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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-27900
ISOCOR(R)
(Exact name of Registrant as specified in its charter)
California 95-4310259
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 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
----- -----
9,386,179 Shares of Common Stock of the Registrant were
outstanding as of June 30, 1997
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ISOCOR
INDEX TO FORM 10-Q
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1997
and December 31, 1996....................................................................... 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1996................................................................ 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1996......................................................... 5
Notes to Consolidated Financial Statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................................... 15
Item 5. Other Information...................................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
Signature........................................................................................... 18
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ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
1997 1996
-------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,393 $ 13,374
Marketable securities 10,802 11,739
Trade accounts receivable
Customer, net 8,848 11,160
Related party 60 74
Other current assets 2,141 1,618
-------- --------
Total current assets 34,244 37,965
Property and equipment, net 2,916 2,990
Other assets 299 343
-------- --------
Total assets $ 37,459 $ 41,298
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,072 $ 819
Other accrued expenses 4,153 3,677
Deferred revenues 3,925 2,730
Product development obligation 151 380
Other current liabilities 275 301
-------- --------
Total current liabilities 9,576 7,907
Other long-term liabilities 156 187
-------- --------
Total liabilities 9,732 8,094
Commitments and contingencies
Shareholders' equity:
Common stock, authorized 50,000,000 shares,
issued and outstanding 9,386,179 and 9,315,241 shares at
June 30, 1997 and December 31, 1996, respectively 39,096 39,047
Notes receivable from shareholders (26) (26)
Accumulated deficit (11,106) (5,680)
Deferred compensation (168) (205)
Cumulative foreign currency translation adjustment (69) 68
-------- --------
Total shareholders' equity 27,727 33,204
-------- --------
Total liabilities and shareholders' equity $ 37,459 $ 41,298
======== ========
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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Products:
Customer $ 3,796 $ 5,106 6,387 $ 10,125
Related parties -- 45 4 430
Services:
Customer 1,547 1,293 2,786 2,371
Related parties 12 23 12 50
-------- -------- -------- --------
Total revenues 5,355 6,467 9,189 12,976
Cost of revenues:
Products 505 832 935 1,549
Services 715 598 1,273 1,156
-------- -------- -------- --------
Total cost of revenues 1,220 1,430 2,208 2,705
-------- -------- -------- --------
Gross profit 4,135 5,037 6,981 10,271
-------- -------- -------- --------
Operating expenses:
Engineering 2,216 2,253 4,227 4,371
Sales and marketing 3,801 2,584 7,389 4,906
Administration 749 649 1,567 1,255
Agency grants (13) (110) (69) (255)
-------- -------- -------- --------
Total operating expenses 6,753 5,376 13,114 10,277
-------- -------- -------- --------
Income (loss) from operations (2,618) (339) (6,133) (6)
Income (loss) from currency fluctuations 72 (51) 109 (64)
Interest income 306 296 616 361
-------- -------- -------- --------
Income (loss) before income taxes (2,240) (94) (5,408) 291
Provision for income taxes 11 93 19 280
-------- -------- -------- --------
Income (loss) before minority interest (2,251) (187) (5,427) 11
Minority interest -- 26 -- 26
-------- -------- -------- --------
Net Income (loss) ($ 2,251) ($ 213) ($ 5,427) ($ 15)
======== ======== ======== ========
Net income (loss) per share $ (0.24) $ (0.02) $ (0.58) $ 0.00
======== ======== ======== ========
Shares used in per share calculation 9,378 9,222 9,361 6,180
======== ======== ======== ========
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)
Six Months Ended June 30
-------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income (loss) $ (5,427) $ (15)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for doubtful accounts, returns and price protection 504 531
Depreciation and amortization 687 620
Amortization of deferred compensation 18 37
Deferred rent (26) (11)
Minority interest 0 26
(Increase) / decrease in:
Accounts receivable 1,070 (867)
Other current assets (648) (652)
Other assets (10) (20)
Increase / (decrease) in:
Accounts payable 325 (49)
Other accrued expenses 711 633
Deferred revenues 1,383 484
Other current liabilities 6 68
Product development obligation (229) (106)
Long-term liabilities 4 (74)
-------- --------
Net cash provided (used) by operating activities 1,544 605
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (756) (992)
Investments, at cost 0 547
Purchase of marketable securities 937 (12,518)
-------- --------
Net cash used by investing activities 181 (12,963)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of stock, net 14 20,121
-------- --------
Net cash provided (used) by financing activities 14 20,121
-------- --------
Effect of exchange rate changes on cash 456 19
-------- --------
Net increase (decrease) in cash (981) 7,782
Cash and cash equivalents, beginning of period 13,374 5,880
-------- --------
Cash and cash equivalents, end of period $ 12,393 $ 13,662
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
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 June 30, 1997, the
consolidated statements of operations for the three and six month periods ended
June 30, 1997 and 1996, and the consolidated statements of cash flows for the
six month periods ended June 30, 1997 and 1996. 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 1997 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 Annual Report on Form 10-K, as of
December 31, 1996, as filed with the Securities and Exchange Commission.
