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, 1998
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 Identification No.)
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 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 ____
9,817,039 Shares of Common Stock of the Registrant were outstanding as of June
30, 1998
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ISOCOR
INDEX TO FORM 10-Q
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997
and June 30, 1998...............................................................3
Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1998....................................................4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1997 and 1998.............................................5
Consolidated Statements of Comprehensive Income for the three and six
months ended June 30, 1997 and 1998.............................................6
Notes to Consolidated Financial Statements......................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................15
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds...................................16
Item 4. Submission of Matters to a Vote of Security Holders.........................17
Item 6. Exhibits and Reports on Form 8-K............................................18
Signature ................................................................................19
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ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
December 31, June 30,
1997 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 10,784 $ 7,326
Marketable securities 9,677 11,925
Trade accounts receivable
Customer, net 9,054 7,885
Related party 46 292
Other current assets 1,993 3,136
-------- --------
Total current assets 31,554 30,564
Property and equipment, net 2,405 2,094
Other assets 264 309
-------- --------
Total assets $ 34,223 $ 32,967
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 839 $ 716
Accrued expenses 3,667 3,990
Deferred revenues 3,678 4,345
Other current liabilities 222 344
-------- --------
Total current liabilities 8,406 9,395
Other long-term liabilities 133 116
-------- --------
Total liabilities 8,539 9,511
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 9,551,931 and 9,817,039 shares at
December 31, 1997 and June 30, 1998, respectively 39,359 39,637
Notes receivable from shareholders (56) (15)
Accumulated deficit (13,584) (16,233)
Deferred compensation (130) (93)
Cumulative foreign currency translation adjustment 95 160
-------- --------
Total shareholders' equity 25,684 23,456
-------- --------
Total liabilities and shareholders' equity $ 34,223 $ 32,967
======== ========
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 1998 1997 1998
-------- -------- -------- --------
Revenues:
Products:
Customer 3,796 4,191 6,387 7,318
Related parties 0 19 4 177
Services:
Customer 1,547 1,820 2,786 3,544
Related parties 12 22 12 59
-------- -------- -------- --------
Total revenues 5,355 6,052 9,189 11,098
Cost of revenues:
Products 505 692 935 1,237
Services 715 934 1,273 1,854
-------- -------- -------- --------
Total cost of revenues 1,220 1,626 2,208 3,091
-------- -------- -------- --------
Gross profit 4,135 4,426 6,981 8,007
-------- -------- -------- --------
Operating expenses:
Engineering 2,216 1,475 4,227 2,930
Sales and marketing 3,801 3,012 7,389 6,572
Administration 749 801 1,567 1,612
Agency grants (13) 0 (69)
-------- -------- -------- --------
Total operating expenses 6,753 5,288 13,114 11,114
-------- -------- -------- --------
Loss from operations (2,618) (862) (6,133) (3,107)
Income (loss) from currency fluctuations 72 86 109 (77)
Interest income 306 260 616 571
-------- -------- -------- --------
Loss before income taxes (2,240) (516) (5,408) (2,613)
Provision for income taxes 11 20 19 37
-------- -------- -------- --------
Net loss ($ 2,251) ($ 536) ($ 5,427) ($ 2,650)
======== ======== ======== ========
Net loss per share, assuming no dilution $ (0.24) $ (0.05) $ (0.58) $ (0.27)
======== ======== ======== ========
Weighted average shares outstanding 9,378 9,786 9,361 9,738
======== ======== ======== ========
Net loss per share, assuming dilution $ (0.24) $ (0.05) $ (0.58) $ (0.27)
======== ======== ======== ========
Weighted average shares outstanding and dilutive shares 9,378 9,786 9,361 9,738
======== ======== ======== ========
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 1998
-------- --------
Cash flows from operating activities:
Net loss ($ 5,427) ($ 2,650)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for doubtful accounts, returns and price protection 504 214
Depreciation and amortization 687 524
Amortization of deferred compensation 18 37
Deferred rent (26) 0
(Increase) / decrease in:
Accounts receivable 1,070 592
Other current assets (648) (1,180)
Other assets (10) (78)
Increase / (decrease) in:
Accounts payable 325 (110)
Other accrued expenses 711 540
Deferred revenues 1,383 664
Other current liabilities 6 1
Product development obligation (229) 0
Long-term liabilities 4 (16)
-------- --------
