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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT 1934
For the Fiscal Year Ended December 31, 1996, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE OF 1934
For the Transition period from to .
Commission file number: 000-27900
ISOCOR
(Exact name of Registrant as specified in its charter)
California 95-4310259
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3420 Ocean Park Boulevard, Santa Monica, California 90405
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (310) 581-8100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $28,781,384 as of February 28, 1997, based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
There were 9,360,597 shares of Registrant's Common Stock issued and outstanding
as of February 28, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of the Registrant for the 1997 Annual
Meeting of Shareholders are incorporated by reference in Part III of this Form
10-K.
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INTRODUCTORY STATEMENT AND REFERENCES
References made in this Annual Report on Form 10-K to "ISOCOR," the
"Company" or the "Registrant" refer to ISOCOR and its subsidiaries. The ISOCOR
name is a registered trademark of the Company. ISOGATE, ISOMAIL, ISOPLEX,
ISOPRO, ISOTRADE, N-PLEX, PLEXLINK, PLEXLINK Secure, and SMARTROUTER are
trademarks of the Company.
Except for the historical information contained in this Annual Report
on Form 10-K, 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 included from time
to time in the Company's other SEC reports and press releases, copies of which
are available from the Company upon request. The Company assumes no obligation
to update any forward-looking statements contained herein.
Risk Factors
Significant Fluctuations in Quarterly Results; Limited Operating History
The Company's quarterly operating results have in the past varied significantly
and are likely in the future to vary significantly based upon a number of
factors, including the introduction and market acceptance of new products
offered by the Company and its competitors, the volume and timing of large
transactions with customers, the level of product and price competition, the
Company's success in expanding its direct sales force and indirect distribution
channels and the risks related to international operations, as well as other
factors. Products are generally shipped as orders are received, and revenues are
generally recognized as products are shipped. Consequently, quarterly revenues
and operating results depend primarily on the volume and timing of orders during
the quarter, which are difficult to forecast due to the length of the sales
cycle. Further, the Company typically generates a large percentage of its
quarterly revenues during the last few weeks of the quarter. A significant
portion of the Company's operating expenses are relatively fixed in the short
term, and planned expenditures are based on sales forecasts. If revenue levels
are below expectations, operating results are likely to be materially adversely
affected. In particular, net income, if any, may be disproportionately affected
because only a small portion of the Company's expenses varies with revenue in
the short term. Although the Company has experienced significant growth in
revenue in recent years, there can be no assurance that the Company will sustain
such revenue growth in the future or be profitable on an operating basis in any
future period. Due to the foregoing factors, the Company believes that
period-to-period comparisons of its results are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, it is
likely that in some future quarter the Company's revenues or operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Common Stock could be materially adversely affected.
The Company was incorporated in February 1991 and recorded its first sales in
the second quarter of 1992. The Company incurred losses through 1994 and also
incurred quarterly losses during the first two quarters of 1995 and second
quarter of 1996. As a result, the Company had an accumulated deficit of $5.7
million as of December 31, 1996. There can be no assurance that the Company will
be profitable in the future.
Substantial Competition
The markets for the Company's products are intensely competitive and
characterized by rapid changes in technology and evolving standards. The Company
encounters competition from a number of sources, including privately held
companies which specialize in messaging products, computer hardware vendors,
customized solution vendors or systems integrators, and software companies such
as Control Data Systems, Inc., Lotus Development Corporation, along with its
affiliate company, SoftSwitch, Inc., Microsoft Corporation, Netscape
Communication Corporation and Worldtalk Corporation. A variety of potential
actions by any of the Company's competitors, including reduction of product
prices, increased promotion, announcement or accelerated introduction of new or
enhanced products, product giveaways or product bundling could have a material
adverse effect on the Company's business, financial condition and results of
operations. Large companies that compete with the Company or that may compete
with it in the future have substantial technical and financial resources that
allow them to
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develop, enhance or acquire competitive products, and substantial marketing
resources and presence to promote these products aggressively. Moreover, the
Company's current and potential competitors may respond more quickly than the
Company to new or emerging technologies or changes in customer requirements.
Accordingly, it is possible that current or potential competitors could rapidly
gain significant market share. See "Business -- Competition."
Dependence on New Products.
The Company has invested significant resources into the development of new
products and expects to continue to make these investments in the future. ISOCOR
also plans to continue to enhance its products with new releases that provide
additional features and to make its products available on additional hardware
and operating system platforms. Any quality, reliability or interoperability
problems with new or enhanced products, or any other actual or perceived
problems in new or enhanced products, could have a material adverse effect on
market acceptance of such products. There can be no assurance that such problems
or perceived problems will not arise or, that even in the absence of such
problems, the new or enhanced products will receive market acceptance. A failure
of new or enhanced products to receive market acceptance for any reason would
have a material adverse effect on the Company's business prospects. See
"Business -- Products" and "-- Product Development."
Dependence on Expansion of North American Sales Force
The Company intends to expand its North American sales and marketing efforts
substantially. In particular, the Company is currently pursuing plans to
increase its North American direct sales force to focus on sales to large
corporate customers and telecommunications providers. The Company has had only
limited success to date in generating North American sales through its direct
sales force. There can be no assurance that the Company will be successful in
attracting or retaining qualified direct sales personnel, that the expansion of
the Company's direct sales force will result in increased sales of the Company's
products, that the cost of such expansion will not exceed the revenues generated
thereby, or that the Company's sales and marketing organization will compete
successfully against the larger and better-funded sales and marketing
organizations of the Company's competitors. A failure in any of these areas
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Marketing, Sales and
Distribution."
Dependence on International Third-Party Distribution
Internationally, the Company relies significantly on resellers for certain
elements of the marketing and for the distribution of its software products. The
agreements in place with these organizations are generally non-exclusive. These
resellers are not within the control of the Company, may distribute products
other than the Company's products and are not obligated to purchase products
from the Company. There can be no assurance that these resellers will place a
high priority on the marketing of the Company's products, and they may give a
higher priority to other products which may include products of the Company's
competitors. This may result in a lower sales effort applied to the Company's
products and a consequent reduction in the Company's operating results. In
addition, because the Company's international sales are made to a large extent
through resellers, the Company often does not enter into product sales contracts
with the international end users of its products. There can be no assurance that
the Company will retain any of its resellers, and there can be no assurance that
the Company will succeed in recruiting replacement or new organizations to
represent the Company's products. Any changes in the Company's distribution
channels may adversely affect sales and consequently may adversely affect the
Company's business, financial condition and results of operations. See "Business
- -- Marketing, Sales and Distribution."
Ability to Respond to Rapid Technological Change
The Company's future success will depend significantly on its ability to enhance
its current software products and develop or acquire and market new products
which keep pace with technological developments and evolving industry standards
as well as respond to changes in customer needs. The market for electronic
information exchange, Internet and International Organization for Standards
("ISO") software products is characterized by rapidly changing technology,
evolving industry standards and customer demands and frequent new product
introductions and enhancements. There can be no assurance that the Company will
be successful in developing or acquiring product enhancements or new products to
address changing technologies and customer requirements adequately, that it will
introduce such products on a timely basis or that any such products or
enhancements will be successful in the marketplace. The Company's delay or
failure in the development or acquisition of technological improvements or the
adaptation of its software products
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to technological change could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Products" and "-- Product Development."
The Company's software products are very complex as a result of market
requirements for a high level of functionality, support of diverse operating
environments and the need for interoperability and support for multiple
technological standards. These products may contain undetected errors or
failures when first introduced or as new versions are released. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products after commencement of
commercial shipments, resulting in loss of or delay in market acceptance. Such
loss or delay could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Products" and
"-- Product Development."
Dependence on International Operations
The Company's international revenues accounted for approximately 78% of the
Company's revenues for 1996, while the Company's European revenues accounted for
approximately 91% of the Company's international revenues in 1996. The Company
expects that international sales will continue to account for a significant
portion of its total revenues in future periods. International sales are subject
to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, longer payment cycles, increased difficulties in
collecting accounts receivable and potentially adverse tax consequences.
Fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to end users in a particular country, leading
to a reduction in sales in that country. In addition, sales in Europe are
adversely affected in the third quarter of each year as many customers and end
users reduce their business activities during the summer months. These seasonal
factors and currency fluctuation risks may have an effect on the Company's
quarterly results of operations. Further, because the Company has operations in
different countries, the Company's management must address differences in
regulatory environments and cultures. Failure to address these differences
successfully could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Marketing, Sales
and Distribution" and "-- Product Development".
Dependence on Commercial Use of the Internet
The success of the N-PLEX product line will depend in large part on increased
commercial use and acceptance of the Internet. Because commercial use of the
Internet is recent and is evolving rapidly, it is difficult to predict with any
assurance whether the Internet will prove to be a viable marketplace. There can
be no assurance that the infrastructure or complementary products necessary to
make the Internet viable for broad electronic business communications will be
developed. The flat rate, time-of-day and volume-independent pricing structure
offered by Internet service providers to organizations is currently favorable.
Less favorable pricing structures may have a material adverse impact on the
commercial adoption of the Internet and therefore on the success of the
Company's N-PLEX product and the Company's business prospects.
Dependence on Third-Party Products
Certain of the Company's products incorporate technology obtained from third
parties, including elements of the directory services products, the web server
component of the Company's N-PLEX product, and character-based user agents
included in a number of the Company's desktop products. Although the Company
believes that its reliance on third-party products does not pose a significant
business risk, due to the time involved in developing an internal alternative or
licensing such technology from another third party, the Company is dependent in
the short term upon the ability of such third parties to enhance their current
products, to develop new products on a timely and cost-effective basis to meet
changing customer needs and to respond to evolving industry standards and other
technological changes. Although the Company believes there are alternative
sources for such third-party software, there can be no assurance that the
Company would be able to replace the functionality provided by such third-party
software in the event that such software becomes inaccessible to the Company,
obsolete or incompatible with future enhancements of the Company's software
products or that, if the Company could replace such functionality, such
replacement could be obtained at a reasonable cost. The absence of or any
significant delay in the replacement of that functionality could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products."
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Currency Fluctuations
While the Company's consolidated financial statements are prepared in United
States Dollars, a substantial portion of the Company's worldwide operations have
a functional currency other than the United States Dollar. In particular, the
Company maintains substantial development operations in Ireland where the
functional currency is the Irish Pound, and in Germany where the functional
currency is the German Mark. A significant portion of the Company's revenues are
also denominated in currencies other than the United States Dollar. Fluctuations
in exchange rates may have a material adverse effect on the Company's results of
operations and could also result in exchange losses. The impact of future
exchange rate fluctuations cannot be predicted adequately. To date, the Company
has not sought to hedge the risks associated with fluctuations in exchange
rates, but may undertake such transactions in the future. The Company does not
have a policy relating to hedging. There can be no assurance that any hedging
techniques implemented by the Company would be successful or that the Company's
results of operations will not be materially adversely affected by exchange rate
fluctuations. See "Business -- Marketing, Sales and Distribution."
Risks Associated with Intellectual Property
The Company regards its software products as proprietary and relies primarily on
a combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. The Company
generally enters into confidentiality and invention assignment agreements with
its employees and consultants. Additionally, the Company enters into
confidentiality agreements with certain of its customers and potential customers
and limits access to, and distribution of, its proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use the Company's technologies without authorization, or to develop
similar technologies independently. Furthermore, the laws of certain countries
in which the Company does business do not protect the Company's software and
intellectual property rights to the same extent as do the laws of the United
States. In its N-PLEX and NetCS Connectivity product lines, ISOCOR has
implemented a key license mechanism which disables use of the various modules of
the product unless proper number keys are provided by the customer during the
installation process. Otherwise, the Company does not include in its software
any mechanisms to prevent or inhibit unauthorized use, but generally either
requires the execution of an agreement that restricts copying and use of the
Company's products or provides for the same in a break-the-seal license
agreement. If unauthorized copying or misuse of the Company's products were to
occur to any substantial degree, the Company's business, financial condition and
results of operations could be materially adversely affected. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology.
While the Company has not received claims alleging infringement of the
proprietary rights of third parties which the Company believes would have a
material adverse effect on the Company's business, financial condition or
results of operations, nor is it aware of any similar threatened claims, there
can be no assurance that third parties will not claim that the Company's current
or future products infringe the proprietary rights of others. Any such claim,
with or without merit, could result in costly litigation or might require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all. See "Business -- Proprietary Rights."
Risk of Increased Taxation; Loss of Grant Aid
The Company has significant operations and generates a substantial portion of
its taxable income in Ireland. Under an incentive tax program due to terminate
in 2010, the Company is taxed in Ireland on its "manufacturing income" at a 10%
rate, which is substantially lower than United States rates. For Irish tax
purposes, most of the Company's operating income earned in Ireland is considered
"manufacturing income." To qualify for this 10% tax rate, the Company must carry
out "software development services" or "technical or consultancy services" (as
defined in the Irish Finance Act 1980) in Ireland and qualify for an employment
grant from the Industrial Authority of Ireland. If the Company ceases to comply
with these qualifications, all or a part of its taxable profits may be subject
to a 38% tax rate on its post disqualification date taxable profits. Should this
occur, or should Irish tax laws be rescinded or changed, the Company's net
income could be materially adversely affected. If the Company could no longer
qualify for this 10% tax rate, or if the Irish tax laws were rescinded or
changed, the Company's net income would be materially adversely impacted. In
addition, if United States or other international tax authorities were to
challenge successfully the manner in which profits are recognized among the
Company and its subsidiaries or if the Company
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were to transfer funds relating to income generated in lower tax jurisdictions
to the United States, the Company's effective tax rate could increase, and its
business, financial condition and results of operations could be materially
adversely affected.
During 1996 the Company secured IDA grant aid in Ireland in the amount of
$793,000 under an incentive program designed to induce organizations to locate
and conduct business in Ireland. To qualify for this grant aid, the Company must
satisfy various conditions, including that the Company must maintain its current
ownership interest in the subsidiary; the subsidiary must not establish or carry
on similar ventures outside Ireland; and the subsidiary must remain solvent. The
grants include remedy provisions which the IDA employs to pursue partial
revocation of amounts granted in the event the recipient of the grant
substantially vacates its presence in Ireland. While the Company's plans include
a commitment to a significant continuing presence in Ireland and the Company
believes the likelihood of refund to be remote, no assurance can be given in
that regard. There can be no assurance that the Company will continue to qualify
for this grant aid or be eligible for future grants or that the Company's
results of operations will not be materially adversely affected by the loss of
grant aid.
During 1996, the Company also received grant aid from the Technological Finance
Authority - Berlin, under an incentive program to promote research and
development in small and medium sized German-owned companies located in Berlin.
The Company is no longer eligible to receive these grants.
Dependence on Key Personnel
The Company's success depends to a significant degree upon the continued
contributions of its key management and engineering personnel, including
particularly the Company's President and Chief Executive Officer and the Senior
Vice President of Engineering. The success of the Company depends to a large
extent upon its ability to retain and continue to attract highly skilled
personnel. Competition for employees in the software industry is intense, and
there can be no assurance that the Company will be able to attract and retain
enough qualified employees. If the business of the Company increases, it may
become increasingly difficult to hire, train and assimilate the new employees
needed. The Company's inability to retain and attract key employees could have a
material adverse impact on the Company's business, financial condition and
results of operations.
Fluctuations in Market Price of Common Stock
Announcements of new products by the Company or its competitors and quarterly
variations in financial results could cause the market price of the Company's
Common Stock to fluctuate substantially. In addition, the stock market has
experienced price and volume fluctuations from time to time that have affected
market prices of many technology based companies that are not necessarily
related to the operating performance of such companies. These broad market
fluctuations may adversely affect the price of the Company's Common Stock.
Blank Check Preferred Stock; Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deterring or preventing a change of control of the Company
without further action by the shareholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no present
plans to issue shares of Preferred Stock. The Company's Articles of
Incorporation and Bylaws provide, among other things, for the elimination of
cumulative voting with respect to the election of directors (effective at the
first annual meeting following the annual meeting at which the Company has 800
or more shareholders of record), the prohibition of actions taken by the
Company's shareholders by written consent and certain other procedures,
including advance notice procedures with regard to the nomination of candidates
for election as directors other than by or at the direction of the Board of
Directors, which could have the effect of making it more difficult for a third
party to effect a change in the control of the Board of Directors. In addition,
these provisions could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company, and may make more
difficult or discourage a takeover of the Company.
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PART I
ITEM 1. BUSINESS
General
ISOCOR was founded and incorporated in California in February 1991. ISOCOR
develops, markets and supports off-the-shelf electronic information exchange
software products and services that enable businesses and government agencies to
engage in electronic communications over corporate networks, public telephone
networks, value-added networks ("VANs") and the Internet. ISOCOR's products are
available either as a complete, integrated package or as individual components,
and they support the two prevailing, market-driven open standards for electronic
information exchange -- International Organization for Standards ("ISO") and
Internet-based standards. ISOCOR's products and services are designed to support
electronic information exchange globally in an accurate, cost-effective and
secure way, while operating seamlessly across multiple protocols and
architectures.
ISOCOR's business strategy is to provide a broad range of products offering
features and performance to meet the wide range of customers' needs; support
open architectures and legacy systems by providing solutions that are hardware
and software platform-independent and are based on open standards; leverage
Internet-based technologies by adding enhanced Internet capabilities to its
message server product line allowing the exchange, switching and management of
traffic formatted in prevailing native Internet-based standards without any
conversions unless that traffic is directed to heterogeneous environments; and
expand distribution channels primarily to increase its North American direct
sales force to focus on sales to large corporate customers and
telecommunications providers and customers within U.S. government agencies.
In furtherance of its strategy to provide open standards, multi-platform
electronic information exchange solutions, ISOCOR, though its wholly owned
subsidiary ISOCOR BV, acquired all of the outstanding quota interests (shares)
of NetCS Informationstechnik GmbH ("NetCS") effective August 29, 1996. NetCS, a
German company, is a developer, integrator and distributor of electronic
information exchange software products with expertise in developing and
marketing ISDN and Internet-based communications subsystems. ISOCOR acquired
NetCS through a pooling of interests, in which all outstanding NetCS quota
interests were exchanged for 475,000 shares of ISOCOR Common Stock.
Products
Initially, the Company licensed software technology to enable it to offer
products to its customers quickly. Thereafter, the Company has developed its own
software technology in order to decrease the amount of time required to respond
to market demand, differentiate its products from those of its competitors in
terms of features and quality, and decrease its dependence on third-party
suppliers. At present, the majority of the Company's products are based upon
internally developed technology.
ISOCOR has designed its software to conform to international standards, allowing
the Company's products to interoperate with many existing products and services.
Conformance with international standards has been achieved through application
of the experience of ISOCOR employees in standards development to the design and
testing of the Company's products. Through its combination with NetCS, ISOCOR
also adds to its product solution standards-based ISDN and X.25 connectivity for
UNIX systems, including TCP/IP over ISDN and TCP/IP and X.25 router
functionality within UNIX.
The ISOCOR solution is implemented through five major product groups: message
servers, directory services, gateways, desktop products and NetCS connectivity
products. Message servers handle the interchange of any size or type of
electronic document or information across and outside of a customer's computer
network. Directory services products support enterprise-wide directory listing,
access and navigation, as well as connection to external networks like the World
Wide Web. Gateway products allow leading proprietary E-mail systems to
interoperate with ISOCOR's message servers and public X.400 VANs, as well as
Internet E-mail. Desktop products provide the primary document transport
function for users of personal computers or workstations, including file
transfer, document handling and E-mail. NetCS connectivity products provide
dial-up client access to, and wide area network server connections between,
remotely located UNIX environments.
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Message Server Products
The Company's server software has been designed to provide high performance
while reducing hardware requirements. This has been achieved through a design
methodology that eliminates the overhead of protocol layering, reduces the
number of computer instructions required to perform common operations and
reduces dependence on the mechanical performance of computer peripheral devices
such as disk drives. The design also reduces the risk that messages will be lost
or cannot be duplicated in the event of external system breakdowns, such as loss
of power or hardware failures. This promotes high reliability of the electronic
information exchange backbone and allows public carriers to rely upon the
software.
ISOPLEX message servers store and relay messages via the X.400 standard,
allowing them to be implemented over prevailing network protocols including
TCP/IP and X.25. In addition, the Company's ISOPLEX servers run on a variety of
hardware platforms and operating systems, enabling customers to integrate
readily the ISOPLEX server within their chosen hardware infrastructure, thus
reducing disruption and lowering cost. All of the ISOPLEX servers are
administered by a management system that allows system managers to view traffic
flow, add or delete users and create billing information. The management system
can be used on a remote basis over a networked set of servers, reducing the
personnel required to manage the ISOPLEX servers.
ISOCOR also offers ISOPLEX ADMD, which provides advanced features in the areas
of mail account tracking, message management and administration and system
control. With ISOPLEX ADMD, large organizations and public carriers can offer
high-end, value-added services unavailable in simpler message management
servers.
N-PLEX, ISOCOR's Internet server product, applies the same characteristics of
robust message management, administrative control and secure message transfer
inherent in its X.400 server products to the SMTP, POP3 and IMAP4 standards.
Performance of Internet mail systems has been enhanced by use of the
ISOCOR-developed caching algorithms to reduce the use of time-consuming DNS
directory accesses over the Internet and by making full use of Microsoft Windows
NT operating system threading facilities for efficient utilization of
multiprocessor computer systems. Security holes are eliminated in the
proprietary ISOCOR design, and authentication login facilities have been added
using encryption technology to prevent unauthorized access to the mail systems.
The N-PLEX Management Center is designed to extend normal server management
capabilities to support mixed protocol backbones with Internet service, X.400
and gateways to other mail systems. It manages ISOCOR's message servers and
gateways in an integrated fashion, providing the high level of service necessary
for implementing mission-critical electronic information exchange applications.
The N-PLEX Management Center runs on the Windows NT platform, performing remote
management of components over TCP/IP, thereby allowing the administrator to
manage multiple sites simultaneously from a central management station. The
management facilities provided by the Management Center include remote
configuration, routing configuration, fault notification, performance
monitoring, system management and message tracking.
Directory Services Products
As systems increase in size and complexity, organizations increasingly need to
implement a central repository for the information required to communicate
across systems. The Global Directory Server ("GDS"), ISOCOR's directory product,
is designed to store and disseminate such information on both a wide area and
local area basis. This information may include E-mail addresses and
cryptographic material for digital signatures and message confidentiality that
are used invisibly by client software, as well as information that users may
access directly, such as telephone numbers, fax numbers, physical mail addresses
and pictures. The directory allows efficient and rapid updating of this
information for use at diverse locations, reducing errors and saving the time
and personnel resources required to maintain and distribute this data. This
distributed application architecture allows system managers to optimize the
location of information so that information required locally is on the local
server, while users continue to have transparent access to information on any
other server in the network.
GDS is standards-based and can synchronize stored information, such as e-mail
addresses, among proprietary systems communicating across different electronic
information exchange systems. A number of client applications are compatible
with GDS, including World Wide Web browsers and X.400 mail clients, which can
access it over the
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wide variety of network connections it supports, including dial-up, Internet
TCP/IP and X.25. GDS can serve as an easy-to-access information source, storing
data from other sources such as corporate databases, World Wide Web servers and
other content sources.
As with other ISOCOR applications, GDS is supplemented by an integrated set of
directory tools, called the Global Directory Navigator, that allows an
administrator to exchange information with other databases, collect accounting
information and administer the system either remotely or locally.
In March, 1996, the Company entered into an agreement with International
Computers Limited ("ICL") to license a portion of ICL's i500 directory server
product for incorporation with ISOCOR's own communication software technology to
create ISOCOR's Global Directory Server product. This bi-lateral crosslicensing
agreement provides for the payment of royalties by the Company based on sales of
products incorporating the licensed i500 directory server product.
ISOCOR's current server and desktop products have been developed and are owned
by ISOCOR, other than the UNIX version of ISOMAIL, the web server software
module of N-PLEX, and certain features of PLEXLINK Secure, which have been
licensed from third parties.
Gateway Products
The proliferation of multiple proprietary electronic information exchange
systems within organizations has created isolated islands of communication where
users on one system cannot communicate with users on other systems. To solve
this incompatibility problem, ISOGATE gateways, in conjunction with ISOPLEX and
N-PLEX servers, enable users across platforms to exchange electronic
information, including attached files such as spreadsheets and word processing
documents, without complex rules or administration. This cross-communication
capability allows the rapid exchange of information across departments or
organizations. The gateway products also connect proprietary electronic
information exchange systems to the ISOCOR message server and directory server
products, so that the proprietary directories reflect the availability of
additional external users via the electronic information exchange backbone.
ISOGATE supports the exchange of data between the most popular local mail
systems including those provided by IBM/Lotus (cc:Mail and Notes) and Microsoft.
ISOGATE products also enable users to connect to public-based systems with its
X.400 and SMTP/MIME (Internet) gateways.
ISOCOR offers application programming interfaces ("APIs") for its ISOGATE
products that can be used to integrate the gateways into an organization's
business applications. One such application-specific gateway is the ISOTRADE EDI
Server ("ISOTRADE"). ISOTRADE links the ISOCOR electronic information exchange
backbone with electronic data interchange ("EDI") translation products, such as
those made by TSI International, Ltd., Supply Tech, Inc., and St. Paul Software,
Inc., and also allows the customer to create software that can directly access
the ISOTRADE APIs for electronic commerce applications.
Desktop Products
A complete electronic information exchange infrastructure includes desktop or
user-interface products. ISOCOR develops and supplies desktop products which
facilitate the use of its message servers and other backbone products. ISOCOR's
desktop products provide native support for the X.400 global standard and
operate in the client server architecture. This flexibility means that users
have interoperability with standards-based message servers and the network
administrator can take advantage of the cost savings of client server solutions.
ISOCOR produces software to connect existing applications to the electronic
information exchange backbone as well as complete electronic information
exchange client applications.
ISOCOR's desktop products contain a unique P7/DAP messaging and directory
protocol implementation utilizing ISOCOR virtual buffer technology which reduces
memory requirements while simultaneously enhancing performance in a Microsoft
Windows environment. In addition, the Company's MAPI-compliant products use
proprietary ISOCOR-developed algorithms to map X.400 and X.500 facilities into
the MAPI feature set, allowing full access to X.400 messaging and X.500
directory from Windows 95 applications that comply with MAPI.
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<PAGE> 10
ISOPRO is a full-featured electronic information exchange client for Windows
that extends support of the ISO X.400 standard to the desktop. ISOPRO provides
facilities for the user to compose messages, attach files for transmission,
access directory services to locate recipients and send messages via ISOPLEX
message servers or public message stores on X.400 VANs via X.25, APS dial-up or
Internet TCP/IP links. Facilities are provided to retrieve, file and view
messages, including attachments. Offering similar functionality, the ISOMAIL
product is for character-oriented UNIX/DOS environments.
PLEXLINK allows existing office automation applications to connect to ISOCOR
electronic information exchange backbone products. This connection is performed
through MAPI, the Windows Messaging Subsystem shipped by Microsoft in Windows
95. Applications enabled include the Microsoft Exchange Client, Excel, Word and
others. Virtually any type of binary file attachments can be handled, and
PLEXLINK enables forms to be distributed using the X.400 or Internet Mail
backbone format supported by the ISOPLEX and N-PLEX servers. PLEXLINK connects
to the ISOPLEX and GDS servers via dial-up lines, the Internet or X.25.
PLEXLINK Secure is a secure messaging version of PLEXLINK. Security includes
encryption and digital signatures for content confidentiality and authentication
of message origin and receipt. These security features may be added to any
MAPI-enabled application simply by installing PLEXLINK Secure on the PC.
PLEXLINK Secure uses the standard public key security algorithm for signatures
developed by RSA Data Security, Inc. ("RSA") and patented by RSA in the United
States, as well as the NIST Data Encryption Standard algorithm for content
confidentiality. This product is currently sold only outside the United States.
Personal ISOTRADE is a desktop product that includes all features of PLEXLINK in
addition to specialized interfaces for third-party EDI and application
developers. It is designed to provide easy-to-use and inexpensive support to
Windows-based EDI translators and applications.
NetCS Connectivity Products
Information systems solutions increasingly require networking and data exchange
capabilities outside the limitations of local area networks. Remote data access,
remote maintenance of systems and sophisticated client/server solutions increase
productivity, efficiency and competitiveness. Today's matrix of network
organizational structure in companies depends on high quality, reliable and fast
remote electronic exchange of information.
The NetCS netACCESS product line combined with the NetCS netGW product provides
a sophisticated, host-based TCP/IP WAN router solution, designed specifically
for dial-up networks with strong support for ISDN and X.25 networks. Features
such as the TWIN option allow fault-tolerant network access to remote users in
home and branch offices. The products include an integrated packet firewall
ensuring security for the network. The netACCESS product provides a
high-performance, cost-efficient and reliable solution for access to Intranets
and the Internet via modern WAN communication media. The NetCS netISDN and
netX.25 product lines provide a close integration of ISDN and X.25 services into
different UNIX platforms.
Marketing, Sales and Distribution
The Company sells its products both directly to end users and indirectly through
resellers, systems integrators and original equipment manufacturers ("OEMs"). In
North America, ISOCOR sells its products primarily through a direct sales
organization focused on Fortune 1000 companies, telecommunication carriers and
U.S. Government agencies. Internationally, ISOCOR sells its products primarily
through a worldwide network of resellers.
The Company's international resellers consist primarily of systems integrators
and value-added resellers ("VARs"). These resellers typically range in size from
several hundred staff down to half a dozen specialists in some smaller
countries. The Company selects resellers based on general experience in
electronic information exchange, data communications and systems integration,
and then trains them on the Company's software products and technologies at
ISOCOR's training centers in the U.S. and Ireland. In addition, ISOCOR sells to
major accounts worldwide, primarily to large telecommunications carriers which
prefer to deal directly with the Company for support. A number of the Company's
international public carrier backbone customers have also begun licensing
ISOCOR's products to end users as customer premises equipment. See "Risk Factors
- -- Dependence on International Third Party Distribution."
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<PAGE> 11
The Company's reseller agreements generally grant resellers non-exclusive rights
to distribute the Company's products in each reseller's defined geographic
market. Each reseller is generally responsible for supporting its end user
customers, while ISOCOR provides technical support to the reseller. The Company
provides price protection to its resellers such that, if the Company reduces the
price of its products, resellers are entitled to a credit for the difference
between the reduced price and the price they previously paid for products that
are held in the reseller's inventory at the time of the price reduction and that
were purchased within the preceding 30 days. ISOCOR's resellers typically stock
little inventory, but instead obtain products from the Company on an
as-needed basis.
To support its sales efforts, the Company conducts marketing programs which
include direct mail, public relations, advertising (including a World Wide Web
home page on the global Internet (http://www.isocor.com)), worldwide trade shows
and selected joint marketing programs. The Company also sponsors an annual
meeting for its resellers to provide them additional information and skills to
market the Company's products effectively. The sales, support and service
functions for the Company's products are provided principally through the
Company's Santa Monica headquarters with the exception of the European, Middle
East and African markets which are serviced through ISOCOR sales and support
offices in Berlin, Bern, Dublin, London and Paris.
During 1996, international revenues accounted for 78% of the Company's total
revenues. Of these international revenues, 91% resulted from sales to resellers
or customers located primarily in Europe, with the remainder resulting from
sales to resellers or customers located in the rest of the international
marketplace. International sales may be subject to government controls and other
risks, including export licenses, federal restrictions on the export of critical
technology, changes in demand resulting from currency exchange fluctuations,
political instability, trade restrictions and changes in tariffs. To date, the
Company has experienced no material difficulties due to these factors. See "Risk
Factors -- Dependence on International Operations" and "-- Currency
Fluctuations".
Customers
ISOCOR's products are used in a variety of industries. The Company markets its
products primarily to large and medium-sized corporate customers, as well as
government and telecommunications customers. Since its founding in 1991, ISOCOR
has licensed more than 5,500 message and directory servers, 3,800 gateways and
525,000 desktop products. During 1996, no single customer accounted for more
than 10% of the Company's revenues. During 1996, the following product classes
accounted for more than 10% of total revenue of ISOCOR: server products
accounted for 42% of total revenue, gateway products accounted for 11% of total
revenue and NetCS connectivity products accounted for 20% of total revenue.
Customer and Reseller Support and Services
The Company offers its resellers and end-user customers standard support and
upgrade services. The agreements that provide for these services vary among end
users, resellers and OEMs, but provide that for an annual fee the Company will
provide customer support services by electronic communication, fax or telephone.
These agreements also generally provide software upgrades to the products as
they are generally released by the Company. ISOCOR also offers training, custom
engineering and pre- and post-sale services to end users and carriers.
Professional services include network design consulting, product installation,
administrator training, custom application integration and turnkey systems
implementation. The Company has major customer support centers in Santa Monica
and Dublin. Additionally, local technical support is available at the Company's
regional offices in London, Paris and Bern. In 1996, provision by ISOCOR of all
customer and reseller support and services accounted for 19% of ISOCOR revenues.
Product Development
The Company has invested significant resources into the development of new
products and expects to continue to make these investments in the future. ISOCOR
also plans to continue to enhance its products with new releases that provide
additional features and to make its products available on additional hardware
and operating system platforms. See "Risk Factors -- Dependence on New Products"
and " -- Ability to Respond to Rapid Technological Change."
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<PAGE> 12
The Company has development centers located in Berlin, Copenhagen, Dublin and
Santa Monica. The largest such facility is located in Dublin in order to take
advantage of lower costs in Ireland, Industrial Development Authority ("IDA")
tax incentives and grants and the strong Irish educational structure. The
presence of development facilities in the U.S. and Europe enhances access to
both American and European markets and technology. ISOCOR invests substantial
management time and resources in quality assurance testing for all of its
products. Quality assurance testing takes place at the Berlin, Dublin and Santa
Monica facilities.
As of December 31, 1996, the Company employed 136 persons in the product
development function, including 99 software and quality assurance engineers. The
product development organization consists of separate product units, each with
expertise in specific areas. Engineering expenses were $9.0 million in 1996.
Competition
The electronic information exchange market is intensely competitive and subject
to rapid technological change and evolving standards. The Company believes its
long-term success will depend in part on its ability to be a leader in
developing and offering products that meet emerging industry or market
standards, to offer a broad range of high-performance, multi-platform,
electronic information exchange products requiring little customization for the
general marketplace, to maintain strong customer support and sufficient
distribution channels and to offer competitively priced products. The Company
believes that its products currently compete favorably with respect to these
factors.
The electronic information exchange software backbone market is fragmented and a
number of companies are participating in this market, with a variety of product
offerings featuring varying profiles and business models. The Company's
competition includes privately held companies which specialize in messaging
products such as Data Communications Ltd., Innosoft International, Inc., Marben
S.A., Net-Tel Computer Systems Limited, Nexor International AB and Software.com.
ISOCOR's competitors also include computer hardware vendors such as
Hewlett-Packard Company, Siemens AG, Sun Microsystems, Inc. and Tandem
Computers, Inc.; customized solution vendors or systems integrators such as
Control Data Systems, Inc. and Infonet Services Corporation; and publicly held
software companies such as the Lotus Development Corporation, a subsidiary of
International Business Machines Corporation, along with its affiliate company,
SoftSwitch, Inc. ("Lotus"), Microsoft Corporation ("Microsoft"), Netscape
Communications Corporation ("Netscape"), Novell, Inc. ("Novell") and Worldtalk
Corporation.
Major software providers such as Microsoft, Lotus and Novell, have incorporated
functionality into their product offerings similar to that provided by the
Company's products. The Company's N-PLEX product contains elements that compete
directly with components or complete products offered by Netscape, Lotus,
Novell, Microsoft and other developers of server-based software products for the
Internet and Intranet communities. The Company's Global Directory Server
contains elements that compete directly and indirectly with components and
complete products offered by Lotus, Novell and other developers of X.500 and
directory server-based software products. The Company's Gateway products contain
elements that compete directly with components or complete products offered by
Control Data Systems, Softswitch, Inc., Innosoft International, Inc., Worldtalk
Corporation and other developers of products for connectivity between dissimilar
electronic information exchange software systems. To the extent such companies
provide such functionality or products, the Company's business, financial
condition and results of operations could be materially adversely affected.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing and other resources than the Company. As
a result, they may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than can the
Company. Increased competition could result in price reductions, reduced
operating margins and loss of market share.
See "Risk Factors -- Dependence on New Products," " -- Substantial Competition"
and "-- Ability to Respond to Rapid Technological Change."
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<PAGE> 13
Proprietary Rights
The Company regards its software products as proprietary and relies primarily on
a combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect its proprietary rights. The Company
generally enters into confidentiality and invention assignment agreements with
certain of its employees and consultants. Additionally, the Company enters into
confidentiality agreements with its customers and potential customers and limits
access to, and distribution of, its proprietary information. In its N-PLEX and
NetCS Connectivity product lines, ISOCOR has implemented a key license mechanism
which disables use of the various modules of the product unless proper number
keys are provided by the customer during the installation process. Otherwise,
the Company does not include in its software any mechanisms to prevent or
inhibit unauthorized use, but generally either requires the execution of an
agreement that restricts copying and use of the Company's products or provides
for the same in a shrinkwrap license agreement. There can be no assurance that
the Company's means of protecting its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology. See "Risk Factors -- Risks Associated with Intellectual Property."
While the Company has not received claims alleging infringement of the
proprietary rights of third parties which the Company believes would have a
material adverse effect on the Company's business, financial condition and
results of operations, nor is it aware of any similar threatened claims, there
can be no assurance that third parties will not claim that the Company's current
or future products infringe the proprietary rights of others. Any such claim,
with or without merit, could result in costly litigation or might require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all.
Manufacturing
The Company contracts with third parties to manufacture the media containing its
software, which consists of diskette, CD-ROM and tape duplication and printing
of manuals and boxes. Assembly is performed by the Company at its Dublin and
Berlin facilities. The raw materials and services associated with manufacturing
the media are generally available through a number of sources. Finished products
are generally shipped from Ireland to customers in Europe, the Middle East and
Africa, and to the Company's United States facility. The Company's United States
facility generally distributes products to customers in North and South America,
the Far East, Australia and New Zealand. The NetCS Connectivity products are
generally shipped directly from Berlin to customers in Germany, and otherwise to
the Company's Irish and United States facilities for further distribution.
Employees
As of December 31, 1996, the Company employed 264 persons, including 136 in
product development and engineering (including 15 in Berlin, three in
Copenhagen, 93 in Dublin and 25 in Santa Monica), 37 in pre- and post-sales
customer support, 13 in North American sales, 25 in international sales, 12 in
marketing, nine in assembly and 32 in administration. The Company also retains
consultants from time to time, primarily in the area of engineering, to assist
with particular areas of software development for limited periods of time. None
of the Company's employees is currently represented by a labor union, and the
Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
ISOCOR's corporate offices are located in Santa Monica, California,
where the Company currently leases approximately 19,000 square feet under a
sublease expiring in 1998. The Company's Santa Monica facility houses its
corporate offices and engineering, sales and marketing departments.
Additionally, the Company leases approximately 2,000 square feet in Vienna,
Virginia for a sales office under a sub-lease expiring in early 1998, and
another approximately 2,500 square feet of total space in Berlin for engineering
and sales offices, including an approximately 2,000 square foot primary space
with a lease expiring in 1999, and an approximately 500 foot satellite space
leased month to month. The Company also leases office space for its major
engineering facility in Dublin, consisting of approximately 22,000 square feet
under a sublease expiring in 1998, with an option to renew to 1999. In addition,
the Company leases approximately 1,000 square feet each of office facilities in
London, Paris, Copenhagen and Bern. The Bern facility is a sales office, while
the offices in London and Paris perform pre-sales
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<PAGE> 14
marketing and support. The London, Paris and Bern leases expire in 1998, 2003
and 1997, respectively, while the lease for the facility in Copenhagen is a
month-to-month lease. The Company believes that these facilities are adequate
for the Company's current needs and that suitable additional space, if needed,
should be available on commercially reasonable terms to accommodate expansion of
the Company's operations. See Note 7 to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
ISOCOR is not currently subject to any material legal proceedings. The
Company may from time to time become a party to various legal proceedings
arising in the normal course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 22, 1996, a Special Meeting of Shareholders was held at the
Company's principal executive offices. The only matter submitted for a vote at
such meeting was approval of an increase in the number of shares of Common Stock
reserved for issuance under the Company's 1992 Stock Option Plan by 500,000
shares to an aggregate of 2,300,000 shares. Shares were voted to approve such
increase as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
5,098,845 320,452 6,600
</TABLE>
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<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company completed an initial public offering of its Common Stock on
March 13, 1996, and the Company's Common Stock is traded on the Nasdaq National
Market under the symbol ICOR. As of December 31, 1996 the Company had
approximately 129 shareholders of record.
The following table shows the high and low bid prices of the Company's
Common Stock for the fiscal year ended December 31, 1996 as reported by Nasdaq:
<TABLE>
<CAPTION>
1996
----
High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter (ended 3/31/96) $ 9.750 $ 7.500
Second Quarter (ended 6/30/96) 20.000 8.750
Third Quarter (ended 9/30/96) 15.000 6.625
Fourth Quarter (ended 12/31/96) 7.375 5.250
</TABLE>
Future stock prices may be subject to volatility particularly on a
quarterly basis. Any shortfall in revenues or net income from amounts expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's stock.
DIVIDEND POLICY
In 1993 and 1994 cash dividends were declared and subsequently paid by
NetCS Informationstechnik GmbH, a corporation later combined with ISOCOR in a
transaction accounted for as a "pooling of interests." The Company has not paid
dividends on its common stock and has no present plans to do so.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues ............................ $ 1,908 $ 5,460 $13,541 $20,774 $26,394
Gross profit .............................. 1,392 3,723 10,720 16,180 21,326
Income (loss) from operations ............. (2,800) (2,531) (120) 586 (33)
Net income (loss) ......................... $(2,782) $(2,791) $ (10) $ 319 $ 483
==================================================================
Net income (loss) per share ............... $ (1.14) $ (1.10) $ -- $ 0.04 $ 0.06
==================================================================
Shares used in per share calculation ...... 2,449 2,528 2,609 7,783 8,247
==================================================================
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Total assets ..................... $5,017 $11,482 $12,484 $19,494 $41,298
Long-term liabilities ............ 78 156 110 606 187
Total shareholders' equity ....... $4,448 $ 9,107 $ 8,697 $12,487 $33,204
Cash dividends declared per common
share (1) ..................... $ 0.02 $ 0.09
</TABLE>
(1) In 1993 and 1994 cash dividends were declared and subsequently paid by NetCS
Informationstechnik GmbH, a corporation later combined with ISOCOR in a
transaction accounted for as a "pooling of interests." Therefore, although the
Company has not paid dividends on its Common Stock and has no plans to pay cash
dividends to its shareholders in the near future, due to the disclosure rules
for poolings of interest, which require presentation as though the combination
had been consummated for all periods presented, some cash dividends are shown
above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The consolidated financial statements of the Company contained in this report
have been retroactively restated for all periods presented to include the
financial position, results of operations and cash flows of NetCS
Informationstechnik GmbH in accordance with the pooling of interests method of
accounting.
Revenues. Total revenues were $13.5 million, $20.8 million and $26.4
million in 1994, 1995 and 1996, respectively, representing increases of 53% and
27% in 1995 and 1996, respectively. Revenues from international sources
accounted for 74%, 82% and 78% of total revenues in 1994, 1995 and 1996,
respectively, with the Company's European revenues accounting for 63%, 66% and
71% of the Company's total revenues in 1994, 1995 and 1996, respectively.
Revenues from international sources increased as a percentage of total revenues
in 1995 largely due to the Company's North American revenues remaining constant
with 1994 levels. In addition, international revenues from non-European sources
increased in 1995, largely due to a single sale in Asia in excess of $1.3
million. Revenues from international sources decreased as a percentage of
revenues in 1996 largely due to the Company's increased focus on the North
American marketplace, where the revenue growth rate was 57%.
Product revenues were $11.1 million, $17.6 million and $21.3 million in
1994, 1995 and 1996, respectively, representing increases of 58% and 21% in 1995
and 1996, respectively. The increase from 1994 to 1995 resulted primarily from
increases in the average prices received by the Company for its products
(primarily because of changes in product mix toward higher priced products), and
to a lesser extent resulted from increases in the volume of products sold. The
increase from 1995 to 1996 resulted primarily from increases in the volume of
products sold, partially offset by an increase in the provision for estimated
future returns.
Service revenues were $2.4 million, $3.2 million and $5.1 million in
1994, 1995 and 1996 respectively, representing increases of 31% and 60% in 1995
and 1996, respectively. Service revenues include software support and update
fees, training, custom engineering and installation. The increases during these
periods were primarily due to increased volumes of software support and update
service fees relating to the Company's increased product sales, and to a lesser
extent increased activity in custom engineering and training.
Cost of Revenues. Cost of revenues includes both cost of product
revenues and cost of service revenues. Cost of product revenues consists
primarily of costs of hardware purchased from third party vendors, product media
duplication, manuals, packaging materials, and third party royalties relating to
licensed technology. Cost of service revenues consists primarily of
personnel-related costs of providing software support and update, training,
custom engineering and installation services. Cost of revenues increased year
over year from 1995 to 1996 primarily as a result of supporting a higher level
of service revenues, and increased production costs associated with higher
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<PAGE> 17
volumes of products sold, partially offset by a reduction in third party
royalties relating to licensed technology. Cost of revenues increased year over
year from 1994 to 1995 primarily as a result of increased costs relating to
hardware purchased from third party vendors associated with increased volumes of
hardware-related revenues, and increased costs relating to supporting a higher
level of service revenues.
Gross Profit. Gross profit was $10.7 million, $16.2 million and $21.3
million, representing 79%, 78% and 81% of revenues in 1994, 1995 and 1996,
respectively.
Gross profit from product sales was $9.5 million, $14.6 million and
$18.6 million, in 1994, 1995 and 1996, respectively, representing 85%, 83% and
87% of product revenues in 1994, 1995 and 1996, respectively. The increases in
gross profit were largely a result of increased sales of the Company's products,
coupled with a shift in the Company's sales principally toward higher margin
products which result primarily from the Company's decreasing reliance upon
technology owned by third parties and thus, lower royalties paid to third
parties. This trend also affected the difference in gross margin between 1994
and 1995, but was partially offset by increased costs relating to hardware
purchased from third party vendors associated with increased volumes of
hardware-related revenues.
Gross profit from services was $1.3 million, $1.5 million and $2.7
million in 1994, 1995 and 1996, respectively, representing 52%, 48% and 53% of
services revenues in 1994, 1995 and 1996, respectively. The changes in service
gross profit percentages were principally a result of fluctuating personnel
costs, which are the primary component of cost of services revenues.
Engineering. Engineering expenses were $4.7 million, $7.5 million and
$9.0 million in 1994, 1995 and 1996, respectively, representing 34%, 36% and 34%
of revenues in 1994, 1995 and 1996, respectively. Engineering expenditures
consist primarily of personnel costs, equipment costs and related costs required
to conduct the Company's development efforts, which include costs related to
engineering, product management, technical writing and quality assurance. The
dollar increases in engineering expenses resulted principally from increased
levels of personnel primarily involved in these activities. The increase in 1995
resulted primarily from in-house development of the Company's ISOGATE product
line and the development of the N-PLEX server product. The increase in 1996
resulted primarily from the continued development and enhancement of the N-PLEX
server product family and the development of the Global Directory Server
product. During 1994, 1995 and 1996, there were approximately 61, 105 and 136
people, respectively, involved in engineering activities. To date, all software
development costs have been expensed as incurred, as the impact of software
development costs that qualify for capitalization under Financial Accounting
Standard No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," have been immaterial to the financial statements.
The Company believes that significant investments in research and development
are required for the Company to remain competitive. As a consequence, the
Company intends to increase the dollar amount of its software development
expenditures in the future, and these increases may not vary directly with the
level of revenues for that same period, having an adverse effect on the results
of operations.
Sales and Marketing. Sales and marketing expenses were $5.1 million,
$6.8 million and $10.1 million in 1994, 1995 and 1996, respectively,
representing 38%, 33% and 38% of revenues in 1994, 1995 and 1996, respectively.
Sales and marketing expenses include personnel and associated costs relating to
selling, sales support and marketing activities, including marketing programs
such as trade shows and other promotional costs. In 1995 and 1996, the increases
in sales expenses in dollars resulted primarily from expansion of the Company's
sales and support organizations both in the United States and internationally.
During 1994, 1995 and 1996, there were approximately 39, 53 and 74 people,
respectively, primarily involved in sales activities. From 1994 to 1995 the
Company's staffing and expenditures with respect to marketing activities
remained relatively unchanged. In 1996, the Company's marketing expenditures
increased primarily due to an increased level of personnel and marketing
programs primarily in North America. The Company intends to increase the dollar
amount of its sales and marketing expenditures in the future.
Administration. Administration expenses were $1.4 million, $2.1 million
and $2.7 million in 1994, 1995 and 1996, respectively, representing 10% of
revenues in each of those years. The dollar increases were primarily due to
higher levels of staffing. In addition, during 1996 the Company incurred
additional expenses to meet the
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<PAGE> 18
reporting requirements imposed on a public company. During 1994, 1995 and 1996,
there were approximately 13, 20 and 29 people, respectively, primarily involved
in administrative activities. The Company expects to increase the dollar amount
of its administration expenditures in the future to support potential growth and
to continue to meet the reporting requirements imposed on a public company.
Agency Grants. In 1992, 1994 and 1996 the Company secured grant aid in
the amount of $750,000, $850,000 and $793,000, respectively, from the Industrial
Development Authority of Ireland under an incentive program designed to induce
organizations to locate and conduct business in Ireland. These grants are for
six years each and are primarily dependent upon the creation and fulfillment of
new jobs within the Company in Ireland. The Company reflected as a reduction of
operating expenses $192,000, $712,000 and $413,000 relating to these grants in
1994, 1995 and 1996, respectively. The Company also received grant aid from the
Technological Finance Authority - Berlin under an incentive program to promote
research and development in small and medium sized German-owned companies
located in Berlin. The Company reflected as a reduction of operating expenses
$13,000, $124,000 and $87,000 relating to these grants in 1994, 1995 and 1996,
respectively. As of August 31, 1996, the Company is no longer eligible to
receive grants from the Technological Finance Authority - Berlin. The Company
also received grant aid from the Israel-United States Binational Industrial
Research and Development Foundation in 1993 in an aggregate amount of $222,000
covering an approximate one-year period. During 1994, the Company reflected as
reduction of operating expense $118,000 as its final amount under this grant.
The Company expects the level of grant aid it receives from differing sources to
vary from year to year.
Acquisition Costs. Acquisition costs of $227,000 in 1996 represent the
direct costs, primarily legal and accounting of the business combination of
NetCS Informationstechnik GmbH and ISOCOR.
Provision for Loss on Investment. Provision for loss on investment of
$100,000 in 1995 represents the Company's estimate of a one-time loss related to
the sale of a 15% interest in a UK company, which interest the Company had held
since 1992 and subsequently liquidated in January 1996. This investment was made
to provide access to technology that is no longer strategic to the Company as a
result of the Company's internal technology development efforts.
Income (Loss) from Currency Fluctuations. Income (loss) from currency
fluctuations was $201,000, $72,000 and $(82,000) in 1994, 1995 and 1996,
respectively. The differences resulted primarily from changes in foreign
currency exchange rates.
Interest Income. Interest income was $157,000, $104,000 and $1,010,000
in 1994, 1995 and 1996, respectively. The increase in 1996 was primarily a
result of interest income on the Company's increased cash equivalents
and marketable securities related to the Company's initial public offering in
March 1996.
Provision for Income Taxes. During 1994 and 1995 the Company did not
generate taxable income in the United States. In 1996, the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States, which resulted in a significant reduction in income tax expense
for that year. Included in provision for income taxes in 1995 is $278,000
relating to income taxes withheld by a foreign government relating to a
substantial sale in that country made from the United States. Such taxes
withheld generate foreign tax credits for U.S. federal tax purposes and
therefore may be used in the future against other United States income taxes
otherwise payable. The Company has significant operations and generates a
substantial portion of its taxable income in Ireland. Under a tax holiday due to
terminate in 2010, the Company is taxed in Ireland on its "manufacturing income"
at a 10% rate. For Irish tax purposes, most of the Company's operating income
earned in Ireland is considered "manufacturing income". To qualify for this 10%
rate, the Company must carry out "software development services" or "technical
or consultancy services" (as defined in the Irish Finance Act 1980) in Ireland
and qualify for an employment grant from the Industrial Development Authority of
Ireland. If the Company ceases to comply with these qualifications, all or a
part of its taxable profits may be subject to a 38% tax rate on its post
disqualification date taxable profits. Should this occur, or should Irish tax
laws be rescinded or changed, the Company's net income could be materially
adversely affected. Because the Company utilized tax loss carryforwards to
offset income otherwise taxable in Ireland in 1994 and 1995, this reduced tax
rate has not resulted in significant reductions in income tax expense for those
years.
-18-
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's initial public offering in March, 1996, the
Company financed its operations primarily through private sales of equity
securities. The Company received net proceeds of approximately $10,000, $3.2
million, and $1.8 million in 1994, 1995 and 1996, respectively, from the private
sale of equity securities. In March, 1996 the Company completed a public
offering and sale of 2,300,000 shares of its common stock, resulting in net
proceeds to the Company of approximately $18.4 million. Funds from the Company's
equity financings continue to be used to fund the expansion of the Company's
infrastructure and internal operations, including purchases of capital equipment
and the hiring of additional personnel.
The Company generated (used) cash from operating activities of
$(259,000), $(565,000) and $446,000 in 1994, 1995 and 1996, respectively.
Operating cash flows in 1995 relative to 1994 were affected by a substantial
increase in accounts receivable as a result of the Company's increased level of
revenues, offset by the Company's achieving positive net income in 1995, and
increases in deferred revenues and product development obligation. Operating
cash flows in 1996 relative to 1995 were affected by increases in deferred
revenues, offset by a substantial increase in accounts receivable as a result of
the Company's increased level of revenues and a decrease in product development
obligation. Cash flow from operations can vary significantly from quarter to
quarter, depending upon the timing of operating cash receipts and payments,
especially accounts receivable and accounts payable. In addition, the Company
typically generates a large percentage of its quarterly revenues during the last
few weeks of the quarter, which when coupled with payment terms in excess of 90
days on some of the larger sales and the Company's increased revenues in 1995
and 1996, have given rise to increases in the accounts receivable balances in
those years. The Company expects that certain of the Company's larger sales will
continue to have longer payment terms, thus slowing the cash flow cycle. The
Company does not believe these longer payment terms are likely to have a
material adverse effect on the collectibility of the related receivables.
The Company currently anticipates that the Company's available cash,
cash equivalent and marketable securities resources (approximately $25.1 million
as of December 31, 1996), will be sufficient to meet its working capital and
capital expenditure requirements through at least the end of 1998.
-19-
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Balance Sheets............................... 21
Consolidated Statements of Operations..................... 23
Consolidated Statements of Shareholders' Equity........... 24
Consolidated Statements of Cash Flows..................... 25
Notes to Consolidated Financial Statements................ 26
-20-
<PAGE> 21
ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
---------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,880 $13,374
Marketable securities -- 11,739
Trade accounts receivable
Customer, net 8,201 11,160
Related party 344 74
Other current assets 1,629 1,618
------- -------
Total current assets 16,054 37,965
Investments, net 638 --
Property and equipment, net 2,434 2,990
Other assets 368 343
------- -------
Total assets $19,494 $41,298
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-21-
<PAGE> 22
ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,051 $ 819
Other accrued expenses 3,114 3,677
Deferred revenues 1,440 2,730
Product development obligation 510 380
Other current liabilities 286 301
------- -------
Total current liabilities 6,401 7,907
Product development obligation 315 --
Other long-term liabilities 291 187
------- -------
Total liabilities 7,007 8,094
Commitments and contingencies
Shareholders' equity:
Redeemable convertible preferred stock, series A,
(liquidation preference $4,688) authorized, issued and
outstanding, 1,875,000 shares at December 31, 1995 4,846
Redeemable convertible preferred stock, series B,
(liquidation preference $7,388) authorized 2,066,673 shares,
issued and outstanding, 2,066,655 shares at December 31, 8,341
1995
Redeemable convertible preferred stock, series C,
(liquidation preference $3,750) authorized 2,060,000 shares,
issued and outstanding, 857,142 shares at December 31, 1995 4,450
Redeemable convertible preferred stock, series D,
(liquidation preference $1,500) authorized 300,000 shares,
issued and outstanding, 150,000 shares at December 31, 1995 653
Common stock, authorized 10,000,000 shares,
issued and outstanding 1,661,967 and 9,315,241
shares at December 31, 1995 and 1996, respectively 601 39,047
Notes receivable from shareholders (45) (26)
Accumulated deficit (6,163) (5,680)
Deferred compensation (280) (205)
Cumulative foreign currency translation adjustment 84 68
------- -------
Total shareholders' equity 12,487 33,204
------- -------
Total liabilities and shareholders' equity $19,494 $41,298
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-22-
<PAGE> 23
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenues:
Products:
Customer $ 9,593 $17,200 $20,785
Related parties 1,514 381 503
Services:
Customer 2,306 3,122 5,045
Related parties 128 71 61
------- ------- -------
Total revenues 13,541 20,774 26,394
Cost of revenues:
Products 1,642 2,938 2,663
Services 1,179 1,656 2,405
------- ------- -------
Total cost of revenues 2,821 4,594 5,068
------- ------- -------
Gross profit 10,720 16,180 21,326
------- ------- -------
Operating expenses:
Engineering 4,668 7,522 9,041
Sales and marketing 5,117 6,843 10,142
Administration 1,378 2,065 2,676
Agency grants (323) (836) (500)
------- ------- -------
Total operating expenses 10,840 15,594 21,359
------- ------- -------
Income (loss) from operations (120) 586 (33)
Acquisition costs -- -- (227)
Provision for loss on investment -- (100) --
Income (loss) from currency fluctuations 201 72 (82)
Interest income 157 104 1,010
------- ------- -------
Income before income taxes 238 662 668
Provision for income taxes 248 343 185
------- ------- -------
Net Income (loss) $ (10) $ 319 $ 483
======= ======= =======
Net income (loss) per share $ -- $ 0.04 $ 0.06
======= ======= =======
Shares used in per share calculation 2,609 7,783 8,247
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-23-
<PAGE> 24
ISOCOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------------------------------------------------------------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 1,875,000 $ 4,846 2,036,997 $ 8,156 457,142 $ 1,951
Issuance of common stock
Net loss
Dividends paid
Currency translation
---------- ------- ---------- ------- -------- -------
Balances, December 31, 1994 1,875,000 4,846 2,036,997 8,156 457,142 1,951
Issuance of preferred stock, net of
offering costs:
Series B preferred stock 29,658 185
Series C preferred stock 400,000 2,499
Series D preferred stock
Issuance of common stock
Repurchase of common stock
Deferred compensation
Payment of notes receivable
Net income
Currency translation
---------- ------- ---------- ------- -------- -------
Balances, December 31, 1995 1,875,000 4,846 2,066,655 8,341 857,142 4,450
Initial public offering (IPO), net of
offering costs
Conversion of preferred stock to (1,875,000) (4,846) (2,066,655) (8,341) (857,142) (4,450)
common stock at IPO
Issuance of common stock
Deferred compensation
Payment of notes receivable
Net income
Currency translation
---------- ------- ---------- ------- -------- -------
Balances, December 31, 1996 -- $ -- -- $ -- -- $ --
========== ======= ========== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
Series D
Preferred Stock Common Stock
---------------------------------------------------------------------------------
Number of Number of Notes Deferred
Shares Amount Shares Amount Receivable Compensation
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 1,521,000 $ 170 $(27) $
Issuance of common stock 104,947 68 (27)
Net loss
Dividends paid
Currency translation
-------- ----- --------- ------- --- -----
Balances, December 31, 1994 -- -- 1,625,947 238 (54) --
Issuance of preferred stock, net of
offering costs:
Series B preferred stock
Series C preferred stock
Series D preferred stock 150,000 653
Issuance of common stock 90,520 58 (26)
Repurchase of common stock (54,500) (20) 20
Deferred compensation 325 (280)
Payment of notes receivable 15
Net income
Currency translation
-------- ----- --------- ------- --- -----
Balances, December 31, 1995 150,000 653 1,661,967 601 (45) (280)
Initial public offering (IPO), net of 2,300,000 18,270
offering costs
Conversion of preferred stock to (150,000) (653) 5,007,130 18,290
common stock at IPO
Issuance of common stock 346,144 1,886
Deferred compensation 75
Payment of notes receivable 19
Net income
Currency translation
-------- ----- --------- ------- --- -----
Balances, December 31, 1996 -- $ -- 9,315,241 $ 9,047 $(26) $(205)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency
Accumulated Translation
Deficit Adjustment Total
----------- -------------------------
<S> <C> <C> <C>
Balances, December 31, 1993 $(6,185) $ 196 $ 9,107
Issuance of common stock 41
Net loss (10) (10)
Dividends paid (287) (287)
Currency translation (154) (154)
----------- -------------------------
Balances, December 31, 1994 (6,482) 42 8,697
Issuance of preferred stock, net of
offering costs:
Series B preferred stock 185
Series C preferred stock 2,499
Series D preferred stock 653
Issuance of common stock 32
Repurchase of common stock 0
Deferred compensation 45
Payment of notes receivable 15
Net income 319 319
Currency translation 42 42
----------- -------------------------
Balances, December 31, 1995 (6,163) 84 12,487
Initial public offering (IPO), net of 18,270
offering costs
Conversion of preferred stock to 0
common stock at IPO
Issuance of common stock 1,886
Deferred compensation 75
Payment of notes receivable 19
Net income 483 483
Currency translation (16) (16)
----------- -------------------------
Balances, December 31, 1996 $ (5,680) $ 68 $33,204
========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
-24-
<PAGE> 25
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ (10) $ 319 $ 483
Adjustments to reconcile net loss to net cash
used by operating activities:
Provision for doubtful accounts, returns and
price protection ............................. 136 279 1,026
Depreciation and amortization .................. 869 938 1,304
Amortization of deferred compensation .......... -- 45 75
Provision for loss on investment ............... -- 100 --
Deferred rent .................................. (79) 47 (21)
(Increase)/decrease in:
Accounts receivable .......................... (2,150) (4,375) (3,577)
Other current assets ......................... (435) (643) 104
Other assets ................................. (6) 71 (81)
Increase/(decrease) in:
Accounts payable ............................. 363 270 (220)
Other accrued expenses ....................... 1,102 606 615
Deferred revenues ............................ (91) 705 1,220
Other current liabilities .................... (11) 199 34
Product development obligation ............... -- 825 (445)
Long-term liabilities ........................ 53 49 (71)
------- ------- --------
Net cash used by operating activities ..... (259) (565) 446
------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment ................ (1,084) (1,612) (1,782)
Purchase of marketable securities ................. -- -- (11,739)
Investments, at cost .............................. (298) (240) --
Sale of minority interest -- -- 547
in non-consolidated subsidiary ................... ------- ------- --------
Net cash used by investing activities ..... (1,382) (1,852) (12,974)
Cash flows from financing activities:
Proceeds from the sale of stock, net .............. 10 3,199 20,165
Payment of cash dividend .......................... (287) -- --
------- ------- --------
Net cash provided by financing activities . (277) 3,199 20,165
------- ------- --------
Effect of exchange rate changes on cash ............. (221) (183) (143)
------- ------- --------
Net increase (decrease) in cash ........... (2,139) 599 7,494
Cash and cash equivalents, beginning of year ........ 7,420 5,281 5,880
------- ------- --------
Cash and cash equivalents, end of year .............. $ 5,281 $ 5,880 $ 13,374
======= ======= ========
Supplemental schedule of non-cash financing
activities:
Common Stock issued for acquisition ............... $ 30 -- --
Series B Preferred Stock issued for acquisition ... -- $ 185 --
Deferred compensation ............................. -- $ 325 --
Common stock issued to shareholders in exchange
for notes receivable, net........................ $ 28 $ 6 --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
-25-
<PAGE> 26
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ISOCOR (the "Company") develops, markets and supports off-the-shelf
electronic information exchange software products and services that enable
businesses and government agencies to engage in electronic communications over
corporate networks, public telephone networks, value-added networks and the
Internet.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of intercompany accounts and
transactions. In accordance with Accounting Principles Board Opinion No. 18 "The
Equity Method of Investing in Common Stock," the Company records investments of
less than 20% of the outstanding common stock of the investee, when there is no
significant influence over the investee's operating or financial policies, on
the cost basis. Investments in excess of 50% of the outstanding common stock of
the investee are consolidated. The Company has no investments between 20% and
50% of investee common stock.
Pursuant to a Stock Purchase Agreement dated August 29, 1996 by and among
ISOCOR B.V., a wholly owned subsidiary of the Company, NetCS Informationstechnik
GmbH, a corporation organized under the laws of the Federal Republic of Germany
("NetCS") and the stockholders of NetCS, (the "Purchase Agreement"), the Company
acquired (the "Acquisition") all of the outstanding quota interests (shares) in
NetCS in exchange for an aggregate of 475,000 shares of the Company's Common
Stock. The Acquisition has been accounted for under "pooling of interests"
accounting treatment, and therefore, as required by 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, Consolidated Balance Sheets, and
Consolidated Statements of Cash Flows presented herein include the operations
and financial position of NetCS for all periods presented.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Statement of cash flows
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
Marketable securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
Government obligations all with maturities of one year or less. All of the
Company's marketable securities have been classified as "available-for-sale"
securities and are reported at fair value based on quoted market prices as
required by Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities."
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash, cash equivalents and accounts
receivable. The Company's accounts receivable are derived from sales directly to
customers and indirectly through resellers, systems integrators and OEMs. The
Company performs ongoing credit evaluations of its customers before granting
uncollateralized credit and to date has not experienced any
-26-
<PAGE> 27
unusual credit-related losses. At December 31, 1996 and 1995, the Company had
balances held in U.S. banks of approximately $2,754,000 and $3,283,000
respectively, which exceeded federally insured limits. Cash equivalents are
managed by major investment firms in accordance with the Company's investment
policy.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of three to five years. Maintenance and repairs are expensed as incurred,
while renewals and betterments are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation, and any resulting gain or loss is included in
operations.
Foreign currency translation
Results of operations for foreign entities are translated using the average
exchange rates during the period. Foreign entities' assets and liabilities are
translated to U.S. Dollars using the exchange rates in effect at the balance
sheet date, and resulting translation adjustments are recorded in a separate
component of shareholder's equity. Actual gains or losses incurred on currency
transactions in other than the entities' functional currencies are included in
income in the current period.
Revenue recognition
The Company derives revenue from two principal and related sources:
software licenses and services. Software license revenues, designated in the
Company's financial statements as product revenues, are generated from licensing
to end users, distributors and resellers. The Company generates service revenues
primarily from software maintenance, training, support and custom engineering.
The Company generally recognizes product revenues upon shipment, net of
allowances for estimated future returns and price protection, provided that no
significant obligations of the Company remain and that collection of the
resulting receivable is deemed probable. Upon shipment, the Company accrues the
cost of any insignificant performance obligations. The Company recognizes
service revenues from customer support and maintenance fees ratably over the
term of the service period, which is typically 12 months. Payments for
maintenance fees are generally made in advance. The Company generally recognizes
service revenues from custom engineering which is separately contracted for and
priced from the software license fees, as specific milestones are met in the
respective agreements. Where customer engineering is essential to the
functionality of the software, the Company does not recognize revenue on the
underlying software until the requirements of the specific development
arrangement are satisfied. Deferred revenues represent the difference between
amounts invoiced and amounts recognized as revenues under software development
and maintenance agreements. The Company recognizes service revenues from
training activities as the services are provided. Amounts received in connection
with a product development arrangement (See Note 11) under which the Company is
committed to specific efforts are recognized as reductions in associated product
development costs as those costs are incurred.
Agency grants
Agency grants are recognized as reductions in operating expenses as earned
under the respective terms of the agreements.
Software development costs
Costs related to the conceptual formulation and design of software products
are expensed as engineering expense. Statement of Financial Accounting Standard
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed" requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's development process, technological feasibility is established upon
completion of a working model. To date, costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been immaterial.
-27-
<PAGE> 28
Excess of cost over assets acquired
The excess of cost over net assets acquired is amortized over the estimated
useful life of one to five years using the straight line method. In March 1995,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121") that establishes accounting
standards for the impairment of long-lived assets, certain intangibles, and
goodwill related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. In accordance with SFAS
No. 121, it is the Company's policy to review and evaluate periodically whether
there has been a permanent impairment in the value of intangibles. Factors
considered in the valuation include current operating results, trends and
anticipated undiscounted cash flows.
Income taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense represents the
tax payable in connection with the current period operations plus or minus the
change during the period in deferred tax assets and liabilities. (See Note 10).
Computation of net income (loss) per common share
Net income (loss) per common share is computed using the weighted average
number of shares of Common Stock and common equivalent shares outstanding.
Common equivalent shares related to stock options, warrants and Preferred Stock
are excluded from the computation when their effect is antidilutive, except
that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares, issued at prices below the
initial public offering price during the 12 months immediately preceding the
initial filing date have been included in the calculation as if they were
outstanding for all periods presented, using the treasury stock method and the
initial public offering price. All per share information has been given
retroactive effect for the 1 for 2.5 reverse stock split which occurred on
January 26, 1996 for all outstanding shares of Common and Preferred Stock. All
of the 475,000 common shares of the company issued to effect the business
combination with NetCS have been fully weighted for all periods presented for
the computation of the weighted average number of shares outstanding as required
for "pooling of interests" accounting treatment.
Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the 1996 presentation.
2. INITIAL PUBLIC OFFERING
In March 1996 the Company completed the public offering and sale of
2,300,000 shares of its common stock at $9 per share resulting in net proceeds
to the Company after offering costs, underwriting discounts and commissions of
approximately $18,379,000. The Company's shares are traded on the Nasdaq
National Market System under the symbol "ICOR."
-28-
<PAGE> 29
3. MARKETABLE SECURITIES
At December 31, 1996 the Company held the following positions (dollars in
thousands):
<TABLE>
<CAPTION>
Maturities
----------
<S> <C> <C>
Corporate notes.................................... $ 8,098 1-10 months
U.S. Government obligations........................ 3,641 1-6 months
-------
$11,739
=======
</TABLE>
Realized gains and losses are based on the book value of the specific
securities sold and were immaterial during the years ended December 31, 1996. In
1994 and 1995, the Company had no marketable securities.
4. ACCOUNTS RECEIVABLE
Customer trade accounts receivable, net of allowances as of December 31,
1995 and 1996 were (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
------ -------
<S> <C> <C>
Accounts receivable .............................. $8,787 $12,807
Less: Allowance for doubtful accounts, returns
and price protection ............................. (586) (1,647)
------ -------
$8,201 $11,160
====== =======
</TABLE>
As of December 31, 1996, approximately 72% of the Company's trade accounts
receivable were from customers located in Europe.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1995 and 1996 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1996
------- -------
<S> <C> <C>
Computer equipment ............... $ 3,345 $ 4,785
Office equipment and furniture.... 1,667 2,010
------- -------
5,012 6,795
Less accumulated depreciation..... (2,578) (3,805)
------- -------
$ 2,434 $ 2,990
======= =======
</TABLE>
For the years ended December 31, 1994, 1995 and 1996, depreciation expense
was $522,000, $925,000 and $1,276,000 respectively.
6. INVESTMENTS, AT COST
In 1994, the Company acquired a technology company located in Europe for
$298,000. The transaction was recorded as a purchase; the $262,000 paid in
excess of fair market value of assets acquired was amortized over the estimated
useful life of 12 months. The results of operations for this investment have
been included in the Consolidated Statement of Operations for the periods
subsequent to the acquisition and were insignificant prior to the acquisition.
-29-
<PAGE> 30
In October 1995, the Company acquired a 60 percent interest in a sales and
distribution company located in Europe for 29,658 shares of Preferred Series B
stock and $279,000 in cash. The transaction was recorded as a purchase and
accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based upon fair market value. The $355,000 paid in excess of the fair
market value is being amortized using the straight line method over an estimated
useful life of five years and is included in Other Assets in the accompanying
Consolidated Balance Sheets as of December 31, 1995 and 1996, net of accumulated
amortization of $14,000 and $72,000, respectively. At December 31, 1995 and 1996
the related 40 percent minority interest was $79,000. The Company is required to
purchase the remaining 40 percent of this sales and distribution company within
four years from the date of purchase, at a price approximating net revenues for
the year preceding the purchase, subject to various adjustments and maximums.
The results of operations for this investment have been included in the
Consolidated Statements of Operations for the periods subsequent to the
acquisition and were insignificant prior to the acquisition.
Provision for loss on investment of $100,000 in 1995 represented the
Company's estimate of a one-time loss related to the sale of a 15% interest in a
UK company, for which the terms for liquidation of the Company's position were
substantially agreed to in December 1995 and the liquidation was consummated in
January 1996.
Pursuant to a Stock Purchase Agreement dated August 29, 1996 by and among
ISOCOR B.V., a wholly owned subsidiary of the Company, NetCS Informationstechnik
GmbH, a corporation organized under the laws of the Federal Republic of Germany
("NetCS") and the stockholders of NetCS, (the "Purchase Agreement"), the Company
acquired (the "Acquisition") all of the outstanding quota interests (shares) in
NetCS in exchange for an aggregate of 475,000 shares of the Company's Common
Stock. The Acquisition has been accounted for under "pooling of interests"
accounting treatment, and therefore, as required by Accounting Principles Board
Statement No. 16, all financial statements herein have been restated as though
the Acquisition had been effected for all periods presented. Accordingly,
although the Company has never paid and has no plans to pay dividends in the
future, the dividends declared by NetCS in 1993 and 1994 and paid in 1994 are
reflected in these financial statements. A reconciliation of the Company's
previously reported revenue and earnings to the earnings shown in these
financial statements follows (dollars in thousands):
<TABLE>
<CAPTION>
Revenues Net income (loss)
-------- -----------------
<S> <C> <C>
Year Ended December 31, 1994
ISOCOR only ..................... $10,192 $(362)
NetCS only ...................... 3,349 352
------- -----
Consolidated ISOCOR.......... $13,541 $ (10)
======= =====
Year Ended December 31, 1995
ISOCOR only ..................... $16,501 $ 314
NetCS only ...................... 4,273 5
------- -----
Consolidated ISOCOR ......... $20,774 $ 319
======= =====
Six Months Ended June 30, 1996
ISOCOR only ..................... $10,354 $ (49)
NetCS only ...................... 2,621 34
------- -----
Consolidated ISOCOR ......... $12,975 $ (15)
======= =====
</TABLE>
7. COMMITMENTS
The Company leases its offices and operating facilities under various
operating leases, which expire through 2001. Certain leases contain free rent
periods and renewal options and provisions to increase monthly rentals at
specified intervals. The Consolidated Statements of Operations reflect rent
expense on a straight-line basis over the term of the respective leases.
-30-
<PAGE> 31
Total rental expense for the years ended December 31, 1994, 1995 and 1996
was $578,000, $1,042,000 and $1,128,000 respectively.
Future minimum rental commitments under operating leases are as follows
(dollars in thousands):
<TABLE>
<S> <C>
For the year ending
1997 ......................... $1,243
1998 ......................... 550
1999 ......................... 301
2000 ......................... 68
2001 ......................... 56
------
$2,218
======
</TABLE>
8. OTHER ACCRUED EXPENSES
Other accrued expenses include (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
------ ------
<S> <C> <C>
Salaries and related expenses.. $ 819 $1,196
Royalties ..................... 336 556
Commissions ................... 455 440
Corporate and sales taxes ..... 714 347
Other ......................... 790 1,138
------ ------
$3,114 $3,677
====== ======
</TABLE>
9. LONG-TERM LIABILITIES
Long term liabilities include (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1995 1996
---- ----
<S> <C> <C>
Minority interest ...................... $ 79 $ 79
Deferred rent .......................... 47 26
Deferred tax liability ................. 100 82
Loan from shareholder .................. 65
---- ----
$291 $187
==== ====
</TABLE>
10. INCOME TAXES
The source of income (loss) before income taxes is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------
1994 1995 1996
------- ------ -----
<S> <C> <C> <C>
United States................ $(1,574) $ (881) $(182)
Foreign...................... 1,812 1,543 850
------- ------ -----
Income before income taxes... $ 238 $ 662 $ 668
======= ====== =====
</TABLE>
-31-
<PAGE> 32
The components of the provision for income taxes for the years ended
December 31, 1994, 1995 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S Federal-current $ -- $ -- $ 18
State-current 1 1 5
Foreign-current 189 374 254
Foreign-deferred 58 (32) (92)
---- ---- ----
Total $248 $343 $185
==== ==== ====
</TABLE>
Included in foreign taxes in the year ended December 31, 1995 is $278,000
relating to income taxes withheld by an Asian government relating to a
substantial sale in that country made from the United States. Such taxes
withheld generate foreign tax credits for U.S. federal tax purposes which may be
used to offset United States income taxes otherwise payable generally for five
years from the date initially claimed. The Company utilized foreign operating
loss carryforwards to offset $1,172,000 and $941,000 of income subject to
foreign taxation in 1994 and 1995, respectively.
The components of the Company's net deferred taxes as of December 31, 1995 and
1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for inventory, sales returns and
doubtful accounts .................... $ 92 $ 302
Accrued vacation ......................... 38 71
Deferred revenues ........................ 341 476
Property and equipment ................... 48 131
Net operating loss carryforward .......... 1,842 1,533
Other .................................... 56 45
------ ------
Total deferred tax assets 2,417 2,558
Valuation allowance ........................... (2,417) (2,484)
------ ------
Net deferred tax assets .............. -- 74
Deferred tax liability, property, equipment and
computer software ........................ (100) (81)
------ ------
Net deferred taxes ................... $ (100) $ (7)
====== ======
</TABLE>
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that management evaluate a variety of factors in reaching a
conclusion regarding whether a valuation allowance against deferred tax assets
is required. The Company has considered a number of factors which impact the
likelihood that the deferred tax assets will be recovered, including the
Company's history of operating losses for federal and state tax reporting
purposes and the likelihood that U.S. operations will generate taxable income
during the carryforward period for unused net operating loss carryforwards.
Based upon a weighting of all available evidence, management believes that it is
more likely than not that the Company will not generate significant taxable
income from U.S. operations during the next two years, and beyond that has no
basis to project taxable income, and has therefore concluded that it is more
likely than not that deferred tax assets will not be realized. The Company has
established a valuation allowance against its U.S. federal deferred tax assets
due to the uncertainty surrounding realization of such assets. Management
evaluates on a quarterly basis the recoverability of the deferred tax assets and
the level of valuation allowance. At such time as it is determined more likely
than not that deferred tax assets are realizable, the valuation allowance will
be appropriately reduced.
-32-
<PAGE> 33
As of December 31, 1996 the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $4.2
million and $1.9 million, respectively, and none remaining in foreign
jurisdictions. These carryforwards, if unused, expire in various periods from
1998 to 2010.
The overall effective tax rate differs from the statutory tax rate for the
years ended December 31, 1994, 1995 and 1996 as follows:
<TABLE>
<CAPTION>
% of Pretax Income
-------------------------------
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Tax provision (benefit) based on the
federal statutory rate ............ 34.0% 34.0% 34.0%
U.S. loss not providing current tax
benefit ........................... (34.0) (34.0) (31.3)
Foreign taxes, net ..................... 104.2 51.8 25.0
----- ---- ----
Effective tax rate ..................... 104.2% 51.8% 27.7%
===== ==== ====
</TABLE>
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under a tax holiday due to terminate in 2010,
the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. For
Irish tax purposes, most of the Company's operating income earned in Ireland is
considered "manufacturing income." To qualify for this 10% tax rate, the Company
must carry out "software development services" or "technical or consultancy
services" (as defined in the Irish Finance Act of 1980) in Ireland and qualify
for an employment grant from the Industrial Development Authority of Ireland. If
the Company ceases to comply with these qualifications, all or a part of its
taxable profits may be subject to a 38% tax rate on its post disqualification
date taxable profits. Should this occur, or should Irish tax laws be rescinded
or changed, the Company's net income could be materially adversely affected.
Because the Company utilized loss carryforwards to offset income otherwise
taxable in Ireland in 1994 and 1995, this reduced tax rate did not result in
significant reductions in income tax expense for those years.
The Company made payments totaling $10,000, $32,000 and $279,000 in 1994, 1995
and 1996 respectively, to foreign tax authorities.
11. SHAREHOLDERS' EQUITY
Common Stock
At December 31, 1995, there were 6,376,673 shares of Common Stock, reserved
for automatic conversion of the Series A, B, C and D Preferred Stock at the
stated conversion rates. This automatic conversion was effected on March 14,
1996, the date of effectiveness of the Company's initial public offering of its
stock.
Preferred Stock
Series A, B, C and D Preferred Stock had stated annual dividend rates of
$.22500, $.32175, $.39375 and $.90000 per share, respectively. No dividends
were ever declared or paid.
The Series A, B, C and D Preferred Stock had a $2.50, $3.575, $4.375 and
$10.00 liquidation preference over shares of Common Stock, respectively, and
were redeemable anytime after July 19, 1998, upon written consent to redemption
of a majority of the holders, at liquidation preference, plus declared and
unpaid dividends, if any.
In connection with the issuance of Series C Preferred Stock in November
1993, the Company provided the investor an option to purchase equity securities
of the Company under certain conditions associated with sales by the investor
and its affiliates of the Company's products in excess of specified minimum
levels. The investor exercised that option, and purchased 39,942 shares of
Common Stock upon the closing of the initial public offering on March 14, 1996
at 80% of the per share price of such offering.
-33-
<PAGE> 34
In December 1995, the Company entered into a Series D Preferred Stock
Purchase Agreement with a strategic investor. The agreement provided for total
consideration to the Company of $3,000,000, of which $1,500,000 was received in
1995 in exchange for 150,000 shares of the Company's Series D Preferred Stock
and the Company's commitment to product development efforts estimated to cost
$825,000. These costs were accrued with the remaining proceeds of $653,000, net,
attributed to the Company's Series D Preferred Stock. Per the terms of the
agreement, the number of shares of Common Stock issued upon automatic conversion
at the initial public offering date, of this Series D Preferred Stock was
calculated to provide effective per share pricing to this investor of 80% of the
price per share of Common Stock paid by the public on that date. The investor
was also committed to acquire and did acquire under the terms of the agreement,
additional shares of the Company's Series D Preferred Stock with an aggregate
purchase price of $1,500,000, at the initial public offering date of March 14,
1996. These shares also automatically converted into Common Stock such that the
effective price per share of the Common Stock was the same as the Price to
Public in the initial public offering on March 14, 1996.
On March 14, 1996, the date of the initial public offering, all outstanding
shares of Preferred Stock were canceled upon their automatic conversion to
Common stock. At December 31, 1996, the Company has 2,000,000 shares of
undesignated Preferred Stock authorized but not issued.
12. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, no compensation cost other than
that required to be recognized by APB 25 for the difference between the fair
value of the Company's Common Stock at the grant date and the exercise price of
the options has been recognized. Had compensation cost for the Company's two
stock option plans been determined based on the fair value at the grant date for
awards in 1995 and 1996 consistent with the provisions of SFAS No.123, the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below (amounts in thousands except for per share
amounts):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net earnings as reported.................. $ 319 $ 483
Net earnings (loss), pro forma............ 311 (584)
Earnings per share as reported............ $0.04 $ 0.06
Earnings per share (loss), pro forma...... $0.04 $(0.08)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Risk free interest rate............... 6.23% 6.10%
Expected lives (years)................ 4 4
Expected volatility................... 70% 70%
Expected dividends.................... 0 0
</TABLE>
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Option Plan") permits the
grant of both "incentive stock options" designed to qualify under Internal
Revenue Code Section 422 and non-qualified stock options. Incentive stock
options may only be granted to employees of the Company whereas non-qualified
stock options may be granted to employees and consultants. Each option, once
vested, allows the optionee the right to purchase one share of the Company's
Common Stock. The Board of Directors determines the exercise price of the
options based on the fair market value of such shares on the date of grant;
options granted to date generally vest ratably over four years and expire ten
years from the date of the grant. Compensation expense equal to the difference
between the assumed fair value of
-34-
<PAGE> 35
the Company's Common Stock at the grant date and the exercise price of the
options, if any, is recognized ratably over the vesting period.
The following tables summarize certain information relative to stock options.
<TABLE>
<CAPTION>
Shares Option Price
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1993.. 240,000 $.375
Granted .......................... 471,400 $.375 to $ .625
Exercised ........................ (2,000) $.375
Canceled or expired .............. (54,000) $.625
---------
Outstanding at December 31, 1994.. 655,400 $.375 to $ .625
Granted .......................... 510,400 $.625 to $ 7.50
Exercised ........................ (30,529) $.375 to $ .625
Canceled or expired .............. (83,884) $.375 to $ .625
---------
Outstanding at December 31, 1995.. 1,051,387 $.375 to $ 7.50
Granted .......................... 1,174,700 $6.44 to $12.50
Exercised ........................ (139,554) $.375 to $ 5.00
Canceled or expired .............. (111,445) $.375 to $12.50
---------
Outstanding at December 31, 1996.. 1,975,088 $.375 to $12.50
=========
</TABLE>
<TABLE>
<CAPTION> Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Outstanding at December 31, 1996
Weighted average life - 112 months ........ 22,500 $12.50
Weighted average life - 109 months ........ 260,200 $ 7.98
Weighted average life - 116 months ........ 915,000 $ 6.54
Weighted average life - 105 months ........ 140,730 $ 1.25
Weighted average life - 94 months ......... 462,297 $ .625
Weighted average life - 74 months ......... 174,361 $ .375
---------
1,975,088 $ 4.49
=========
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price
------ ------------
<S> <C> <C>
Exercisable at December 31, 1996
Weighted average life - 112 months .......... -- --
Weighted average life - 109 months .......... 17,560 $7.72
Weighted average life - 116 months .......... 9,676 $5.00
Weighted average life - 105 months .......... 44,664 $1.25
Weighted average life - 94 months ........... 267,138 $.625
Weighted average life - 74 months .......... 165,731 $.375
-------
504,769 $.928
=======
Options at December 31, 1996 available
for future grant ...................... 152,828
=======
</TABLE>
401(k) Salary Reduction Plan and Trust
In 1992, the Company adopted the ISOCOR 401(k) Salary Reduction Plan and
Trust (the "Plan") for all qualified employees. No Company contributions were
made to the Plan for the years ended December 31, 1994, 1995 and 1996.
-35-
<PAGE> 36
1996 Employee Stock Purchase Plan
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 250,000 shares of Common Stock has been reserved
for issuance under the Purchase Plan. The Purchase Plan will enable eligible
employees to purchase Common Stock at 85% of the lower of the fair market value
of the Company's Common Stock on the first day or the last day of each six-month
purchase period. At December 31, 1996 no shares had been issued under this
Purchase Plan.
1996 Directors Stock Option Plan
In 1996, the Company adopted the 1996 Directors' Stock Option Plan (the
"Directors' Plan"). A total of 150,000 shares of Common Stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for the
grant of nonstatutory stock options to nonemployee directors of the Company,
including an option to purchase 10,000 shares of Common Stock on the date on
which the optionee first becomes a nonemployee director of the Company or
January 18, 1996 with respect to the Company's current nonemployee directors,
and an additional option to purchase 2,500 shares of Common Stock on the first
calendar day of the Company's fiscal year commencing in 1997 if, on such date,
the optionee shall have served on the Company's Board of Directors for at least
three months. The exercise price per share of all options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option. During the year ended
December 31, 1996, under this Plan, options to purchase 45,000 shares of Common
Stock at an exercise price of $8.00 per share were granted, 12,500 of which were
canceled prior to December 31, 1996. At December 31, 1996 there were 32,500
options outstanding at an exercise price of $8.00 per share, none of which were
exercisable at that date, and there were 117,500 options available for future
grant under the Directors' Plan.
13. GEOGRAPHICAL AREA INFORMATION
The Company operates in a single industry segment, the development,
marketing and support of off-the-shelf electronic information exchange software.
The Company's operations consist of engineering, sales and marketing,
administration and support in both the United States and Europe.
Revenues and operating income for the years ended December 31, 1994, 1995,
and 1996 and identifiable assets as of December 31, 1994, 1995 and 1996,
classified by the major geographical areas in which the Company operates, are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
United States ......................... $ 5,056 $ 7,942 $10,927
Ireland ............................... 7,503 12,067 15,932
Other Europe .......................... 3,604 5,173 7,226
Intercompany elimination .............. (2,622) (4,408) (7,691)
------- ------- ------
$13,541 $20,774 26,394
======= ======= ======
Operating income (loss):
United States ......................... $(1,867) $(1,298) $(1,361)
Ireland ............................... 1,430 1,929 1,177
Other Europe .......................... 317 (45) 151
------- ------- ------
(120) 586 (33)
Provision for loss on investment ...... -- (100) --
Other income .......................... 358 176 701
------- ------- ------
Income before income taxes ............ $ 238 $ 662 $ 668
======= ======= ======
</TABLE>
-36-
<PAGE> 37
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Identifiable assets:
United States....... $ 6,343 $ 8,878 $29,304
Ireland............. 4,751 7,591 9,146
Other Europe........ 1,390 3,025 2,848
------- ------- -------
Total...... $12,484 $19,494 $41,298
======= ======= =======
</TABLE>
The Company's transfers between geographical areas are accounted for using
methods designed to approximate comparable arms-length transactions. Such
transfers are eliminated in the consolidated financial statements. Export sales
from the United States for the years ended December 31, 1994, 1995 and 1996 were
$1,475,000, $3,464,000 and $2,131,000, respectively. The majority of these sales
were made to Asia and South America.
The Company currently relies significantly on resellers in Europe for
certain elements of marketing and distribution of its software products. In the
event the Company is unable to retain its resellers, there is no assurance that
the Company will succeed in replacing them. Any changes in the Company's
distribution channel could have a significant impact on sales and adversely
affect operating results.
14. RELATED PARTY TRANSACTIONS
In 1991, the Company entered into a software OEM agreement with a United
Kingdom based software company in connection with a license to use their
software products. In 1992, the Company purchased 15% of this company for
$737,668 which investment was subsequently divested in early 1996 (See Note 6).
During 1994 and 1995 when this software company was a related party, royalty
payments totaling approximately $303,000 and $355,000 were made under the
agreement. The Company's cost of sales in 1994 and 1995 included $237,000 and
$210,000, respectively, of royalty costs associated with this arrangement.
Accrued royalties payable to this software company as of December 31, 1995 were
$79,000.
The Company made rental payments of approximately $160,000 and $100,000 for
the years ended December 31, 1994, and 1995, respectively, to an affiliate of a
shareholder in connection with the lease of the Company's previous California
offices.
Included in related party revenues for the years ended December 31, 1994,
1995, and 1996 was approximately $910,000, $83,000, and $272,000 respectively,
relating to software license and maintenance agreements with a shareholder.
Included in deferred revenues as of December 31, 1995 and 1996 were $37,000 and
$0, respectively, relating to the same transactions.
Included in revenue for the year ended December 31, 1994, 1995, and 1996
was approximately $732,000, $369,000 and $292,000, respectively relating to a
software license and maintenance agreements with an affiliate of a preferred
shareholder. Included in accounts receivable as of December 31, 1995 and 1996
was $344,000 and $74,000, respectively, relating to this distributor.
Gross margins on related party revenues approximate those realized in
transactions with non-affiliates.
As part of the 1995 acquisition discussed in Note 6, the Company
assumed a $65,000 liability due to a shareholder, which was paid during 1996.
During 1996, the Company reflected as a reduction of operating expenses
$445,000 relating to product development efforts committed to and performed by
the Company under the Series D Preferred Stock Purchase Agreement discussed in
Note 11.
-37-
<PAGE> 38
15. AGENCY GRANTS
During 1992, 1994 and 1996, the Irish Industrial Development Authority
("IDA") approved grant agreements with one of the Company's international
subsidiaries for approximately $750,000, $850,000 and $793,000, respectively,
over six years. The Company reflected as reduction of operating expenses
$192,000, $712,000, and $413,000 relating to these grants for the years ended
December 31, 1994, 1995 and 1996, respectively. These grants are based upon the
Company's creation and fulfillment of new jobs in Ireland and include remedy
provisions employed by the IDA to pursue partial revocation of amounts granted
in the event the recipient of the grant substantially vacates its presence in
Ireland during a period of five to seven years from date of grant. The Company's
plans entail commitment to a significant continuing presence in Ireland, and
accordingly, no liability has been recognized in the financial statements for
this contingency. During 1993, the IDA purchased 20,000 shares of the Company's
Common Stock.
The Economic and Technological Finance Authority - Berlin ("Authority")
makes grants to promote research and development in small and medium sized
German-owned companies located in Berlin. The grants are paid quarterly based
upon actual development costs, including salaries, and depend upon the work
being carried out in Berlin. The Company reflected as a reduction of operating
expenses $13,000, $124,000, and $87,000 relating to these grants for the years
ended December 31, 1994, 1995 and 1996, respectively. Although remedy provisions
exist for the recoverability of such grants if certain conditions are not met,
the Company has been assured by the Authority that no recovery of the grants
made to NetCS is contemplated, and accordingly, no liability has been recognized
in the financial statements for this contingency. As of August 31, 1996, the
company is no longer eligible to receive these grants in Germany.
During 1993, the Israel-United States Binational Industrial Research and
Development Foundation approved a grant agreement with the Company for $222,000
over approximately a one-year period. During 1994, the Company reflected as a
reduction of operating expenses $118,000 as its final amount relating to this
grant.
-38-
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the consolidated financial statements and the financial
statement schedule of ISOCOR and subsidiaries listed in the index on page 20 of
this Form 10-K. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The consolidated financial statements give retroactive effect to the merger of
ISOCOR B.V., a wholly-owned subsidiary of the Company and NetCS
Informationstechnik GmbH on August 29, 1996, which has been accounted for as a
pooling of interests as described in Note 1 to the consolidated financial
statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ISOCOR and
subsidiaries as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
February 12, 1997
-39-
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-40-
<PAGE> 41
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A as promulgated by
the U.S. Securities and Exchange Commission (the "1997 Proxy Statement") for its
Annual Meeting of Shareholders to be held May 15, 1997.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company, and their ages
as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Andrew De Mari............... 57 President, Chief Executive Officer and
Director
Bjorn Ahlen.................. 44 Senior Vice President, International
Sales and Marketing
Janine M. Bushman............ 42 Vice President, Finance and
Administration, Chief Financial
Officer and Director
Paul Gigg.................... 43 Vice President, European Marketing and
Sales
Patrick S. Moore............. 45 Vice President, North American Sales
Betty Niimi.................. 55 Senior Vice President, Product
Development and Services
C. Raomal Perera............. 38 Senior Vice President, Engineering
John B. Stephensen........... 44 Vice President, Product Management
William M. Wolfe............. 45 Vice President, Business Development and
Corporte Marketing
Jean-Michel Barbier (1)(2)... 51 Director
Alexandra Giurgiu (1)........ 38 Director
G. Bradford Jones (2)........ 41 Director
</TABLE>
- --------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
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 its founding in 1991. Dr. De Mari was previously a founder and the
Chairman and Chief Executive Officer of Retix from its inception in 1985 to
November 1990. Retix develops, manufactures, markets and supports 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.
Bjorn Ahlen is a founder of the Company and has been an officer of the
Company since July 1991. For five years prior to joining the Company, Mr. Ahlen
was the Vice President, International Marketing and Sales of Retix. Mr. Ahlen
holds an E.E. degree with Computer Science specialization from Chalmers
University of Technology in Gothenburg, Sweden.
-41-
<PAGE> 42
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.
Paul R. Gigg joined ISOCOR in January 1993. He became General Manager,
Europe in October 1995 and was elected Vice President, European Marketing and
Sales in October 1996. For more than five years prior to joining ISOCOR, Mr.
Gigg was Director of Marketing and Engineering at Dowty Communications (formally
Case Communications) a developer and supplier of networking products. Mr. Gigg
holds a B.Sc. in Electrical and Electronic Engineering from the University of
Wales.
Patrick S. Moore joined the Company in January 1996 as Vice President
of North American Sales. From February 1995 until joining the Company, he served
as Vice President of Business Development for Locus Computing Corp., a software
development company. From May 1993 to January 1995, he was the Vice President of
Sales for Softbank Incorporated, an electronic distributor of software. From
January 1992 until April 1993, Mr. Moore held a variety of positions in the
sales organization of SunSoft, Inc., a developer and distributor of networking
technologies. For nine years prior to that, Mr. Moore held a variety of
positions in the sales organization of Interactive Systems Corporation. Mr.
Moore holds a B.A. from Stanford University.
Betty M. Niimi joined ISOCOR in May 1996 as Senior Vice President of
Product Development and Services. For more than six years prior to joining
ISOCOR, Ms. Niimi was Senior Vice President of the OEM Services Division at
Locus Computing Corporation, a developer and supplier of UNIX operating systems
software. Ms. Niimi holds an M.S. in Mathematics from the University of Illinois
and a B.S. in Mathematics from the University of Massachusetts.
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.
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 ISOCOR.
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, 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 Corporate
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. in Education from
the University of Milwaukee.
Jean-Michel Barbier is Directeur General of Thomson-CSF Ventures, a
corporate venture capital investor, with which he has been associated since
1987. He was elected to the Board of Directors of the Company in November 1993.
He also serves on the Board of Directors of the following companies: Geris
Consultants, Optim, Info Radio Interactive Services, Financial Architecture
Research and Resources, Thomnet, Aonix Inc., Virtual IO, Inc., Virtual
Prototypes, Inc. and Era A.S.
-42-
<PAGE> 43
Alexandra Giurgiu is President of Olivetti Management of America, Inc.,
an investment subsidiary of Ing. C. Olivetti & C., S.p.A., a manufacturer of
information processing systems, which position she has held since 1991. Ms.
Giurgiu has also been a Managing Director and Executive Officer of 4C Ventures,
L.P., a venture capital partnership, since 1994. From 1984 to 1985, she was
Director of International Operations for Lifeboat Associates, a software
distribution and publishing company. She became a member of the Company's Board
of Directors in May 1993. Additionally, she currently serves on the Board of
Directors of Wireless Access, and Alacrity Systems.
G. Bradford Jones is a general partner in the venture capital firm of
Brentwood Venture Capital, which he joined in 1981. He became a member of the
Company's Board of Directors in July 1991. Mr. Jones also serves on the Board of
Directors of Aastrom Biosciencies, Interpore International, Onyx Acceptance
Corporation, Plasma & Materials Technologies Inc. and several privately held
companies.
Further information regarding Registrant's directors will be set forth
under the caption "Election of Directors - Nominees" in the Registrant's 1997
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Compensation of
Executive Officers" in the Company's 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Company's 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Certain
Relationships and Related Transactions" in the Company's 1997 Proxy Statement.
-43-
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) (1) Consolidated Financial Statements:......................... 20
(2) Financial Statement Schedules:............................. S-1
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K):
NUMBER DESCRIPTION
2.1* Stock Purchase Agreement by and among Registrant, NetCS and the
stockholders of NetCS dated August 29, 1996.
2.2* Escrow Agreement dated August 29, 1996.
3.1+ Amended and Restated Articles of Incorporation of Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
10.1 1992 Stock Option Plan and forms of option agreements thereunder.
10.2** 1996 Directors' Stock Option Plan and form of option agreement
thereunder.
10.3** 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4** Form of Indemnification Agreement.
10.5** Lease dated November 11, 1994 between ISOCOR and Telos
Corporation.
10.6** Lease dated June 15, 1995 between ISOCOR B.V. and Forfas.
10.7** Rights Agreement dated December 29, 1995 among the Registrant,
its Preferred shareholders and certain of its Common
shareholders, as amended.
10.8++** International Reseller Agreement dated May 11, 1993 between the
Registrant and Syseca S.A.
10.9** Source Code Access License Agreement dated September 15, 1993 and
Amendment to the Source Code Access License Agreement dated May
1, 1995, between the Registrant and Syseca S.A.
10.10++** Report of Discussions between the Registrant and Syseca S.A.
dated September 27, 1994 (translated) and Affidavit of
Translations by Abbey Translations dated January 25, 1996.
10.11++** Master Binary License Agreement dated September 30, 1994 between
the Registrant and LIR S.A.
10.12++** Master Binary License Agreement dated December 28, 1994,
Amendment to the Master Binary Agreement dated March 2, 1995 and
Amendment to the Master Binary License Agreement dated December
28, 1995, between the Registrant and Syseca S.A.
10.13** Product Loan Agreement between the Registrant and Syseca S.A.
dated November 1, 1995.
10.14** Employment Agreement between the Registrant and C. Raomal Perera
dated September 9, 1992.
10.15++** Series D Preferred Stock Purchase Agreement dated December 29,
1995 between the Registrant and Intel Corporation and related
Statement of Work and Product Requirements.
11.1 Statement of Computation of Shares Used in Per Share Calculation.
21.1** Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule.
-44-
<PAGE> 45
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K dated August 29, 1996
reporting the acquisition of all of the outstanding quota interests of NetCS
Informationstechnik GmbH by ISOCOR B.V. No financial statements were included
therein.
- --------------------------------------------------------------------------------
* Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K dated August
29, 1996.
** Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
amendments thereto (File No. 333-606) which became effective on March 13,
1996.
+ Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Registrant's Registration Statement on Form S-8, dated
June 5, 1996.
++ Confidential treatment granted by order effective March 13, 1996.
-45-
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ISOCOR
Date: March 31, 1997 By: /s/ Andrew De Mari
-----------------------------------
Andrew De Mari, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Andrew De Mari and Janine M. Bushman,
jointly and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Andrew De Mari President, Chief Executive March 31, 1997
- ---------------------------
(Andrew De Mari) Officer and Director
(Principal Executive Officer)
/s/ Janine M. Bushman Vice President, Finance and March 31, 1997
- ---------------------------
(Janine M. Bushman) Administration, Chief Financial
Officer and Director
(Principal Financial and Accounting Officer)
/s/ Jean-Michel Barbier Director March 31, 1997
- ---------------------------
(Jean Michel Barbier)
/s/ Alexandra Giurgiu Director March 31, 1997
- ---------------------------
(Alexandra Giurgiu)
/s/ G. Bradford Jones Director March 31, 1997
- ---------------------------
(G. Bradford Jones)
</TABLE>
-46-
<PAGE> 47
SCHEDULE II
ISOCOR
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
ACCOUNT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts,
returns, and price protection $(152) $ (344) $ 202 $ (294)
Year ended December 31, 1995
Allowance for doubtful accounts,
returns, and price protection $(294) $ (557) $ 265 $ (586)
Year ended December 31, 1996,
Allowance for doubtful accounts,
returns, and price protection $(586) $(2,771) $1,710 $(1,647)
</TABLE>
S-1
<PAGE> 48
EXHIBIT INDEX
NUMBER DESCRIPTION
2.1* Stock Purchase Agreement by and among Registrant, NetCS and the
stockholders of NetCS dated August 29, 1996.
2.2* Escrow Agreement dated August 29, 1996.
3.1+ Amended and Restated Articles of Incorporation of Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
10.1 1992 Stock Option Plan and forms of option agreements thereunder.
10.2** 1996 Directors' Stock Option Plan and form of option agreement
thereunder.
10.3** 1996 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4** Form of Indemnification Agreement.
10.5** Lease dated November 11, 1994 between ISOCOR and Telos
Corporation.
10.6** Lease dated June 15, 1995 between ISOCOR B.V. and Forfas.
10.7** Rights Agreement dated December 29, 1995 among the Registrant,
its Preferred shareholders and certain of its Common
shareholders, as amended.
10.8++** International Reseller Agreement dated May 11, 1993 between the
Registrant and Syseca S.A.
10.9** Source Code Access License Agreement dated September 15, 1993 and
Amendment to the Source Code Access License Agreement dated May
1, 1995, between the Registrant and Syseca S.A.
10.10++** Report of Discussions between the Registrant and Syseca S.A.
dated September 27, 1994 (translated) and Affidavit of
Translations by Abbey Translations dated January 25, 1996.
10.11++** Master Binary License Agreement dated September 30, 1994 between
the Registrant and LIR S.A.
10.12++** Master Binary License Agreement dated December 28, 1994,
Amendment to the Master Binary Agreement dated March 2, 1995 and
Amendment to the Master Binary License Agreement dated December
28, 1995, between the Registrant and Syseca S.A.
10.13** Product Loan Agreement between the Registrant and Syseca S.A.
dated November 1, 1995.
10.14** Employment Agreement between the Registrant and C. Raomal Perera
dated September 9, 1992.
10.15++** Series D Preferred Stock Purchase Agreement dated December 29,
1995 between the Registrant and Intel Corporation and related
Statement of Work and Product Requirements.
11.1 Statement of Computation of Shares Used in Per Share Calculation.
21.1** Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.1
ISOCOR
1992 STOCK OPTION PLAN
AS AMENDED OCTOBER, 1996
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or non-statutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to paragraph (a) of Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as
amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means ISOCOR, a California corporation.
(g) "Consultant" means any person, including an advisor, who
is engaged by the Company or any Parent or Subsidiary to render consulting
services and is compensated for such services, and any director of the Company
whether compensated for such services or not, provided that if and in the event
the Company registers any class of any equity security pursuant to the Exchange
Act, the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee" means the absence of
any interruption or termination of the employment relationship by the Company or
any Subsidiary. Continuous Status as an Employee shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other
leave of absence approved by the Board, provided that such leave is for a period
of not more than ninety (90) days, unless reemployment upon the expiration of
such leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) in the case of
transfers between locations of the Company or between the Company, its
Subsidiaries or its successor.
<PAGE> 2
(i) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a director's fee by the Company shall not be sufficient to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(k) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported, as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock) for the last market trading day
prior to the time of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq
System (but not on the National Market thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock for the last market trading day prior to the time of determination,
as reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(m) "Named Executive" means (any individual who, on the last
day of the Company's fiscal year, is the chief executive officer of the Company
(or is acting in such capacity) or among the four highest compensated officers
of the Company (other than the chief executive officer). Such officer status
shall be determined pursuant to the executive compensation disclosure rules
under the Exchange Act.
(n) "Nonstatutory Stock Option" means an Option not intended
to qualify as an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the
Plan.
(p) "Optioned Stock" means the Common Stock subject to an
Option.
(q) "Optionee" means an Employee or Consultant who receives an
Option.
<PAGE> 3
(r) "Parent" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1992 Stock Option Plan.
(t) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(u) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13
of the Plan, the maximum aggregate number of shares that may be optioned and
sold under the Plan is 2,300,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares that were
subject thereto shall, unless the Plan shall have been terminated, become
available for future grant under the Plan.
4. Administration of the Plan.
(a) Composition of Administrator.
(i) Multiple Administrative Bodies. If permitted by
Rule 16b-3, and by the legal requirements relating to the administration of
incentive stock option plans, if any, of applicable securities laws and the Code
(collectively, the "Applicable Laws"), the Plan may (but need not) be
administered by different administrative bodies with respect to directors,
officers who are not directors and Employees who are neither directors nor
officers.
(ii) Administration with respect to Directors and
Officers. With respect to grants of Options to Employees or Consultants who are
also officers or directors of the Company, the Plan shall be administered by (A)
the Board, if the Board may administer the Plan in compliance with Rule 16b-3 as
it applies to a plan intended to qualify thereunder as a discretionary plan and
Section 162(m) of the Code as it applies so as to qualify grants of Options to
Named Executives as performance-based compensation, or (B) a Committee
designated by the Board to administer the Plan, which Committee shall be
constituted in such a manner as to permit the Plan to comply with Rule 16b-3 as
it applies to a plan intended to qualify thereunder as a discretionary plan, to
qualify grants of Options to Named Executives as performance-based compensation
under Section 162(m) of the Code and otherwise so as to satisfy the Applicable
Laws.
<PAGE> 4
(iii) Administration with respect to Other Persons.
With respect to grants of Options to Employees or Consultants who are neither
directors nor officers of the Company, the Plan shall be administered by (A) the
Board or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws.
(iv) General. If a Committee has been appointed
pursuant to subsection (ii) or (iii) of this Section 4(a), such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of any Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies (however caused)
and remove all members of a Committee and thereafter directly administer the
Plan, all to the extent permitted by the Applicable Laws and, in the case of a
Committee appointed under subsection (ii), to the extent permitted by Rule 16b-3
as it applies to a plan intended to qualify thereunder as a discretionary plan,
and to the extent required under Section 162(m) of the Code to qualify grants of
Options to Named Executives as performance-based compensation.
(b) Powers of the Administrator. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom
Options may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options
are granted hereunder;
(iv) to determine the number of shares of Common
Stock to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted
hereunder (including, but not limited to, the share price and
any restriction or limitation);
(vii) to determine whether and under what
circumstances an Option may be settled in cash under Section
10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to
the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option shall have declined
since the date the Option was granted.
<PAGE> 5
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final
and binding on all Optionees and any other holders of any Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he or she is
otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of the Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options
shall be taken into account in the order in which they were granted, and the
Fair Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with an Optionee's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement. However, in the case of an Option granted to
an Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
in Section 13 of this Plan, the maximum number of shares which may be subject to
Options granted to any one employee under this Plan for any fiscal year of the
Company shall be 750,000.
<PAGE> 6
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be such price as is
determined by the Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time
of the grant of such Incentive Stock Option, owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per
Share exercise price shall be no less than 100% of the Fair Market Value per
Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of
the grant of such Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
(B) granted to a person, who, at the time of
grant of such Option is a Named Executive of the Company, the per share exercise
price shall be no less than 100% of the Fair Market Value on the date of grant.
(C) granted to any person other than those
persons described in subsections (ii) (A) and (B) above, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on the date
of grant.
(b) Permissible Consideration. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator (and, in the case of an
Incentive Stock Option, shall be determined at the time of grant) and may
consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares
that (x) in the case of Shares acquired upon exercise of an Option, have been
owned by the Optionee for more than six months on the date of surrender, and (y)
have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which such Option shall be exercised, (5)
authorization from the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a Fair Market Value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised, (6) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, (7) delivery of a subscription agreement for the Shares that
irrevocably
<PAGE> 7
obligates the option holder to take and pay for the Shares not more than twelve
months after the date of delivery of the subscription agreement, (8) any
combination of the foregoing methods of payment, or (9) such other consideration
and method of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration to
accept, the Board shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 9(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment. In the event of termination of
an Optionee's consulting relationship or Continuous Status as an Employee with
the Company, such Optionee may, but only within three (3) months (or such other
period of time as is determined by the Board, with such determination in the
case of an Incentive Stock Option being made at the time of grant of the Option
and not exceeding three (3) months) after the date of such termination (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), exercise his or her Option to the extent that Optionee
was entitled to exercise it at the date of such termination. To the extent that
Optionee was not entitled to ,exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
<PAGE> 8
(c) Disability of Optionee. Notwithstanding the provisions of
Section 10(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of his or her total
and permanent disability (within the meaning of Section 22(e)(3) of the Code),
Optionee may, but only within twelve (12) months from the date of such
termination (but in no event later than the expiration date of the term of such
Option as set forth in the Option Agreement), exercise the Option to the extent
otherwise entitled to exercise it at the date of such termination. To the extent
that Optionee was not entitled to exercise the Option at the date of
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(d) Death of Optionee. In the event of the death of an
Optionee, the Option may be exercised, at any time within twelve (12) months
following the date of death (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), by the Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee was entitled to exercise the
Option at the date of death. To the extent that the Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(e) Rule 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
12. Stock Withholding to Satisfy Withholding Tax Obligation. At the
discretion of the Administrator. Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option, which tax liability is subject to tax withholding
under applicable tax laws, and the Optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the Optionee may
satisfy the withholding tax obligation by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined (the "Tax Date").
<PAGE> 9
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable
Tax Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option as to which the election is made;
(c) all elections shall be subject to the consent or
disapproval of the Administrator;
(d) if the Optionee is subject to Section 16 of the Exchange
Act, the election must comply with the applicable provisions of Rule 16b-3 and
shall be subject to such additional conditions or restrictions as may be
required thereunder to qualify for the maximum exemption from Section 16 of the
Exchange Act with respect to Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but, such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option, and the number of shares of Common Stock that have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or that have been returned to the Plan upon cancellation or
expiration of an Option, the maximum number of shares of Common Stock for which
Options may be granted to any employee under Section 8 of the Plan and the price
per share of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason
<PAGE> 10
thereof shall be made with respect to, the number or price of shares of Common
Stock subject to an Option.
(b) Corporate Transactions. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option will terminate immediately prior to
the consummation of such proposed action. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, the Option may be assumed or an equivalent
option may be substituted by such successor corporation or a parent or
subsidiary of such successor corporation. If the successor corporation does not
agree to assume the Option or substitute an equivalent option, the Board shall
notify the Optionee at least fifteen (15) days prior to the consummation of the
transaction. To the extent it has not been previously exercised, the Option will
terminate immediately prior to the consummation of such transaction.
14. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable; provided that, the following revisions or amendments shall require
approval of the shareholders of the Company in the manner described in Section
19 of the Plan:
(i) any increase in the number of Shares subject to
the Plan, other than an adjustment under Section 13 of the
Plan;
(ii) any change in the designation of the class of
persons eligible to be granted Options;
(iii) any change in the limitation on grants to
employees as described in Section 8 of the Plan or other
changes which would require shareholder approval to qualify
options granted hereunder as performance-based compensation
under Section 162(m) of the Code; or
(iv) any revision or amendment requiring shareholder
approval in order to preserve the qualification of the Plan
under Rule 16b-3.
(b) Shareholder Approval. If any amendment requiring
shareholder approval under Section 16(a) of the Plan is made subsequent to the
first registration of any class of equity
<PAGE> 11
securities by the Company under Section 12 of the Exchange Act, such shareholder
approval shall be solicited as described in Section 19 of the Plan.
(c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
18. Agreements. Options shall be evidenced by written agreements in
such form as the Board shall approve from time to time.
19. Shareholder Approval.
(a) Continuance of the Plan shall be subject to approval by
the shareholders of the Company within twelve (12) months before or after the
date the Plan is adopted. Such shareholder approval shall be obtained in the
degree and manner required under applicable state and federal law and the rules
of any stock exchange upon which the Shares are listed.
(b) In the event that the Company registers any class of
equity securities pursuant to Section 12 of the Exchange Act, any required
approval of the shareholders of the
<PAGE> 12
Company obtained after such registration shall be solicited substantially in
accordance with Section 14(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(c) If any required approval by the shareholders of the Plan
itself or of any amendment thereto is solicited at any time otherwise than in
the manner described in Section 19(b) hereof, then the Company shall, at or
prior to the first annual meeting of shareholders held subsequent to the later
of (1) the first registration of any class of equity securities of the Company
under Section 12 of the Exchange Act or (2) the granting of an Option hereunder
to an officer or director after such registration, do the following:
(i) furnish in writing to the holders entitled to
vote for the Plan substantially the same information that would be required (if
proxies to be voted with respect to approval or disapproval of the Plan or
amendment were then being solicited) by the rules and regulations in effect
under Section 14(a) of the Exchange Act at the time such information is
furnished; and
(ii) file with, or mail for filing to, the Securities
and Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to shareholders.
20. Information to Optionees. The Company shall provide to each
Optionee and individual who acquired shares pursuant to the exercise of an
option, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information that are
provided to all shareholders of the Company.
<PAGE> 13
SCHEDULE II
ISOCOR
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
ACCOUNT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts,
returns, and price protection $(152) $ (344) $ 202 $ (294)
Year ended December 31, 1995
Allowance for doubtful accounts,
returns, and price protection $(294) $ (557) $ 265 $ (586)
Year ended December 31, 1996,
Allowance for doubtful accounts,
returns, and price protection $(586) $(2,771) $1,710 $(1,647)
</TABLE>
STATEMENT OF COMPUTATION OF SHARES USED IN PER SHARE COMPUTATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Computation of shares used in net income (loss) per share:
Weighted average common shares outstanding .......... 1,618 1,663 7,258
Common equivalent shares attributable to stock
options (treasury stock method) ................... 178 938 989
Common equivalent shares attributable to redeemable
preferred stock ................................... 813 5,182 --
----- ----- -----
Shares used in per share calculation ..................... 2,609 7,783 8,247
===== ===== =====
</TABLE>
<PAGE> 1
Exhibit 11.1
STATEMENT OF COMPUTATION OF SHARES USED IN PER SHARE COMPUTATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Computation of shares used in net income (loss) per share:
Weighted average common shares outstanding .......... 1,618 1,663 7,258
Common equivalent shares attributable to stock
options (treasury stock method) ................... 178 938 989
Common equivalent shares attributable to redeemable
preferred stock ................................... 813 5,182 --
----- ----- -----
Shares used in per share calculation ..................... 2,609 7,783 8,247
===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
ISOCOR on Form S-8 (File No. 333-05275) of our report dated February 12, 1997,
on our audits of the financial statements of ISOCOR as of December 31, 1996 and
1995, and for the years ended December 31, 1996, 1995 and 1994, which report is
included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
March 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1996 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,374
<SECURITIES> 11,739
<RECEIVABLES> 12,807
<ALLOWANCES> 1,647
<INVENTORY> 0
<CURRENT-ASSETS> 37,965
<PP&E> 6,795
<DEPRECIATION> 3,805
<TOTAL-ASSETS> 41,298
<CURRENT-LIABILITIES> 7,907
<BONDS> 0
0
0
<COMMON> 39,047
<OTHER-SE> (5,843)
<TOTAL-LIABILITY-AND-EQUITY> 41,298
<SALES> 26,394
<TOTAL-REVENUES> 26,394
<CGS> 2,663
<TOTAL-COSTS> 5,068
<OTHER-EXPENSES> 21,359
<LOSS-PROVISION> 211
<INTEREST-EXPENSE> (1,010)
<INCOME-PRETAX> 668
<INCOME-TAX> 185
<INCOME-CONTINUING> 483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 483
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