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. Cash equivalents are managed by major investment firms in
accordance with the Company's investment policy. At June 30, 1997, the Company
held balances in U.S. banks of approximately $955,000 which exceeded federally
insured limits.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." This
statement requires dual presentation of newly defined basic and diluted
earnings per share ("EPS") on the face of the income statement for all entities
with complex capital structures. The accounting standard is effective for both
interim and annual periods ending after December 15, 1997 and requires
restatement of all prior period EPS data presented. Earlier application is not
permitted. The Company is currently evaluating the requirements of SFAS No.
128.
On June 30, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 Company is currently evaluating the requirements of SFAS No. 130.
On June 30, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards
for the way that 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 131 is effective for fiscal years
beginning after December 15, 1997 and requires restatement of earlier periods
presented. Management is currently evaluating the requirements of SFAS No. 131.
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
2. 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 report include the operations of
NetCS for the three and six months ended June 30, 1996 and 1997 and the
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 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 report is provided below.
(dollars in thousands)
Revenues Earnings (Loss)
-------- ---------------
1996
ISOCOR only, three months ended June 30, 1996 $ 5,025 $ (249)
NetCS only, three months ended June 30, 1996 1,442 36
------- -------
Combined company three months ended June 30, 1996 $ 6,467 $ (213)
======= =======
1996
ISOCOR only, six months ended June 30, 1996 $10,354 $ (49)
NetCS only, six months ended June 30, 1996 2,622 34
------- -------
Combined company six months ended June 30, 1996 $12,976 $ (15)
======= =======
3. MARKETABLE SECURITIES
At June 30, 1997, the Company held the following positions (dollars in
thousands):
June 30, 1997
-------------
Corporate notes $10,802
U.S. Government obligations -0-
-------
$10,802
=======
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
4. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of June 30, 1997 and
December 31, 1996 were (dollars in thousands):
June 30, December 31,
1997 1996
-------- ------------
Accounts receivable $ 10,883 $ 12,807
Less: Allowance for doubtful accounts, returns and
price protection (2,035) (1,647)
-------- --------
$ 8,848 $ 11,160
======== ========
5. OTHER ACCRUED EXPENSES
Other accrued expenses include (dollars in thousands):
June 30, December 31,
1997 1996
-------- ------------
Salaries and related expenses $1,346 $1,196
Royalties 447 556
Commissions 568 440
Other 1,792 1,485
------ ------
$4,153 $3,677
====== ======
6. INCOME TAXES
The source of income (loss) before income taxes for the three and six months
ended June 30, 1997 and 1996 is as follows (dollars in thousands):
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------- ------- ------- -------
United States $ (498) $ (477) $(1,843) $ (968)
Foreign $(1,753) $ 264 $(3,585) $ 953
Income (loss) before
income taxes and
minority interest $(2,251) $ (213) $(5,428) $ (15)
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
June 30, 1997, no net operating loss carryforwards remain in foreign
jurisdictions. The taxes provided relate primarily to foreign source income.
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
7. 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 are excluded from the computation
when their effect is antidilutive.
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.
8. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended June 30, 1997 and 1996 was
approximately $12,000 and $6,000, respectively, relating to product sales to and
software maintenance agreements with an affiliate of a shareholder. Revenues
from this same affiliate for the six months ended June 30, 1997 and 1996 were
approximately $12,000 and $266,000, respectively. Included in accounts
receivable as of June 30, 1997 was $60,000 relating to this affiliate. Included
in operating expenses for the three months ended June 30, 1997 and 1996 was
approximately $45,000 and $13,000, respectively, relating to consulting services
provided by this affiliate. Operating expenses relating to this same affiliate
for the six months ended June 30, 1997 and 1996 were approximately $113,000 and
$74,000, respectively. Included in accounts payable as of June 30, 1997 was
$114,000 related to these consulting services.