Net cash used by operating activities (1,632) (1,462)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (756) (210)
Purchase of marketable securities (14,211) (27,293)
Sale of marketable securities 14,150 21,545
Marketable securities at maturity 998 3,500
-------- --------
Net cash (used) provided by investing activities 181 (2,458)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of stock, net 14 316
-------- --------
Net cash provided by financing activities 14 316
-------- --------
Effect of exchange rate changes on cash 456 146
-------- --------
Net decrease in cash (981) (3,458)
Cash and cash equivalents, beginning of period 13,374 10,784
-------- --------
Cash and cash equivalents, end of period $ 12,393 $ 7,326
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
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ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1998 1997 1998
------- ------- ------- -------
Net Loss $(2,251) $ (536) $(5,427) $(2,650)
Income/(loss) from foreign currency translation, net of tax 11 (112) (137) 65
------- ------- ------- -------
Comprehensive Loss $(2,240) $ (648) $(5,564) $(2,585)
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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, 1998, the
consolidated statements of operations for the three and six month periods ended
June 30, 1997 and 1998, and the consolidated statements of cash flows for the
six month periods ended June 30, 1997 and 1998. 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 1998 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, 1997, 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. At December 31, 1997 and June 30, 1998, United States,
Ireland and Other Europe represented 53%, 34% and 13%, and 43%, 38% and 19%,
respectively, of the Company's net accounts receivable. At December 31, 1997 and
June 30, 1998, the Company held balances in U.S. banks of approximately
$1,486,000 and $1,093,000 respectively, which exceeded federally insured limits.
Cash equivalents are managed by major investment firms in accordance with the
Company's investment policy.
Comprehensive income
In January 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income." ("SFAS No. 130")
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements.
Revenue recognition
In January 1998, the Company adopted the AICPA Accounting Standards Executive
Committee Statement of Position (SOP) 97-2, "Software Revenue Recognition," as
amended by SOP 98-4. SOP 97-2, as amended, supercedes the previous software
revenue recognition standard, SOP 91-1. The Company generally recognizes product
revenues when all the following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the vendor's fee is fixed or
determinable, and (4) collectibility is probable. 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 contracted for and priced separately from the
software license fees, as specific milestones are met in the respective
agreements. Where custom engineering is essential to the functionality of the
software, the Company does not recognize revenue on the underlying software
until
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
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.
Recently issued accounting standard
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 in the year following the year
of adoption. 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.
2. MARKETABLE SECURITIES
The Company held the following positions as of December 31, 1997 and June 30,
1998 (dollars in thousands):
December 31, 1997 June 30, 1998
----------------- -------------
Corporate notes ................ $ 8,182 $11,427
U.S. Government obligations .... 1,495 498
------- -------
$ 9,677 $11,925
======= =======
3. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of December 31, 1997
and June 30, 1998 (dollars in thousands):
December 31, 1997 June 30, 1998
----------------- -------------
Accounts receivable ..................................... $ 10,563 $ 9,585
Less: Allowance for doubtful accounts, returns and
price protection ........................................ (1,509) (1,700)
-------- --------
$ 9,054 $ 7,885
======== ========
4. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and June 30, 1998 were (dollars in
thousands):
December 31, 1997 June 30, 1998
----------------- -------------
Salaries and related expenses $1,197 $1,148
Royalties 499 434
Commissions 464 324
Other 1,507 2,084
------ ------
$3,667 $3,990
====== ======
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
5. INCOME TAXES
The sources of loss before income taxes for the three and six months ended June
30, 1997 and 1998 are as follows (dollars in thousands):
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
------- ------- ------- -------
United States $ (432) $ (484) $(1,777) $(1,654)
Foreign (1,808) (32) (3,631) (959)
------- ------- ------- -------
Loss before income taxes $(2,240) $ (516) $(5,408) $(2,613)
======= ======= ======= =======
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, 1998, there are net operating loss carryforwards which remain in
foreign jurisdictions. The taxes provided relate primarily to foreign source
income.
