additional personnel in
connection with continued growth in the Company's business, and the costs
associated with being a public company.
Agency Grants. Agency grants have been received from two sources.
Under an incentive program designed to induce organizations to locate and
conduct business in Ireland, the Industrial Development Authority of Ireland
makes grants that are based predominately upon the number of new jobs created
by the Company there. The amount of grants in any given period will therefore
vary based upon the number of jobs created and the timing of receipt of grant
aid payments and will continue to fluctuate on a quarterly basis. The Economic
and Technological Finance Authority - Berlin 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. As
of August 31, 1996, the company is no longer eligible to receive these grants
in Germany.
Acquisition Costs. Acquisition costs were $182,000 for the three
months ended September 30, 1996 representing the direct costs, primarily legal
and accounting, of acquiring NetCS Informationstechnik GmbH, which were
required to be to be expensed as incurred under the "pooling of interests"
accounting methodology.
(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was ($15,000) and $62,000 for the three months ending September
30, 1996 and 1995, respectively. The fluctuation during these periods resulted
from changes in foreign currency exchange rates.
Interest income. Interest income was $326,000 for the three months
ended September 30, 1996 as compared with $31,000 in the same period in 1995.
The increase resulted primarily from interest earned on the investment of cash
received in the company's initial public offering which was completed in March
of 1996.
Income Tax Provision (Benefit). The income tax provision was $95,000
on pre-tax income of $358,000 for the three months ended September 30, 1996,
which resulted from taxes on the Company's profitable foreign operations. For
the three months ended September 30, 1995, the income tax benefit of ($45,000)
related primarily to losses sustained in Germany.
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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. Total revenues were $19,388,000 and $13,664,000 for the
nine months ended September 30, 1996 and 1995, respectively, representing an
increase in 1996 of 42% over the same period one year ago. Revenues from
international sources accounted for approximately 77% and 83% of total revenues
in the nine months ended September 30, 1996 and 1995, respectively. This
decrease in the percentage of revenues from international sources is primarily
due both to an increased Company focus on the domestic marketplace in the 1996
period including a single large sale in excess of $650,000 to a customer in the
telecommunications industry, offset by the impact of a single sale in Asia in
excess of $1.3 million during the nine months ended September 30, 1995. The
Company's European revenues accounted for 90% and 76% of the Company's
international revenues in the nine months ended September 30, 1996, and 1995
respectively. This increase was primarily due to the previously mentioned
single sale in Asia during 1995.
Product revenues were $15,769,000 and $11,773,000 for the nine months
ended September 30, 1996 and 1995, respectively. The 34% increase from 1995 to
1996 was mainly due to increased volumes of the Company's products sold.
Service revenues were $3,619,000 and $1,891,000 for the nine months
ended September 30, 1996 and 1995, respectively. The 91% increase from 1995 to
1996 resulted primarily from increased software support and update service fees
relating to the Company's increased product sales, and increased amounts of
training and installation.
Cost of Revenues. Cost of product revenues consists primarily of
hardware purchased from third party vendors, costs of media duplication,
manuals and packaging materials, and third party royalties relating to licensed
technology. The decrease in cost of product revenues as a percent of product
revenues between the nine months ended September 30, 1996 and the same period
of 1995, was primarily due to the continuing shift in sales toward products
containing little or no technology owned by third parties, resulting in lower
royalties paid to third parties.
Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, training and installation, and custom
engineering services and was approximately flat as a percent of service
revenues, as a percent of service revenues between the nine months ended
September 30, 1996 and the same period of 1995.
Gross Profit. Gross profit was $15,565,000 and $10,912,000 for the
nine months ended September 30, 1996 and 1995, respectively, representing 80.3%
and 79.9% of revenues for those same periods, respectively.
Gross profit from product sales was $13,703,000 and $9,959,000 for the
nine months ended September 30, 1996 and 1995, respectively, representing 86.9%
and 84.6% of product sales for those same periods, respectively.
Gross profit from services was $1,862,000 and $953,000 the nine months
ended September 30, 1996 and 1995 respectively, representing 51.5% and 50.4% of
services revenues for those same periods.
Engineering. Engineering expenses were $6,689,000 and $5,508,000 for
the nine months ended September 30, 1996 and 1995, respectively, representing
34.5% and 40.3% of revenues for those same periods, respectively. The absolute
increase in engineering expenses resulted principally from increased levels of
engineering personnel from an average of 92 for the nine months ended September
30, 1995 to an average of 132 for the nine months ended September 30, 1996.
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Sales and Marketing. Sales and marketing expenses were $7,167,000 and
$4,986,000 for the nine months ended September 30, 1996 and 1995, respectively,
representing approximately 37% of revenues in those same periods. The absolute
increase resulted primarily from increased labor expenses resulting from growth
in the Company's sales, support and marketing organizations where headcount
increased from an average of 45 for the nine months ended September 30, 1995 to
an average of 77 for the nine months ended September 30, 1996.