Included in revenues for the three months ended June 30, 1997 and 1996 was zero
and approximately $62,000, respectively, relating to software license and
maintenance agreements with a shareholder. Revenues from this same affiliate for
the six months ended June 30, 1997 and 1996 were approximately $4,000 and
$214,000, respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and 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 in accordance with the pooling of interests method of
accounting.
Except for the historical information contained in this Report on Form 10-Q, the
matters discussed herein are 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, 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 discussed 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues were $5,355,000 and $6,467,000 for the three
months ended June 30, 1997 and 1996, respectively, representing a decrease in
1997 of 17% over the same period one year ago. Revenues from domestic sources
accounted for approximately 38% and 21% of total revenues in the three months
ended June 30, 1997 and 1996, respectively, while the Company's international
revenues accounted for 62% and 79%, respectively, of the Company's total
revenues in the same periods.
Product revenues were $3,796,000 and $5,151,000 for the three months
ended June 30, 1997 and 1996, respectively. The 26% decrease from 1996 to 1997
was mainly due to decreased volumes of, and declining prices for, the Company's
X.400 products, partially offset by increased volumes of the Company's newer
Internet/Intranet products. The decreased volumes of X.400 products sold relate
primarily to a continuing shift in market demand away from the Company's X.400
product lines and the Company expects this market shift to continue.
Service revenues were $1,559,000 and $1,316,000 for the three months
ended June 30, 1997 and 1996, respectively. The 18% increase from 1996 to 1997
resulted primarily from increased software support and update service fees.
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 from the three months ended
June 30, 1996 to the three months ended June 30, 1997 resulted principally from
a decreased level of costs relating to hardware purchased from third party
vendors as a result of decreased sales of these components, a trend which the
Company expects to continue.
Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, training and installation, and custom
engineering services.
Gross Profit. Gross profit was $4,135,000 and $5,037,000 for the three
months ended June 30, 1997 and 1996, respectively, representing 77% and 78% of
revenues for those same periods, respectively.
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Gross profit from product sales was $3,291,000 and $4,319,000 for the
three months ended June 30, 1997 and 1996, respectively, representing 86.7% and
83.8% of product sales for those same periods, respectively. This percentage
increase is primarily due to the impact of a decreased level of sales which
include hardware components, which carry a higher cost of sale.
Gross profit from services was $844,000 and $718,000 for the three
months ended June 30, 1997 and 1996, respectively, representing 54.1% and 54.6%
of services revenues for those same periods, respectively.
Engineering. Engineering expenses were $2,216,000 and $2,253,000 for
the three months ended June 30, 1997 and 1996, respectively, representing 41.4%
and 34.8% of revenues for those same periods, respectively. The absolute
decrease in engineering expenses resulted principally from decreased expenses in
labor and consulting, while the increase in the percentage is primarily driven
by the lower revenue in the three months ended June 30, 1997.
Sales and Marketing. Sales and marketing expenses were $3,801,000 and
$2,584,000 for the three months ended June 30, 1997 and 1996, respectively,
representing 71.0% and 40.0% of revenues for those same periods, respectively.
The increase in sales and marketing expenses resulted principally from
labor-related costs arising from increased levels of personnel and to a lesser
extent from marketing program expenses. The increased number of personnel and
level of program expenses reflect an intensified focus by the Company on sales
and marketing efforts which the Company expects to continue. The increase
in sales and marketing expenses as a percentage of revenues is also affected by
the lower revenue in the three months ended June 30, 1997.
Administration. Administration expenses were $749,000 and $649,000 for
the three months ended June 30, 1997 and 1996, respectively, representing 14.0%
and 10.0% of revenues for those same periods, respectively. The absolute
increase primarily resulted from increased labor expenses relating to the
additional personnel devoted to these activities, while the increase in the
percentage is principally driven by the lower revenue in the three months
ended June 30, 1997.
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.
(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $(72,000) and $51,000 for the three months ended June 30, 1997
and 1996, respectively. The fluctuation during these periods resulted from
changes in foreign currency exchange rates.
Interest income. Interest income was $306,000 for the three months June
30, 1997 as compared with $296,000 in the same period in 1996.
