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, 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
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
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 [ ]
9,822,225 Shares of Common Stock of the Registrant were outstanding
as of September 30, 1998
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ISOCOR
INDEX TO FORM 10-Q
Page
----
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1997
and September 30, 1998...................................................................... 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1997 and 1998........................................................... 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1998.................................................... 5
Consolidated Statements of Comprehensive Income for the three and nine
months ended September 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
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds...............................................18
Item 6. Exhibits and Reports on Form 8-K....................................................... 19
Signature........................................................................................... 20
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ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
December 31, September 30,
1997 1998
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,784 $ 8,834
Marketable securities 9,677 8,396
Trade accounts receivable
Customer, net 9,054 11,461
Related party 46 54
Other current assets 1,993 3,475
-------- --------
Total current assets 31,554 32,220
Property and equipment, net 2,405 2,351
Other assets 264 1,167
-------- --------
Total assets $ 34,223 $ 35,738
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 839 $ 1,606
Accrued expenses 3,667 4,744
Deferred revenues 3,678 6,415
Other current liabilities 222 1,496
-------- --------
Total current liabilities 8,406 14,261
Other long-term liabilities 133 222
-------- --------
Total liabilities 8,539 14,483
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 9,822,225 shares at
December 31, 1997 and September 30, 1998, respectively 39,359 39,638
Notes receivable from shareholders (56) (15)
Accumulated deficit (13,584) (18,062)
Deferred compensation (130) (75)
Cumulative foreign currency translation adjustment 95 (231)
-------- --------
Total shareholders' equity 25,684 21,255
-------- --------
Total liabilities and shareholders' equity $ 34,223 $ 35,738
======== ========
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,
------------------------- -------------------------
1997 1998 1997 1998
-------- -------- -------- --------
(Unaudited)
Revenues:
Products:
Customer $ 4,464 $ 2,496 $ 10,851 $ 9,858
Related parties 91 28 95 161
Services:
Customer 1,618 2,725 4,404 6,269
Related parties 14 11 26 70
-------- -------- -------- --------
Total revenues 6,187 5,260 15,376 16,358
Cost of revenues:
Products 808 509 1,743 1,746
Services 753 1,518 2,026 3,372
-------- -------- -------- --------
Total cost of revenues 1,561 2,027 3,769 5,118
-------- -------- -------- --------
Gross profit 4,626 3,233 11,607 11,240
-------- -------- -------- --------
Operating expenses:
Engineering 2,017 1,309 6,244 4,238
Sales and marketing 3,168 3,388 10,556 9,960
Administration 714 859 2,282 2,472
Agency grants 0 0 (69) 0
-------- -------- -------- --------
Total operating expenses 5,899 5,556 19,013 16,670
-------- -------- -------- --------
Loss from operations (1,273) (2,323) (7,406) (5,430)
(Income) loss from currency fluctuations 23 (378) (93) (301)
Interest income (285) (212) (893) (784)
-------- -------- -------- --------
Loss before income taxes (1,011) (1,733) (6,420) (4,345)
Provision for income taxes 3 77 22 114
-------- -------- -------- --------
Loss before minority interest (1,014) (1,810) (6,442) (4,459)
Minority interest 0 19 0 19
-------- -------- -------- --------
Net Loss $( 1,014) $( 1,829) $( 6,442) $( 4,478)
======== ======== ======== ========
Net loss per share, basic and dilutive $ (0.11) $ (0.19) $ (0.69) $ (0.46)
======== ======== ======== ========
Weighted average shares outstanding 9,429 9,819 9,405 9,767
======== ======== ======== ========
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
-------------------------
1997 1998
-------- --------
(Unaudited)
Cash flows from operating activities:
Net loss $( 6,442) $( 4,478)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for doubtful accounts, returns and price protection 457 569
Depreciation and amortization 1,018 840
Amortization of deferred compensation 56 56
Deferred rent (26) 0
(Increase) / decrease in:
Accounts receivable 1,045 (998)
Other current assets (388) (702)
Other assets (10) (116)
Increase / (decrease) in:
Accounts payable 11 233
Other accrued expenses (92) 417
Deferred revenues 843 2,164
Other current liabilities (221) 120
Product development obligation (304) 0
Long-term liabilities (7) 183
-------- --------
Net cash used by operating activities (4,060) (1,712)
-------- --------
Cash flows from investing activities:
Cash paid for acquisition, net of cash required 0 (917)
Purchase of property and equipment (859) (413)
Purchase of marketable securities (17,101) (30,209)
Sale of marketable securities 17,150 27,491
Marketable securities at maturity 997 3,999
-------- --------
Net cash (used)/provided by investing activities 187 (49)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of stock 211 321
-------- --------
Net cash provided by financing activities 211 321
-------- --------
Effect of exchange rate changes on cash 610 (510)
-------- --------
Net decrease in cash (3,052) (1,950)
Cash and cash equivalents, beginning of period 13,374 10,784
-------- --------
Cash and cash equivalents, end of period $ 10,322 $ 8,834
======== ========
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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1998 1997 1998
------- ------- ------- -------
(Unaudited)
Net Loss $(1,014) $(1,829) $(6,442) $(4,478)
Income/(loss) from foreign currency translation net of tax 40 (391) (97) (326)
------- ------- ------- -------
Comprehensive Loss $ (974) $(2,220) $(6,539) $(4,804)
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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, but are not audited. 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, 1998, the consolidated statements of operations for the three and
nine month periods ended September 30, 1997 and 1998, and the consolidated
statements of cash flows for the nine month periods ended September 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 September 30, 1998, United
States, Ireland and Other Europe represented 53%, 34% and 13%, and 40%, 20% and
40%, respectively, of the Company's net accounts receivable. At December 31,
1997 and September 30, 1998, the Company held balances in U.S. banks of
approximately $1,486,000 and $1,290,000, 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. For software contracts not requiring
modification, the Company generally recognizes product revenue 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. When the Company enters into a license
agreement with a customer requiring significant customization of the software
products, the Company recognizes revenue related to the license agreement using
contract accounting. Deferred revenues represent the difference between
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
amounts invoiced and amounts recognized as revenues under software development
and maintenance agreements. 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 recognizes service revenues from training
activities as the services are provided.
Segment reporting
The Company completed a review and assessed the impact of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." ("SFAS No. 131") The Company operates in a single
reportable segment, the development, marketing and support of electronic
messaging and directory infrastructure software. The Company's operations
consist of engineering, sales and marketing, administration and support in both
the United States and Europe. SFAS No. 131 will be adopted and all related
disclosures will be made beginning with the Company's financial statements for
the year ending December 31, 1998 and in interim financial reports issued to
shareholders in the year following the year of adoption.
2. ACQUISITION
On July 15, 1998, the Company acquired a 60 percent interest in System Wizards
S.p.A., which is primarily a services company, which distributes the Company's
products in Italy for $945,000 in cash. The Company accounted for this
transaction as a purchase and accordingly, the purchase price was allocated to
assets acquired and liabilities assumed based upon the fair value. The $855,000
paid in excess of the net assets acquired is being amortized using the straight
line method over an estimated life of five years and is included in Other Assets
in the accompanying Consolidated Balance Sheet as of September 30, 1998. The
Company is required to purchase the remaining 40% of System Wizards within the
period of January 1, 2000 and December 31, 2001. The results of operations for
this investment have been included in the Consolidated Statements of Operations
for the period subsequent to the acquisition.
3. MARKETABLE SECURITIES
The Company held the following positions as of December 31, 1997 and September
30, 1998 (dollars in thousands):
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
Corporate notes ........................ $8,182 $8,396
U.S. Government obligations ............ 1,495 0
------ ------
$9,677 $8,396
====== ======
4. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of December 31, 1997
and September 30, 1998 were as follows (dollars in thousands):
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
Accounts receivable ................................... $ 10,563 $ 13,586
Less: Allowance for doubtful accounts, returns and
price protection ................................... (1,509) (2,125)
-------- --------
$ 9,054 $ 11,461
======== ========
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and September 30, 1998 were (dollars in
thousands):
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
Salaries and related expenses .......... $1,197 $1,807
Royalties .............................. 499 402
Commissions ............................ 464 342
Other .................................. 1,507 2,193
------ ------
$3,667 $4,744
====== ======
6. INCOME TAXES
The sources of income/(loss) before income taxes for the three and nine months
ended September 30, 1997 and 1998 are as follows (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1997 1998 1997 1998
------- ------- ------- -------
United States ................ $ (48) $(1,807) $(1,891) $(3,461)
Foreign ...................... (963) 74 (4,529) (884)
------- ------- ------- -------
Loss before income taxes
and minority interest ........ $(1,011) $(1,733) $(6,420) $(4,345)
======= ======= ======= =======
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, 1998, there are net operating loss carryforwards which remain in
certain foreign jurisdictions. The taxes provided relate primarily to certain
foreign source income.
7. 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 prior
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.
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ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share (EPS) computations for the three and nine months
ended September 30, 1997 and 1998 (in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1998 1997 1998
------- ------- ------- -------
Numerator:
Net loss numerator
for basic and diluted EPS: $(1,014) $(1,829) $(6,442) $(4,478)
------- ------- ------- -------
Denominator:
Denominator for basic EPS-
weighted average shares 9,429 9,819 9,405 9,767
Effect of dilutive securities:
Stock options -- -- -- --
------- ------- ------- -------
Denominator for diluted EPS-
adjusted weighted average shares
and assumed conversions: 9,429 9,819 9,405 9,767
------- ------- ------- -------
Common shares related to stock options that are antidilutive amounted to
approximately 2,113,936 and 2,369,331 shares at September 30, 1997 and 1998,
respectively.
8. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended September 30, 1997 and 1998 was
approximately $14,000 and $39,000, respectively, relating to product sales to,
and software maintenance agreements with, an affiliate of a shareholder.
Revenues from this same affiliate for the nine months ended September 30, 1997
and 1998 were approximately $26,000 and $231,000, respectively. Included in
accounts receivable as of December 31, 1997 and September 30, 1998 was $46,000
and $54,000, respectively, relating to this affiliate. Included in operating
expenses for the three months ended September 30, 1997 and 1998 was
approximately $22,000 and $0, respectively, relating to consulting services
provided by this affiliate. Operating expenses relating to this same affiliate
for the nine months ended September 30, 1997 and 1998 were $135,000 and $1,000,
respectively. Included in accounts payable as of December 31, 1997 and September
30, 1998 was $96,000 and $0, respectively, related to these consulting services.
Revenues from a distributor that is a shareholder for the nine months ended
September 30, 1997 and 1998 were approximately $94,000 and $45,000,
respectively. In the three months ended September 30, 1997 and 1998, there were
no such revenues from this same distributor.
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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 the
mix of business between products and services; the type and size of customers
doing business with the Company, their product and services requirements and the
impact of the timing of revenues relative to expenses; the ability of the
Company to realize revenues from orders booked in prior periods; 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; acquisition activities and the ability to integrate acquired
businesses successfully; the impact of changes in accounting standards; the
effect and rate of change in standards and platforms for messaging products; the
risks associated with the Year 2000 issue on the Company's software products,
internal IT systems, vendors and customers, 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 or through the
Electronic Data Gathering, Analysis and Retrieval system (EDGAR) at www.sec.gov.
The Company assumes no obligation to update the forward-looking statements
contained herein.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues. Total revenues were $5,260,000 and $6,187,000 for the three
months ended September 30, 1998 and 1997, respectively, representing a decrease
in 1998 of 15% over the same period one year ago.
The Company's volume of orders for the three months ended September 30,
1998 was approximately $9 million, and at September 30, 1998 the Company had a
backlog of orders of approximately $4 million. The backlog is expected to flow
into revenues throughout 1999 and into early 2000 subject to satisfying the
requirements of the contracts. This compares to a backlog of orders at September
30, 1997 of less than $500,000. The Company's worldwide business is evolving to
include more customers who are implementing larger-scale software systems. These
systems take more time to design, configure and implement. This evolution has a
delaying impact on the speed at which the Company recognizes its revenues, such
that the larger projects will be recognized as revenue over several quarters.
This trend is currently more pronounced in the Company's U.S. customers, than
elsewhere in the world.
Revenues from domestic sources accounted for approximately 12% and 29%
of total revenues in the three months ended September 30, 1998 and 1997,
respectively, while the Company's international revenues accounted for 88% and
71%, respectively, of the Company's total revenues in the same periods.
Product revenues were $2,524,000 and $4,555,000 for the three months
ended September 30, 1998 and 1997, respectively. The decrease was primarily
attributable to decreased volumes of products licensed. ISOCOR's Internet
Messaging product line consists primarily of the N-PLEX products, including
gateways associated with N-PLEX Hub implementations, and accounted for $1.2
million or 48% of total product revenues in the three months ended September 30,
1998, down on a dollar basis from the three months ended September 30, 1997
level of $1.9 million or 42% of total product revenues. Directory revenues
accounted for $379,000 or 15% of total product revenues in the three months
ended September 30, 1998, down from the three months ended September 30, 1997
level of $577,000 or 13% of total product revenues. The remainder of total
product revenues in the three months ended September 30, 1998 and 1997 relate
primarily to ISOCOR's older non-Internet related product lines.
Service revenues were $2,736,000 and $1,632,000 for the three months
ended September 30, 1998 and 1997, respectively. The 68% increase from 1997 to
1998 resulted primarily from the inclusion in the
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three month period ended September 30, 1998 of $526,000 of service revenues
attributable to the Company's recent acquisition of a 60% interest in System
Wizards S.p.A., as well as increased levels of software support and update and
custom engineering revenues.
Cost of Revenues. Cost of product revenues consists primarily of costs
of media duplication, manuals and packaging materials, personnel and facility
costs associated with the assembly operation, third party royalties relating to
licensed technology and hardware purchased from third party vendors. The
decrease in cost of product revenues to $509,000 in the three months ended
September 30, 1998 from $808,000 in the three months ended September 30, 1997,
respectively, resulted primarily from decreased third party royalties relating
to decreased volumes of products sold.
Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, custom engineering services and
training and installation services. The increase in cost of service revenues to
$1,518,000 for the three months ended September 30, 1998 from $753,000 for the
three months ended September 30, 1997 resulted primarily from increased
personnel-related costs associated with supporting a higher level of service
revenues which, in turn, is principally attributable to the Company's recent
acquisition of a 60% interest in System Wizards, S.p.A.
Gross Profit. Gross profit was $3,233,000 and $4,626,000 for the three
months ended September 30, 1998 and 1997, respectively, representing 61% and 75%
of revenues for those same periods, respectively.
Gross profit from product sales was $2,015,000 and $3,747,000 for the
three months ended September 30, 1998 and 1997, respectively. This represents
79.8% and 82.3% of product sales for the three months ended September 30, 1998
and 1997, respectively. The decline in gross profit percentage is primarily due
to the impact of spreading the personnel and facility costs associated with the
assembly operation across a lower revenue base.
Gross profit from services was $1,218,000 and $879,000 for the three
months ended September 30, 1998 and 1997, respectively, representing 44.5% and
53.9% 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, particularly attributable to the Company's recent acquisition of a 60%
interest in System Wizards, S.p.A.
Engineering. Engineering expenses were $1,309,000 and $2,017,000 for
the three months ended September 30, 1998 and 1997, respectively, representing
24.9% and 32.6% of revenues for those same periods, respectively. The absolute
decrease in engineering expenses and the related percentage decline resulted
principally from decreased personnel and related expenses.
Sales and Marketing. Sales and marketing expenses were $3,388,000 and
$3,168,000 for the three months ended September 30, 1998 and 1997, respectively,
representing 64.4% and 51.2% of revenues for those same periods, respectively.
The majority of the absolute increase is attributable to the Company's recent
acquisition of a 60% interest in System Wizards, S.p.A., which in conjunction
with lower revenues for the three months ended September 30, 1998, represents
the majority of the increase in percentage of revenues.
Administration. Administration expenses were $859,000 and $714,000 for
the three months ended September 30, 1998 and 1997, respectively, representing
16.3% and 11.5% of revenues for those same periods, respectively. The increase
is primarily attributable to the increased operating expenses associated with
the Company's recent acquisition of a 60% interest in System Wizards, S.p.A.,
which in conjunction with lower revenues for the three months ended September
30, 1998 represents the majority of the increase in percentage of revenues.
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(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $(378,000) and $23,000 for the three months ended September 30,
1998 and 1997, respectively. The major fluctuation during these periods resulted
principally from changes in foreign currency exchange rates.
Interest income. Interest income was $212,000 for the three months
September 30, 1998 as compared with $285,000 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 September 30, 1998 as
compared to the same period in 1997.
Provision for Income Taxes. The income tax provision was $77,000 and
$3,000 for the three months ended September 30, 1998 and 1997, respectively, on
pre-tax losses of $1,733,000 and $1,011,000 for the three months ended September
30, 1998 and 1997, respectively, which resulted from taxes on the Company's
foreign operations.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues. Total revenues were $16,358,000 and $15,376,000 for the nine
months ended September 30, 1998 and 1997, respectively, representing an increase
in 1998 of 6% over the same period one year ago. Revenues from domestic sources
accounted for approximately 27% and 28% of total revenues in the nine months
ended September 30, 1998 and 1997, respectively, while the Company's
international revenues accounted for 73% and 72%, respectively, of the Company's
total revenues in the same periods.
Product revenues were $10,019,000 and $10,946,000 for the nine months
ended September 30, 1998 and 1997, respectively. The 8.5% decrease from 1997 to
1998 was mainly due to 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 partially offset by increased average prices of the
Company's Internet products driven by the increased demand for software
solutions as a result of the increased business usage of the Internet. ISOCOR's
Internet Messaging product line consists primarily of the N-PLEX products,
including gateways associated with N-PLEX Hub implementations, and accounted for
$4.9 million or 49% of total product revenues in the nine months ended September
30, 1998, up from the nine months ended September 30, 1997 level of $4.5 million
or 42% of total product revenues. Directory revenues accounted for $1.5 million
or 15% of total product revenues in the nine months ended September 30, 1998, up
from the nine months ended September 30, 1997 level of $1.2 million, or 11% of
product revenues. The remainder of total product revenues in the nine months
ended September 30, 1998 and 1997 relate primarily to ISOCOR's older
non-Internet related product lines.
Service revenues were $6,339,000 and $4,430,000 for the nine months
ended September 30, 1998 and 1997, respectively. The 43% increase from 1997 to
1998 resulted from the inclusion in the three month period ended September 30,
1998 of $526,000 of services revenues attributable to the Company's recent
acquisition of a 60% interest in System Wizards S.p.A., as well as 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, personnel and facility
costs associated with the assembly operation, and third party royalties relating
to licensed technology and hardware purchased from third party vendors. The
increase in cost of product revenues to $1,746,000 from $1,743,000 in the nine
months ended September 30, 1998 to September 30, 1997, respectively, resulted
primarily from increased third party royalties relating to increased volumes of
products sold.
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Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, custom engineering and training and
installation services. The increase in cost of service revenues from $2,026,000
for the nine months ended September 30, 1997 to $3,372,000 for the nine months
ended September 30, 1998 resulted from increased personnel and related costs
associated with supporting a higher level of service revenues and includes the
services cost of sales attributable to the Company's recent acquisition of a 60%
interest in System Wizards, S.p.A.
Gross Profit. Gross profit was $11,240,000 and $11,607,000 for the nine
months ended September 30, 1998 and 1997, respectively, representing 69% and 75%
of revenues for those same periods, respectively.
Gross profit from product sales was $8,273,000 and $9,203,000 for the
nine months ended September 30, 1998 and 1997, respectively, representing 82.6%
and 84.1% of product sales for the nine months ended September 30, 1998 and
1997, respectively. The decline in gross profit percentage is primarily due to
the impact of spreading the personnel and facility costs associated with the
assembly operation across a lower revenue base.
Gross profit from services was $2,967,000 and $2,404,000 for the nine
months ended September 30, 1998 and 1997, respectively, representing 46.8% and
54.3% 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, particularly
attributable to the Company's recent acquisition of a 60% interest in System
Wizards, S.p.A.
Engineering. Engineering expenses were $4,238,000 and $6,244,000 for
the nine months ended September 30, 1998 and 1997, respectively, representing
25.9% and 40.6% of revenues for those same periods, respectively. The absolute
decrease in engineering expenses and the related percentage decline resulted
principally from decreased personnel and related expenses.
Sales and Marketing. Sales and marketing expenses were $9,960,000 and
$10,556,000 for the nine months ended September 30, 1998 and 1997, respectively,
representing 60.9% and 68.7% 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 percentage decline is further affected by the
higher revenues for the nine months ended September 30, 1998.
Administration. Administration expenses were $2,472,000 and $2,282,000
for the nine months ended September 30, 1998 and 1997, respectively,
representing 15.1% and 14.8% of revenues for those same periods, respectively.
The absolute increase is primarily attributable to the increased operating
expenses associated with the Company's recent acquisition of a 60% interest in
System Wizards, S.p.A.
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 Company does
not expect to receive additional grants from such source in the foreseeable
future. 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.
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(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $(301,000) and $(93,000) for the nine months ended September
30, 1998 and 1997, respectively. The fluctuation during these periods resulted
principally from changes in foreign currency exchange rates.
Interest income. Interest income was $784,000 for the nine months ended
September 30, 1998 as compared with $893,000 in the same period in 1997. The
decrease is primarily related to decreased levels of cash, cash equivalents and
marketable securities during the nine months ended September 30, 1998 as
compared to the same period in 1997.
Provision for Income Taxes. The income tax provision was $114,000 and
$22,000 for the nine months ended September 30, 1998 and 1997, respectively, on
pre-tax losses of $4,345,000 and $6,420,000, respectively, which resulted from
taxes on the Company's foreign operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash usage from operating activities of $1,712,000 and $4,060,000
for the nine months ended September 30, 1998 and 1997, respectively, decreased
period over period by $2,348,000. The primary reason for the decrease between
the two periods is due to decreased usage of cash by operating activities of
$1,898,000 resulting from the decreased net loss (net of adjustments due to
depreciation and amortization and the provision for doubtful accounts, returns
and price protection) and increased net cash flows from accounts payable of
$222,000, other accrued expenses of $509,000 and deferred revenues of
$1,321,000, primarily offset by decreased net cash flows from accounts
receivable of $2,043,000.
As of September 30, 1998, total accounts receivable, net was $11,515,000 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 September 30, 1998, the Company had a balance of $8,834,000 in cash and
cash equivalents, and a balance of $8,396,000 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.
YEAR 2000 COMPLIANCE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems and the Company's
software products to process information accurately that may be date-sensitive.
Any of the Company's programs or products that recognize a date using "00" as
the year 1900 rather than the year 2000 could result in errors or system
failures. The Company utilizes a
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number of computer programs across its entire operation. The Company is
assessing both the readiness of its internal computer systems and software, and
the compliance of its software licensed to customers, for handling the year
2000.
The Company relies on a variety of internal computer systems, as well as
services provided by third parties, in the operation of its business. While the
Company is continuing its assessment of the impact of the year 2000 problem upon
such systems, the Company does not believe that any of such systems are
mission-critical to the Company's business operations such that a failure in
such systems would have an immediate adverse effect on the Company's business,
financial condition or results of operations. At this time, the Company believes
that the majority of its systems are year 2000 compliant and is taking steps or
monitoring the actions of its suppliers with respect to those systems where a
potential problem may exist. The Company's internal systems run on personal
computers and microprocessor-based computer servers set up in a workstation
environment and should not be susceptible to universal failures. Were system
failures to occur as a result of the year 2000 issue, the Company believes that
its on-site engineers and technical personnel would be able to address and
resolve such issues prior to the occurrence of any material adverse effect on
the Company's business operations. The failure of certain of the systems upon
which the Company relies, such as payroll and banking services, could, however,
be disruptive to the Company's business operations if such systems were
unavailable for an extended period of time. The Company is in the process of
making inquiries with the providers of such types of services to determine their
year 2000 readiness. However, the Company believes that its business operations
would not be materially adversely effected by short disruptions in such services
and that the providers of such services (who also typically service many other
business customers) will take steps to rectify any failures as soon as possible.
More generally, the Company does not believe that its risks with regard to
failures in the power grid or general communications, building security and
similar systems place the Company in a unique position relative to year 2000
issues as compared to other businesses.
The Company is currently in the process of testing and upgrading, where
necessary, the current versions of its currently-offered software products to
address the year 2000 issue. The Company intends to complete testing of all of
those products by March 31, 1999 and expects those versions to be year 2000
compliant by June 30, 1999. The Company estimates that Year 2000 compliant
versions of its products are currently available in support of approximately 70%
of its $10 million of product revenues for the nine months ended September 30,
1998. The Company believes that a number of its older or obsolete products
and/or versions are not year 2000 compliant, and the Company currently does not
intend to update such products or versions. The Company has taken and plans to
continue to take appropriate steps to notify its customers and distribution
channels about the year 2000 issues associated with the Company's products. The
Company maintains on its website a list of the Company's current year
2000-compliant products (by product and version number). Customers under current
support and maintenance agreements with the Company will be entitled to upgrade
to a year 2000-compliant replacement product. The Company recently completed a
mailing to its customers under support and maintenance agreements regarding the
Company's year 2000 upgrade plans. The Company has given certain of its
customers warranties with respect to year 2000 compliance and may have to offer
updates, workarounds or replacement products to those customers. Through its
website, the Company is encouraging customers not under support and maintenance
agreements to contact the Company regarding possible upgrades or migration paths
to address year 2000 issues. In addition to the information contained on the
Company's website, the Company's regular newsletter contains similar information
regarding year 2000 issues, and the Company plans to conduct a general customer
mailing (including the Company's distribution channels and customers not under
maintenance and support agreements) regarding such issues and the possible
solutions. In certain cases, however, customers may need to make hardware and/or
operating system changes in order to implement a year 2000 solution. In other
cases, the Company will not be able to offer a solution. The Company plans to
publish information regarding the older or obsolete products and versions that
the Company does not intend to upgrade for year 2000 compliance. In the event
that any of the products that the Company has made or intends to make year
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2000-compliant suffer unanticipated failures as a result of year 2000 problems,
the Company would deploy its engineering and technical support resources to
implement a solution.
Some of the Company's products incorporate software code supplied by third
parties. The Company is currently working with such vendors to ensure that such
code is updated to address year 2000 issues where appropriate. Because such
third parties license their code to others in addition to the Company, the
Company believes that such third parties will take measures to address any year
2000 issues with respect to such code. However, in the event that such third
parties do not take actions to make the code year 2000-compliant or their
actions prove insufficient, and where the Company has the right to make code
modifications, the Company believes that is technical personnel, who are
familiar with the code used in the Company's products, could make necessary
modifications to correct problems that arise.
The Company has not incurred substantial costs to date to address the year 2000
issue and does not expect the total costs of such project to be material to the
Company's financial position. To date, the Company has spent approximately
$250,000 in connection with actions taken by the Company to address year 2000
problems. The Company estimates remaining costs to be between $40,000 and
$60,000. Such costs are being expensed as they are incurred and are being funded
through operating cash flow. Cost estimates are based on currently available
information. Factors that could affect these estimates include, but are not
limited to, the availability and cost of trained personnel to evaluate and
implement necessary changes, the ability to locate and correct noncompliant
systems and the ability of the Company's customers and service providers to
successfully implement year 2000 compliant systems or fixes. Any failure by the
Company to make its products year 2000 compliant could result in a decrease in
sales of the Company's products and/or possible claims against the Company by
customers as a result of year 2000 problems caused by the Company's products.
Despite the Company's efforts to address the year 2000 impact on its internal
systems, products and business operations, the year 2000 issue may result in a
material disruption of its business or have a material adverse effect on the
Company's business, financial condition or results of operations.
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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 September 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 $ 3,327,000
Working Capital 12,134,000
Investment in short-term, interest-bearing obligations 540,000
Repayment of short-term liabilities 1,368,000
Application to short-term assets 931,000
-----------
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 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: November 13, 1998 By: /s/JANINE M. BUSHMAN
------------------------------------
Janine M. Bushman, Vice President,
Finance and Administration, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Exhibits Page
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27.1 Financial Data Schedule ....................................22
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