6. PER SHARE INFORMATION
The Company adopted SFAS No. 128, "Earnings Per Share" during 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 loss per common share
is computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per common share is
computed by dividing net 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 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 three and six months
ended June 30, 1997 and 1998 (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
1997 1998 1997 1998
------- ------- ------- -------
Numerator:
Net loss numerator
for basic and diluted EPS: $(2,251) $ (536) $(5,427) $(2,650)
------- ------- ------- -------
Denominator:
Denominator for basic EPS-
weighted average shares 9,378 9,786 9,361 9,738
Effect of dilutive securities:
Stock options -- -- -- --
------- ------- ------- -------
Denominator for diluted EPS-
adjusted weighted average shares
and assumed conversions: 9,378 9,786 9,361 9,738
------- ------- ------- -------
Common shares related to stock options that are antidilutive amounted to
approximately 2,213,975 and 1,787,013 shares at June 30, 1997 and 1998,
respectively.
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
7. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended June 30, 1997 and 1998 was
approximately $12,000 and $42,000, 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
1998 were approximately $12,000 and $192,000, respectively. Included in accounts
receivable as of June 30, 1997 and 1998 was $60,000 and $292,000, respectively,
relating to this affiliate. Included in operating expenses for the three months
ended June 30, 1997 and 1998 was approximately $45,000 and $0, 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 1998
were $113,000 and $1,000, respectively. Included in accounts payable as of June
30, 1997 and 1998 was $114,000 and $7,000, respectively, related to these
consulting services.
Revenues from a distributor who is a shareholder for the six months ended June
30, 1997 and 1998 were approximately $4,000 and $45,000, respectively. In the
three months ended June 30, 1997 and 1998 there were no such revenues from this
same distributor.
8. SUBSEQUENT EVENTS
On July 15, 1998, the Company acquired a 60% interest in System Wizards S.p.A.,
a distributor of the Company's products in Italy. The Company expects to account
for such transaction as a purchase which will be reflected in financial
statements for periods following the date of such acquisition.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 actual results to differ
materially from those projected. Factors that could affect results include
timely development, introduction and acceptance of new products in evolving
markets, the impact of competitive announcements and products, the Company's
ability to increase revenues, the rate of growth of the markets in which the
Company competes, the specific timing of customer purchases of the Company's
products, the effect of the Year 2000 issue on the Company's software products,
internal IT systems, vendors and customers, acquisition activities, the impact
of changes in accounting standards, the effect and rate of change in standards
and platforms for messaging products, as well as the risk factors listed from
time to time in the Company's US Securities and Exchange Commission (SEC)
reports, including but not limited to the report on Form 10-K for the year ended
December 31, 1997, and/or Form 10-Q for the quarters ended in 1998, copies of
which are available from ISOCOR's Investor Relations Department. The Company
assumes no obligation to update the forward-looking statements contained herein.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues were $6,052,000 and $5,355,000 for the three
months ended June 30, 1998 and 1997, respectively, representing an increase in
1998 of 13% over the same period one year ago. Revenues from domestic sources
accounted for approximately 34% and 38% of total revenues in the three months
ended June 30, 1998 and 1997, respectively, while the Company's international
revenues accounted for 66% and 62%, respectively, of the Company's total
revenues in the same periods.
Product revenues were $4,210,000 and $3,796,000 for the three months
ended June 30, 1998 and 1997, respectively. The 11% increase from 1997 to 1998
was mainly due to increased average prices of the Company's products driven by
the increased demand for software solutions as a result of the increased
business usage of the Internet, partially offset by decreased volumes of the
Company's products related to a continuing shift in market demand away from the
Company's older non-Internet related product lines. ISOCOR's Internet Messaging
product line consists primarily of the N-PLEX products, including gateways
associated with N-PLEX Hub implementations, and accounted for $2.5 million or
59% of total product revenues in the three months ended June 30, 1998, up from
the three months ended June 30, 1997 level of $2.0 million or 53% of total
product revenues. Directory revenues accounted for $645,000 or 15% of total
product revenues in the three months ended June 30, 1998, up from the three
months ended June 30, 1997 level of $336,000 or 9% of total product revenues.
The remainder of total product revenues in the three months ended June 30, 1998
and 1997 relate primarily to ISOCOR's older non-Internet related product lines.
Service revenues were $1,842,000 and $1,559,000 for the three months
ended June 30, 1998 and 1997, respectively. The 18% increase from 1997 to 1998
resulted primarily from increased levels of software support and update,
training and installation, and custom engineering revenues.
Cost of Revenues. Cost of product revenues consists primarily of
costs of media duplication, manuals and packaging materials, third party
royalties relating to licensed technology and hardware purchased from third
party vendors. The increase in cost of product revenues from $505,000 to
$692,000 in the three months ended June 30, 1997 to the three months ended June
30, 1998, respectively, resulted primarily from increased materials costs.
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 between
the three months ended June 30, 1998 from the three months ended June 30,
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1997 resulted primarily from increased personnel related costs associated with
supporting a higher level of service revenues.
Gross Profit. Gross profit was $4,426,000 and $4,135,000 for the
three months ended June 30, 1998 and 1997, respectively, representing 73% and
77% of revenues for those same periods, respectively.
Gross profit from product sales was $3,518,000 and $3,291,000 for the
three months ended June 30, 1998 and 1997, respectively. This represents 83.6%
and 86.7% of product sales for the three months ended June 30, 1998 and 1997,
respectively.
Gross profit from services was $908,000 and $844,000 for the three
months ended June 30, 1998 and 1997, respectively, representing 49.3% and 54.1%
of services revenues for those same periods, respectively. The decrease in gross
profit percentage between the periods was primarily driven by increased levels
of personnel, and thus associated costs, required to provide these services.
Engineering. Engineering expenses were $1,475,000 and $2,216,000 for
the three months ended June 30, 1998 and 1997, respectively, representing 24.4%
and 41.4% of revenues for those same periods, respectively. The absolute
decrease in engineering expenses resulted principally from decreased personnel
and related expenses, which is further affected on a percentage basis by the
higher revenue in the three months ended June 30, 1998.
Sales and Marketing. Sales and marketing expenses were $3,012,000 and
$3,801,000 for the three months ended June 30, 1998 and 1997, respectively,
representing 49.8% and 71.0% of revenues for those same periods, respectively.
The majority of the absolute decrease is related to reduced sales expenses,
particularly in Europe, with a minor reduction related to marketing expenses.
This is further affected on a percentage basis by the higher revenue in the
three months ended June 30, 1998.
Administration. Administration expenses were $801,000 and $749,000
for the three months ended June 30, 1998 and 1997, respectively, representing
13.2% and 14.0% of revenues for those same periods, respectively. The decrease
in the percentage is primarily driven by the higher revenue in the three months
ended June 30, 1998
Agency Grants. Agency grants have been received 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 Company has decreased its level of employment in Ireland in the latter part
of 1997 and therefore did not earn any agency grants in Ireland during the three
months ended June 30, 1998. The Company is committed to retaining a significant
and continuing presence in Ireland, however the amount of grants in any given
period will 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, 1997, the Company is no longer eligible to
receive these grants in Germany.
Income from currency fluctuations. Income from currency fluctuations
was $86,000 and $72,000 for the three months ending June 30, 1998 and 1997,
respectively. The minor fluctuation during these periods resulted principally
from changes in foreign currency exchange rates.
Interest income. Interest income was $260,000 for the three months
June 30, 1998 as compared with $306,000 in the same period in 1997. The decrease
is primarily related to decreased levels of cash, cash equivalents and
marketable securities during the three months ended June 30, 1998 as compared to
the same period in 1997.
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Provision for Income Taxes. The income tax provision was $20,000 and
$11,000 for the three months ended June 30, 1998 and 1997, respectively, on
pre-tax losses of $516,000 and $2,240,000 for the three months ended June 30,
1998 and 1997, respectively which resulted from taxes on the Company's foreign
operations.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues were $11,098,000 and $9,189,000 for the six
months ended June 30, 1998 and 1997, respectively, representing an increase in
1998 of 21% over the same period one year ago. Revenues from domestic sources
accounted for approximately 34% and 28% of total revenues in the six months
ended June 30, 1998 and 1997, respectively, while the Company's international
revenues accounted for 66% and 72%, respectively, of the Company's total
revenues in the same periods.
Product revenues were $7,495,000 and $6,391,000 for the six months
ended June 30, 1998 and 1997, respectively. The 17.3% increase from 1997 to 1998
was mainly due to increased average prices of the Company's products driven by
the increased demand for software solutions as a result of the increased
business usage of the Internet, partially offset by decreased volumes of the
Company's products related to a continuing shift in market demand away from the
Company's older non-Internet related product lines. ISOCOR's Internet Messaging
product line consists primarily of the N-PLEX products, including gateways
associated with N-PLEX Hub implementations, and accounted for $3.7 million or
50% of total product revenues in the six months ended June 30, 1998, up from the
six months ended June 30, 1997 level of $2.6 million or 41% of total product
revenues. Directory revenues accounted for $1.1 million or 15% of total product
revenues in the six months ended June 30, 1998, up from the six months ended
June 30, 1997 level of $607,000, or 10% of product revenues. The remainder of
total product revenues in the six months ended June 30, 1998 and 1997 relate
primarily to ISOCOR's older non-Internet related product lines.
Service revenues were $3,603,000 and $2,798,000 for the six months
ended June 30, 1998 and 1997, respectively. The 29% increase from 1997 to 1998
resulted primarily from increased revenues from custom engineering, and to a
lesser extent from software support and update services and training and
installation services.
Cost of Revenues. Cost of product revenues consists primarily of
costs of media duplication, manuals and packaging materials, and third party
royalties relating to licensed technology and hardware purchased from third
party vendors. The increase in cost of product revenues from $935,000 to
$1,237,000 in the six months ended June 30, 1997 to June 30, 1998, respectively,
resulted primarily from increased materials costs and royalties paid to third
party vendors.
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 between
the six months ended June 30, 1998 from the six months ended June 30, 1997
resulted primarily from increased personnel and related costs associated with
supporting a higher level of service revenues.
Gross Profit. Gross profit was $8,007,000 and $6,981,000 for the six
months ended June 30, 1998 and 1997, respectively, representing 72% and 76% of
revenues for those same periods, respectively.
Gross profit from product sales was $6,258,000 and $5,456,000 for the
six months ended June 30, 1998 and 1997, respectively, representing 83.5% and
85.3% of product sales for the six months ended June 30, 1998 and 1997,
respectively.
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Gross profit from services was $1,749,000 and $1,525,000 for the six
months ended June 30, 1998 and 1997, respectively, representing 48.5% and 54.5%
of services revenues for those same periods, respectively. The decrease in
gross profit percentage between the periods was primarily driven by increased
levels of personnel required to provide these services.
Engineering. Engineering expenses were $2,930,000 and $4,227,000 for
the six months ended June 30, 1998 and 1997, respectively, representing 26.4%
and 46.0% of revenues for those same periods, respectively. The absolute
decrease in engineering expenses resulted principally from decreased personnel
and related expenses, which is further affected on a percentage basis by the
higher revenue in the six months ended June 30, 1998.
Sales and Marketing. Sales and marketing expenses were $6,572,000 and
$7,389,000 for the six months ended June 30, 1998 and 1997, respectively,
representing 59.2% and 80.4% of revenues for those same periods, respectively.
The decrease in sales and marketing expenses resulted principally from reduced
sales expenses, particularly in Europe and to a lesser extent from marketing
program expense reductions. The decrease in sales and marketing expenses as a
percentage of revenues is also affected by the higher revenue in the six months
ended June 30, 1998.
Administration. Administration expenses were $1,612,000 and
$1,567,000 for the six months ended June 30, 1998 and 1997, respectively,
representing 14.5% and 17.1% of revenues for those same periods, respectively.
The decrease in the percentage is driven principally by the higher revenue in
the six months ended June 30, 1998.
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,
1997, the Company is no longer eligible to receive these grants in Germany.
Income (loss) from currency fluctuations. Income (loss) from currency
fluctuations was $(77,000) and $109,000 for the six months ended June 30, 1998
and 1997, respectively. The fluctuation during these periods resulted
principally from changes in foreign currency exchange rates.
Interest income. Interest income was $571,000 for the six months
ended June 30, 1998 as compared with $616,000 in the same period in 1997. The
decrease is primarily related to decreased levels of cash, cash equivalents and
marketable securities during the six months ended June 30, 1998 as compared to
the same period in 1997.
Provision for Income Taxes. The income tax provision was $37,000 and
$19,000 for the six months ended June 30, 1998 and 1997, respectively, on
pre-tax losses of $2,613,000 and $5,408,000, respectively which resulted from
taxes on the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash usage from operating activities of $1,462,000 and $1,632,000
for the six months ended June 30, 1998 and 1997, respectively, decreased period
over period by $170,000 The primary reason for the decreased cash usage between
the two periods is due to increased cash flow of $2,324,000
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resulting from the decreased net loss (net of adjustments due to depreciation
and amortization and the provision for doubtful accounts, returns and price
protection), primarily offset by decreased net cash flows from accounts
receivable of $478,000, accounts payable of $435,000 and deferred revenues of
$719,000
As of June 30, 1998, total accounts receivable, net was $8,177,000 versus
$9,100,000 at December 31, 1997. The Company typically generates a large
percentage of its quarterly revenue during the last few weeks of the quarter.
Certain portions of the Company's larger sales have extended 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 payment terms
are likely to have a material adverse effect on the collectibility of the
related receivables. 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.
As of June 30, 1998, the Company had a balance of $7,326,000 in cash and cash
equivalents, and a balance of $11,925,000 in marketable securities. The Company
believes that these existing capital resources will be adequate to finance the
Company's operations and capital expenditures through at least the end of 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
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PART II Other Information
Item 2. - Changes in Securities and Use of Proceeds
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 June 13, 1996.
The Company registered 2,300,000 shares of its Common Stock, $0.001 par value
per share. The offering commenced on June 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.
The net offering proceeds to the Company after deducting the total expenses
above were approximately $18,300,000. From June 14, 1996 to June 30, 1998, the
Company used such net offering proceeds, in direct or indirect payments to
others, as follows:
Purchase and installment of machinery and equipment $2,524,000
Working Capital 10,305,000
Investment in short-term, interest-bearing obligations 3,210,000
Repayment of short-term liabilities 1,368,000
Application to short-term assets 893,000
------------
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.
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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 March 27, 1998 for purposes of its Annual Meeting of
Shareholders, which was subsequently held on May 13, 1998. The matters voted on
and the results of such voting were as follows:
A. Election of Janine M. Bushman, Dennis Cagan, Andrew De Mari, Paul
Gigg, Alexandra Giurgiu and G. Bradford Jones as directors of the Company each
to serve for a one-year term:
BROKER
NOMINEE FOR AGAINST WITHHELD ABSTAIN NON-VOTES
------- --- ------- -------- ------- ---------
Janine M. Bushman 6,951,914 49,731 0 0 0
Dennis Cagan 6,876,094 125,551 0 0 0
Andrew De Mari 6,951,443 50,202 0 0 0
Paul Gigg 6,951,914 49,731 0 0 0
Alexandra Giurgiu 6,951,443 50,202 0 0 0
G. Bradford Jones 6,951,914 49,731 0 0 0
B. Authorization of amendments to the Company's 1992 Stock Option
Plan to increase the number of shares reserved for issuance thereunder by
350,000 shares to an aggregate of 2,950,000 shares:
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTES
--- ------- -------- ------- ---------
6,368,520 235,917 0 397,208 357,483
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,
1998:
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTES
--- ------- -------- ------- ---------
6,947,645 23,500 0 30,500 0
9,645,122 shares of the Company's Common Stock were outstanding as of
the record date.
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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:
27.1-Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for which this
report has been filed.
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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, 1998 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
- ------ -------- ----
27.1 Financial Data Schedule..........................................21
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