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Provision for Income Taxes. The income tax provision of $11,000 on a
pre-tax loss of $2,240,000 for the three months ended June 30, 1997, resulted
from taxes on the Company's international operations. For the three months ended
June 30, 1996, the income tax provision of $93,000 on a pre-tax loss of $94,000
related primarily to the Company's international operations.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues were $9,189,000 and $12,976,000 for the six
months ended June 30, 1997 and 1996, respectively, representing a decrease in
1997 of 29% over the same period one year ago. Revenues from domestic sources
accounted for approximately 28% and 21% of total revenues in the six months
ended June 30, 1997 and 1996, respectively, while the Company's international
revenues accounted for 72% and 79%, respectively, of the Company's total
revenues in the same periods.
Product revenues were $6,391,000 and $10,555,000 for the six months
ended June 30, 1997 and 1996, respectively. The 39% decrease from 1996 to 1997
was mainly due to decreased volumes of, and declining prices for, the Company's
X.400 products, partially offset by increased volumes of the Company's newer
Internet/Intranet products. The decreased volumes of X.400 products sold relate
primarily to a continuing shift in market demand away from the Company's X.400
product lines which the Company expects to continue.
Service revenues were $2,798,000 and $2,421,000 for the six months
ended June 30, 1997 and 1996, respectively. The 16% increase from 1996 to 1997
resulted primarily from increased software support and update service fees.
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 from the six months ended
June 30, 1996 to the six months ended June 30, 1997 resulted principally from a
decreased level of costs relating to hardware purchased from third party vendors
as a result of decreased sales of these components, a trend which the Company
expects to continue.
Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, training and installation, and custom
engineering services.
Gross Profit. Gross profit was $6,981,000 and $10,271,000 for the six
months ended June 30, 1997 and 1996, respectively, representing 76% and 79% of
revenues for those same periods.
Gross profit from product sales was $5,456,000 and $9,006,000 for the
six months ended June 30, 1997 and 1996, respectively, representing 85.3% of
product sales for each of those same periods, respectively.
Gross profit from services was $1,513,000 and $1,265,000 for the six
months ended June 30, 1997 and 1996, respectively, representing 54.1% and 52.2%
of services revenues for those same periods, respectively. This percentage
increase is primarily due to reductions in the costs of custom engineering and
software support and upgrade services.
Engineering. Engineering expenses were $4,227,000 and $4,371,000 for
the six months ended June 30, 1997 and 1996, respectively, representing 46.0%
and 33.7% of revenues for those same periods, respectively. The absolute
decrease in engineering expenses resulted principally from decreased expenses in
labor and consulting, while the increase in the percentage is driven mainly by
the lower revenue in the six months ended June 30, 1997.
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Sales and Marketing. Sales and marketing expenses were $7,389,000 and
$4,906,000 for the six months ended June 30, 1997 and 1996, respectively,
representing 80.4% and 37.8% of revenues for those same periods, respectively.
The increase in sales and marketing expenses resulted principally from
labor-related costs arising from increased levels of personnel and to a lesser
extent from marketing program expenses. The increased number of personnel and
level of program expenses reflect an intensified focus by the Company on sales
and marketing efforts which the Company expects to continue. The increase in
sales and marketing expenses as a percentage of revenues is also affected by the
lower revenue in the six months ended June 30, 1997.
Administration. Administration expenses were $1,567,000 and $1,255,000
for the six months ended June 30, 1997 and 1996, respectively, representing
17.1% and 9.7% of revenues for those same periods, respectively. The absolute
increase primarily resulted from increased labor expenses relating to the
additional personnel devoted to these activities, while the increase in the
percentage is driven principally by the lower revenue in the six months ended
June 30, 1997.
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.
(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $(109,000) and $64,000 for the six months ended June 30, 1997
and 1996, respectively. The fluctuation during these periods resulted from
changes in foreign currency exchange rates.
Interest income. Interest income was $616,000 for the six months ended
June 30, 1997 as compared with $361,000 in the same period in 1996. The increase
resulted primarily from interest earned on the investment of cash received from
the Company's initial public offering which was completed in mid-March 1996.
Provision for Income Taxes. The income tax provision was $19,000 on a
pre-tax loss of $5,408,000 for the six months ended June 30, 1997, which
resulted from taxes on the Company's international operations. For the six
months ended June 30, 1996, the income tax provision of $280,000 on pre-tax
income of $291,000 related primarily to the Company's profitable international
operations.
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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. Concurrently with such offering, 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.
The Company generated cash from operating activities of $1,544,000 and $605,000
for the six months ended June 30, 1997 and 1996, respectively. The primary
factors contributing to this increase in cash flow in 1997 are increased cash
flow resulting from a net decrease in accounts receivable, offset by a decrease
in cash flow due to the higher operating loss for the six months ended June 30,
1997 of $2.3 million versus an operating loss of $15,000 for the six months
ended June 30, 1996. As of June 30, 1997, total accounts receivable, net was
$8,908,000 versus $11,234,000 at December 31, 1996. This lower accounts
receivable balance at June 30, 1997 is partially attributable to lower revenue
levels in the six months ending at that same date.
The Company typically generates a large percentage of its quarterly revenue
during the last few weeks of the quarter, and has payment terms in excess of 90
days on some of its larger sales. 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 June 30, 1997, the Company had a balance of $12,393,000 in cash and cash
equivalents, and a balance of $10,802,000 in marketable securities. The Company
believes that its existing capital resources will be adequate to finance the
Company's operations and capital expenditures through the end of 1998.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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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 April 1, 1997 for purposes of its Annual Meeting of
Shareholders, which was subsequently held on May 15, 1997. The matters voted on
and the results of such voting were as follows:
A. Election of Jean-Michel Barbier, Janine M. Bushman, Andrew De Mari,
Alexandra Giurgiu and G. Bradford Jones as directors of the Company each to
serve for a one-year term:
NOMINEE FOR AGAINST WITHHELD
- ------- --------- ------- --------
Jean-Michel Barbier 7,021,613 67,578 0
Janine M. Bushman 7,021,834 67,357 0
Andrew De Mari 7,021,834 67,357 0
Alexandra Giurgiu 7,021,834 67,357 0
G. Bradford Jones 7,021,834 67,357 0
B. Authorization of amendments to the Company's 1992 Stock Option Plan
to increase the number of shares reserved for issuance thereunder by 300,000
shares to an aggregate of 2,600,000 shares:
FOR AGAINST WITHHELD
--------- ------- --------
6,699,828 114,742 274,621
C. Ratification of the appointment of Coopers & Lybrand L.L.P. as the
independent auditors for the Company for the fiscal year ending December 31,
1997:
FOR AGAINST WITHHELD
--------- ------- --------
7,068,055 10,770 10,366
9,362,472 shares of the Company's Common Stock were outstanding as of
the record date.
Item 5. - Other Information
As of July 31, 1997, the executive officers of ISOCOR consisted of the following
individuals:
NAME POSITION
---- --------
Andrew De Mari............ President and Chief Executive Officer
Paul Gigg................. Chief Operating Officer
C. Raomal Perera.......... Senior Vice President, Engineering
Janine M. Bushman......... Vice President, Finance and
Administration and Chief Financial
Officer
John B. Stephensen........ Vice President, Product Management
William M. Wolfe.......... Vice President, Business Development and
Marketing
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Andrew De Mari is a founder of the Company and has served as the
Company's President and Chief Executive Officer and a member of the Board of
Directors since the Company's 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
networking software and system products. 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, he was elected Vice President, European Marketing and
Sales in October 1996, and was appointed to his current position as Chief
Operating Officer in April 1997. For more than five years prior to joining
ISOCOR, Mr. Gigg was Director of Marketing and Engineering at Dowty
Communications (formerly Case Communications) an international developer and
supplier of networking products. Mr. Gigg holds a B.Sc. in Electrical and
Electronic Engineering from the University of Wales.
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 an officer of ISOCOR in November 1992. 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 Swansea, U.K.
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 Vice President of Finance and
Administration and Chief Financial Officer 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.
John B. Stephensen joined the Company in October 1993 and became Vice
President, Product Management in July 1994. 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 the Vice President of Business Development and
Marketing. 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.
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Item 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report
on Form 10-Q:
11.1 - Statement of Computation of Shares Used in Per Share
Computation.
27.1 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter covered by
this report.
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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 10-Q 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: August 14, 1997 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
- ------- -------- ----
11.1 Statement of Computation of Shares Used in Per Share Computation............... 1
27.1 Financial Data Schedule........................................................ 2