Administration. Administration expenses were $1,889,000 and
$1,444,000 for the nine months ended September 30, 1996 and 1995, respectively,
representing 9.7% and 10.6% of revenues for each of those periods,
respectively. The absolute dollar increase resulted from the hiring of
additional personnel in connection with continued growth in the Company's
business, and the costs associated with being a public company.
Agency Grants. The Industrial Development Authority of Ireland makes
grants under an incentive program designed to induce organizations to locate
and conduct business in Ireland, based predominately upon the number of new
jobs created by the Company there. The amount of grants in any given period
will therefore vary based upon the number of jobs created and the timing of
receipt of grant aid payments and will continue to fluctuate on a quarterly
basis. The Economic and Technological Finance Authority - Berlin 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. As of August 31, 1996, the company is no longer eligible to
receive these grants in Germany.
Acquisition Costs. Acquisition costs were $182,000 for the nine
months ended September 30, 1996, representing the direct costs, primarily legal
and accounting, of acquiring NetCS Informationstechnik GmbH.
(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $49,000 and ($72,000) for the nine months ended September 30,
1996 and 1995, respectively. The fluctuation during these periods primarily
resulted from changes in foreign currency exchange rates.
Interest income. Interest income was $687,000 for the nine months
ended September 30, 1996 as compared with $105,000 in the same period in 1995.
The increase resulted primarily from interest earned on the investment of cash
received in the company's initial public offering which was completed in March
of 1996.
Income Tax Provision. The income tax provision was $375,000 on a
pre-tax profit of $649,000 for the nine months ended September 30, 1996, which
resulted from taxes on the Company's profitable foreign operations. For the
nine months ended September 30, 1995, the income tax provision of $131,000
consisted primarily of taxes of $286,000 withheld by a foreign government in
connection with a single large sale in Asia made from the United States,
partially offset by tax benefits related to losses sustained in Germany.
LIQUIDITY AND CAPITAL RESOURCES
During March, 1996 the Company completed a public offering and sale of
2,300,000 shares (including the over-allotment option) of its Common Stock at
$9 per share, resulting in net proceeds to the Company after offering costs of
approximately $18,379,000. The Company received an additional $1,500,000 from
Intel Corporation and an additional $288,000 from Thomson-CSF Ventures as a
result of the sale and issuance of 166,667 and 39,942 shares of common stock,
respectively.
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As of September 30, 1996, total accounts receivable, net was
$9,855,000 versus $8,545,000 at December 31, 1995. The Company typically
generates a large percentage of its quarterly revenue during the last few weeks
of the quarter, which when coupled with increased sales levels and payment
terms in excess of 90 days on some of the larger sales, has given rise to an
increase in the accounts receivable balance at September 30, 1996. Certain of
the Company's larger sales have longer payment terms, thus slowing the cash
flow cycle, and the Company expects that future large sales will follow the
same pattern. The Company does not believe these longer payment terms are
likely to have a material adverse effect on the collectibility of the related
receivables.
As of September 30, 1996, the Company had a balance of approximately
$13,317,000 in cash and cash equivalents, and a balance of $12,475,000 in
marketable securities. The Company believes that its existing capital
resources will be adequate to finance the Company's operations and capital
expenditures through at least the end of 1997.
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PART II Other Information
Item 4. - Submission of Matters to a Vote of Security Holders
The Company submitted a definitive proxy statement to its shareholders
of record as of September 17, 1996 announcing a special meeting to be held on
October 22, 1996 for the purpose of approving an increase in the number shares
of common stock available for grant under the Company's 1992 Stock Option Plan
by 500,000, to 2,300,000. Such meeting was held on October 22, 1996 and the
matter was approved by the shareholders as follows:
For: 5,098,845
Against 320,452
Abstain 6,600
Outstanding as of record date 9,277,077
Item 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly
Report on Form 10-Q:
4.1 - The Company's 1992 Stock Option Plan, as amended.
11.1 - Statement of Computation Shares Used in Per Share
Computation.
27.1 - Financial Data Schedule.
(b) During the third quarter of 1996, the Company filed the
following report on Form 8-K
Current report on Form 8-K dated August 29, 1996 (filed
September 12, 1996) reporting the Company's acquisition of
NetCS Informationstechnik GmbH.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10Q to be signed on its
behalf by Janine M. Bushman, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
ISOCOR
Date: November 12, 1996 By: /s/ JANINE M. BUSHMAN
----------------------------------------
Janine M. Bushman, Vice President,
Finance and Administration, and Chief
Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Exhibits Page
- -------------------------------------------------------------------------------------------------
4.1 The Company's 1992 Stock Option Plan, as amended . . . . . . . . . . . . . . .
11.1 Statement of Computation Shares Used in Per Share Computation . . . . . . . .
27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . .