<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________ to_________
Commission File Number 000-27900
ISOCOR(R)
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
California 95-4310259
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
3420 Ocean Park Blvd., Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (310) 581-8100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
10,176,981 Shares of Common Stock of the Registrant were
outstanding as of March 31, 1999
<PAGE> 2
ISOCOR
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998
and March 31, 1999........................................................ 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1999............................................. 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1999...................................... 5
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 1998 and 1999...................................... 6
Notes to Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 16
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................... 17
Signature........................................................................ 18
</TABLE>
<PAGE> 3
ISOCOR
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,656 $ 11,875
Marketable securities 9,456 6,999
Trade accounts receivable, net 8,900 7,429
Other current assets 1,805 3,116
-------- --------
Total current assets 29,817 29,419
Property and equipment, net 2,380 2,301
Other assets 928 1,739
-------- --------
Total assets $ 33,125 $ 33,459
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,009 $ 1,898
Accrued expenses 4,634 4,664
Deferred revenues 5,708 6,477
Other current liabilities 1,863 1,664
-------- --------
Total current liabilities 13,214 14,703
Other long-term liabilities 146 127
-------- --------
Total liabilities 13,360 14,830
Commitments and contingencies
Shareholders' equity:
Preferred stock , undesignated, authorized 2,000,000 shares, -- --
none issued or outstanding
Common stock, authorized 50,000,000 shares,
issued and outstanding 9,888,038 and 10,176,981 shares at
December 31, 1998 and March 31, 1999, respectively 39,758 40,083
Notes receivable from shareholders (15) (15)
Accumulated deficit (19,749) (21,662)
Deferred compensation (56) (37)
Accumulated comprehensive income (loss) (173) 260
-------- --------
Total shareholders' equity 19,765 18,629
-------- --------
Total liabilities and shareholders' equity $ 33,125 $ 33,459
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE> 4
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
-------- --------
<S> <C> <C>
Revenues:
Products $ 3,285 $ 4,016
Services 1,762 2,912
-------- --------
Total revenues 5,047 6,928
-------- --------
Cost of revenues:
Products 545 726
Services 921 2,209
-------- --------
Total cost of revenues 1,466 2,935
-------- --------
Gross profit 3,581 3,993
-------- --------
Operating expenses:
Engineering 1,454 1,395
Sales and marketing 3,560 3,267
Administration 812 962
-------- --------
Total operating expenses 5,826 5,624
-------- --------
Loss from operations (2,245) (1,631)
Loss from currency fluctuations (163) (479)
Interest income 311 222
-------- --------
Loss before income taxes and minority interest (2,097) (1,888)
Provision for income taxes 17 45
-------- --------
Loss before minority interest (2,114) (1,933)
Minority interest -- (19)
-------- --------
Net loss $ (2,114) $ (1,914)
======== ========
Net loss per share (basic and diluted) $ (0.22) $ (0.19)
======== ========
Weighted average shares outstanding 9,595 10,028
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE> 5
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,114) $ (1,914)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for doubtful accounts, returns and price protection 221 (112)
Depreciation and amortization 247 302
Amortization of deferred compensation 19 19
Minority interest 0 (19)
(Increase) / decrease in:
Trade accounts receivable (635) 1,072
Other current assets (819) (1,490)
Other assets 4 (894)
Increase / (decrease) in:
Accounts payable (88) 979
Accrued expenses 464 (124)
Deferred revenues 820 1,388
Other current liabilities 1 0
Other long-term liabilities (11) 0
-------- --------
Net cash used by operating activities (1,891) (793)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (82) (260)
Purchase of marketable securities (19,548) (1,978)
Sale of marketable securities 2,500 0
Marketable securities at maturity 15,920 4,435
-------- --------
Net cash (used) provided by investing activities (1,210) 2,197
-------- --------
Cash flows from financing activities:
Proceeds from the sale of common stock, net 95 325
-------- --------
Net cash provided by financing activities 95 325
-------- --------
Effect of exchange rate changes on cash 270 490
-------- --------
Net increase (decrease) in cash (2,736) 2,219
Cash and cash equivalents, beginning of year 10,784 9,656
-------- --------
Cash and cash equivalents, end of period $ 8,048 $ 11,875
======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE> 6
ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
------- -------
<S> <C> <C>
Net Loss $(2,114) $(1,914)
Income/(loss) from foreign currency translation 177 (433)
------- -------
Comprehensive Loss $(1,937) $(2,347)
======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE> 7
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by ISOCOR
(the "Company"), pursuant to the regulations of the U.S. Securities and Exchange
Commission, but are not audited. In the opinion of management, the financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the consolidated financial position at
March 31, 1999, and the consolidated statements of operations, of cash flows and
of comprehensive income for the three month periods ended March 31, 1998 and
1999. These interim statements do not include all of the disclosures required by
generally accepted accounting principles for annual statements.
The statements of operations and cash flows for the 1999 interim periods are not
necessarily indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K, as of
December 31, 1998, as filed with the Securities and Exchange Commission.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash, cash equivalents and accounts
receivable. The Company's accounts receivable are derived from sales directly to
customers and indirectly through resellers, systems integrators and OEMs. The
Company performs ongoing credit evaluations of its customers before granting
uncollateralized credit and to date has not experienced any unusual
credit-related losses. At December 31, 1998 and March 31, 1999, United States,
Ireland and rest of Europe represented 25%, 34% and 41%, and 20%, 37% and 42%,
respectively, of the Company's net accounts receivable. At December 31, 1998 and
March 31, 1999, the Company held balances in U.S. banks of approximately
$1,805,000 and $1,586,000, respectively, which exceeded federally insured
limits. Cash equivalents are managed by major investment firms in accordance
with the Company's investment policy.
Comprehensive income
In January 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income." This
statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Revenue recognition
In January 1998, the Company adopted the AICPA Accounting Standards Executive
Committee Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as
amended by SOP 98-4. SOP 97-2, as amended, supercedes the previous software
revenue recognition standard, SOP 91-1. For software contracts not requiring
software modification, the Company generally recognizes product revenue when all
the following criteria are met: (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred, (3) the vendor's fee is fixed or
determinable, and (4) collectibility is probable. In addition, for contracts
with multiple obligations (e.g. deliverable and undeliverable products, services
and maintenance) revenue must be allocated to each component of the contract
based on evidence of fair value which is specific to the Company, or for
products not being sold separately, the price established by management with
relevant authority. When the Company enters into a license agreement with a
customer requiring significant customization of the software products, the
Company recognizes revenue related to the license using contract accounting.
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 customer support and maintenance
fees ratably over the term of the service period, which is typically 12 months.
Payments for maintenance fees are generally made in advance. The Company
recognizes service revenues from training activities as the services are
provided.
7
<PAGE> 8
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
Segment reporting
In 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company operates in a
single reportable segment; the development, marketing and support of electronic
messaging and directory infrastructure software. The Company's operations
consist of engineering, sales and marketing, administration and support in both
the United States and Europe.
2. ACQUISITION
On July 15, 1998, the Company acquired a 60 percent interest in System Wizards
S.p.A., which is primarily a services company and also distributes the Company's
products in Italy, for $933,000 of which $720,000 was paid in cash at closing
and $213,000 will be paid in installments through July 2000. $165,000 is
included in other current liabilities and $48,000 is included in other long-term
liabilities in the accompanying consolidated balance sheet as of March 31, 1999
for these remaining installments. The Company accounted for this transaction as
a purchase and accordingly, the purchase price was allocated to assets acquired
and liabilities assumed based upon their fair value. The $843,000 paid in excess
of the net assets acquired has been allocated to goodwill, which is being
amortized using the straight line method over an estimated life of five years
and is included in other assets in the accompanying consolidated balance sheet
as of March 31, 1999, net of accumulated amortization of $120,000. The Company
is committed to purchase the remaining 40% of System Wizards within the period
of January 1, 2000 to December 31, 2001 for a contingent amount based on
revenues and net profits of System Wizards for the four quarters preceding
exercise of the Company's option to purchase the remaining 40%, subject to
various adjustments and maximums. The results of operations for this investment
have been included in the consolidated statements of operations for the period
subsequent to the acquisition and were insignificant prior to the acquisition.
3. MARKETABLE SECURITIES
The Company held the following positions as of December 31, 1998 and March 31,
1999 (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(Unaudited)
<S> <C> <C>
Corporate notes ...................... $9,456 $6,999
U.S. Government obligations .......... 0 0
------ ------
$9,456 $6,999
====== ======
</TABLE>
8
<PAGE> 9
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
4. ACCOUNTS RECEIVABLE
Trade accounts receivable, net of allowances as of December 31, 1998 and March
31, 1999 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(Unaudited)
<S> <C> <C>
Accounts receivable .................. $ 11,035 $ 9,345
Less: Allowance for doubtful accounts,
returns and price protection ......... (2,135) (1,916)
-------- --------
$ 8,900 $ 7,429
======== ========
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and March 31, 1999 were as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(Unaudited)
<S> <C> <C>
Salaries and related expenses ........ $1,262 $1,511
Royalties ............................ 401 405
Commissions .......................... 461 372
Corporate and sales taxes ............ 461 372
Other ................................ 2,159 2,063
------ ------
$4,634 $4,664
====== ======
</TABLE>
6. INCOME TAXES
The sources of loss before income taxes for the three months ended March 31,
1998 and 1999 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1999
------- -------
<S> <C> <C>
United States ................................ $(1,170) $ (197)
Foreign ...................................... (927) (1,691)
------- -------
Loss before income taxes and minority interest $(2,097) $(1,888)
======= =======
</TABLE>
On an interim basis, the Company provides for income taxes using its estimated
effective tax rate for the year for foreign and domestic source income. As of
March 31, 1999, there are net operating loss carryforwards which remain in
certain foreign jurisdictions. The taxes provided relate primarily to certain
foreign source income.
7. PER SHARE INFORMATION
Basic net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
net loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding plus the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued. Potential common shares related to
stock options are excluded from the computation when their effect is
antidilutive. Common share equivalents related to stock options that are
antidilutive amounted to approximately 1,904,470 and 2,088,195 shares at March
31, 1998 and 1999, respectively.
9
<PAGE> 10
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
8. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended March 31, 1998 and 1999 was
approximately $150,000 and $133,000, respectively, relating to product sales to,
and software maintenance agreements with, an affiliate of a shareholder.
Included in accounts receivable as of March 31, 1998 and 1999 was $178,000 and
$173,000, respectively, relating to this affiliate. Included in operating
expenses for the three months ended March 31, 1998 and 1999 was approximately
$1,000 and $0, respectively, relating to consulting services provided by this
affiliate. Included in accounts payable as of March 31, 1998 and 1999 was
$75,000 and $0, respectively, related to these consulting services.
Revenues from a distributor that is also a shareholder for the three months
ended March 31,1998 and 1999 were approximately $45,000 and $0, respectively.
Included in accounts receivable as of March 31, 1998 and 1999 was $45,000 and
$0, respectively, relating to this distributor.
In order to attract Paul Gigg to become the Company's new Chief Executive
Officer, the Company committed to loan him up to $500,000 in order to purchase a
home. In March 1999, the Company loaned him $500,000. The amount is
collateralized by real property currently owned by Mr. Gigg. The loan accrues
interest on a monthly basis and will be repaid beginning in March 2002 over a
thirty-six month period. The amount is included in other assets in the
accompanying consolidated balance sheet as of March 31, 1999.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained in this Report on Form 10-Q, the
matters discussed herein are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could affect results include the
mix of business between products and services; the type and size of customers
doing business with the Company and the structure of those transactions, their
product and services requirements and the impact of the timing of revenues
relative to expenses; timely development, introduction and acceptance of new
products and enhancements to existing products in evolving markets; expansion of
the Company's products to support additional enterprise software environments
and hardware platforms; the Company's ability to consummate relationships with
alliance partners; the impact of competitive announcements and products; the
rate of growth of the markets in which the Company competes; acquisition
activities and the ability to integrate acquired businesses successfully; the
impact of changes in accounting standards; the effect and rate of change in
standards and platforms for messaging products; the risks associated with the
Year 2000 issue on the Company's software products, internal IT systems, vendors
and customers, as well as the risk factors listed from time to time in the
Company's US Securities and Exchange Commission (SEC) reports, including but not
limited to the report on Form 10-K for the year ended December 31, 1998, and/or
Form 10-Q for the quarters ended in 1998, copies of which are available from
ISOCOR's Investor Relations Department or through the Electronic Data Gathering,
Analysis and Retrieval system (EDGAR) at www.sec.gov. The Company assumes no
obligation to update the forward-looking statements contained herein.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues. Total revenues were $6,928,000 and $5,047,000 for the three
months ended March 31, 1999 and 1998, respectively, representing an increase in
1999 of 37% over the same period one year ago.
On a geographic basis, revenues from North American sources accounted
for 37% and 34% of total revenues, while revenues in the Company's European
marketplace accounted for 53% and 56% of total revenues in the three months
ended March 31, 1999 and 1998, respectively. The remaining 10% percent of
revenues in the three months ended March 31, 1999 and 1998, respectively, were
generated from sources outside North America and Europe, primarily from Asia,
South America and Australia.
Product revenues were $4,016,000 and $3,285,000 for the three months ended
March 31, 1999 and 1998, respectively. The increase was primarily attributable
to increased volumes of Internet related products licensed, partially offset by
declining volumes of the Company's older non-Internet related product lines
reflecting a continuing shift in market demand away from non-Internet related
products. While the Company continues to sell non-Internet related projects in
certain parts of the world, or in certain specific application areas, the
Company believes that this marketplace will continue to decline slowly
throughout 1999 and beyond. In the three months ended March 31, 1999 and 1998
product revenues driven by the demand for non-Internet related solutions were 7%
and 22% of product revenues, respectively. ISOCOR's Internet Messaging product
line consists primarily of the N-PLEX products, which accounted for $1.5 million
or 39% of total product revenues in the three months ended March 31, 1999. These
amounts represented an increase on an absolute basis from the three months ended
March 31, 1998 level of $1.3 million or 38% of total product revenues. Directory
revenues accounted for $1.6 million or 41% of total product revenues in the
three months ended March 31, 1999, increased from the three months ended March
31, 1998 level of $460,000 or 14% of total product revenues. The Company's
worldwide Internet Messaging and Directory business is evolving to include more
customers who are implementing larger-scale/more complex software systems. These
systems take increased time to design, configure and implement. This evolution
has a delaying impact on the speed at which the company recognizes its revenues,
such that larger projects will be recognized as revenue over several quarters.
This trend is currently more pronounced in the Company's U.S. customers, than
elsewhere in the world. As of March 31, 1999 and 1998 the Company had
approximately $6.5 million and $1.0 million, respectively, of orders in backlog.
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<PAGE> 12
Service revenues were $2,912,000 and $1,762,000 for the three months
ended March 31, 1999 and 1998, respectively. The 65% increase from 1998 to 1999
resulted primarily from increased levels of custom services revenues largely
driven by the increased capabilities provided by the Company's acquisition of a
60% interest in an Italy-based services company in the third quarter of 1998 and
to a lesser extent due to increased volumes of software support and update
services. The Company believes that custom services revenues are becoming, and
will continue to become, an increasingly important component of its offerings to
the market because more customers are implementing larger-scale/more complex
software systems.
Cost of Revenues. Cost of product revenues consists primarily of costs
of third party royalties relating to licensed technology, hardware purchased
from third party vendors, media duplication, manuals and packaging materials and
personnel and facility costs associated with the assembly operation. The
increase in cost of product revenues to $726,000 in the three months ended March
31, 1999 from $545,000 in the three months ended March 31, 1998, resulted
primarily from increased hardware costs and higher third party royalties
relating to increased volumes sold of certain of its Internet-related
royalty-bearing products.
Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, custom engineering services and
training and installation services. The increase in cost of service revenues to
$2,209,000 for the three months ended March 31, 1999 from $921,000 for the three
months ended March 31, 1998 resulted primarily from increased personnel-related
costs associated with supporting a higher level of service revenues which is
partially attributable to the Company's acquisition of a 60% interest in an
Italy-based services company in the third quarter of 1998.
Gross Profit. Gross profit was $3,993,000 and $3,581,000 for the three
months ended March 31, 1999 and 1998, respectively, representing 58% and 71% of
revenues for those same periods, respectively. The decline in the gross profit
percentage is primarily attributable to a decline in services gross margin
percentage combined with the impact of an increasing percentage of services
revenues to totals revenues.
Gross profit from product sales was $3,290,000 and $2,740,000 for the
three months ended March 31, 1999 and 1998, respectively. This represents 82%
and 83% of product sales for the three months ended March 31, 1999 and 1998,
respectively. The percentage decrease is primarily due to increased hardware
costs and higher third party royalties relating to increased volumes of
certain of its Internet-related royalty-bearing products.
Gross profit from services was $703,000 and $841,000 for the three
months ended March 31, 1999 and 1998, respectively, representing 24% and 48% of
services revenues for those same periods, respectively. The decrease in gross
profit percentage between the periods was primarily driven by increased levels
of personnel, and thus associated costs, required to provide these services,
partially attributable to the Company's acquisition of a 60% interest in an
Italy-based services company in the third quarter of 1998.
Engineering. Engineering expenses were $1,395,000 and $1,454,000 for the
three months ended March 31, 1999 and 1998, respectively, representing 20% and
29% of revenues for those same periods, respectively. The percentage decrease is
principally driven by the higher revenue base in the three months ended March
31, 1999 versus March 31, 1998.
Sales and Marketing. Sales and marketing expenses were $3,267,000 and
$3,560,000 for the three months ended March 31, 1999 and 1998, respectively,
representing 47% and 70% of revenues for those same periods, respectively. The
absolute decrease is principally due to the Company's refocusing of its sales
and marketing efforts and a decrease in the level of personnel involved and
expenses associated with those efforts. The percentage decrease is primarily
driven by the higher revenue base in the three months ended March 31, 1999
versus March 31, 1998.
Administration. Administration expenses were $962,000 and $812,000 for
the three months ended March 31, 1999 and 1998, respectively, representing 14%
and 16% of revenues for those same periods,
12
<PAGE> 13
respectively. The absolute increase is primarily attributable to the increased
operating expenses associated with the Company's acquisition of a 60% interest
in an Italy-based services company in the third quarter of 1998, while the
percentage decrease is driven primarily by increased revenue levels.
Loss from currency fluctuations. Loss from currency fluctuations was
$(479,000) and $(163,000) for the three months ended March 31, 1999 and 1998,
respectively. The fluctuation during the three months ended March 31, 1999
resulted principally in Ireland due to the strength of the US dollar against
local currencies.
Interest income. Interest income was $222,000 for the three months March
31, 1999 as compared with $311,000 in the same period in 1998. The decrease is
primarily related to decreased levels of marketable securities during the three
months ended March 31, 1999 as compared to the same period in 1998.
Provision for Income Taxes. The income tax provision was $45,000 and
$17,000 for the three months ended March 31, 1999 and 1998, respectively, on
pre-tax losses of $1,888,000 and $2,097,000 for the three months ended March 31,
1999 and 1998, respectively, which resulted from taxes on the Company's foreign
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash usage from operating activities of $793,000 and $1,891,000
for the three months ended March 31, 1999 and 1998, respectively, decreased
period over period by $1,098,000. Operating cash flows for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998 were
positively affected by a decreased operating loss (net of adjustments due to
depreciation and amortization and the provision for doubtful accounts, returns
and price protection) and increased cash flow relative to a decreased level of
trade accounts receivable, increased level of accounts payable and deferred
revenues offset by increases in other current and long-term assets. Cash flow
from operations can vary significantly from quarter to quarter depending upon
the timing of operating cash receipts and payments, especially accounts
receivable and accounts payable.
As of March 31, 1999, total accounts receivable, net was $7,429,000 compared to
$8,900,000 at December 31, 1998. The Company typically generates a large
percentage of its quarterly revenue during the last few weeks of the quarter.
Certain portions of the Company's larger sales have extended payment terms, thus
slowing the cash flow cycle, and the Company expects that future large sales
will follow the same pattern. The Company does not believe these payment terms
are likely to have a material adverse effect on the collectibility of the
related receivables.
As of March 31, 1999, the Company had $11,875,000 in cash and cash equivalents,
and $6,999,000 in marketable securities. The Company believes that these
existing capital resources will be adequate to finance the Company's operations
and capital expenditures through at least the end of 2000.
YEAR 2000 COMPLIANCE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems and the Company's
software products to process information accurately that may be date-sensitive.
Any of the Company's programs or products that recognize a date using "00" as
the year 1900 rather than the year 2000 could result in errors or system
failures. The Company utilizes a number of computer programs across its entire
operation. The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers,
for handling the year 2000.
The Company relies on a variety of internal computer systems, as well as
services provided by third parties, in the operation of its business. While the
Company is continuing its assessment of the impact of the year
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<PAGE> 14
2000 problem upon such systems, the Company does not believe that any of such
systems are mission-critical to the Company's business operations such that a
failure in such systems would have an immediate adverse effect on the Company's
business, financial condition or results of operations. At this time, the
Company believes that the majority of its systems are year 2000 compliant and is
taking steps or monitoring the actions of its suppliers with respect to those
systems where a potential problem may exist. The Company's internal systems run
on personal computers and microprocessor-based computer servers set up in a
workstation environment and should not be susceptible to universal failures.
Were system failures to occur as a result of the year 2000 issue, the Company
believes that its on-site engineers and technical personnel would be able to
address and resolve such issues prior to the occurrence of any material adverse
effect on the Company's business operations. The failure of certain of the
systems upon which the Company relies, such as payroll and banking services,
could, however, be disruptive to the Company's business operations if such
systems were unavailable for an extended period of time. The Company is in the
process of making inquiries with the providers of such types of services to
determine their year 2000 readiness. However, the Company believes that its
business operations would not be materially adversely effected by short
disruptions in such services and that the providers of such services (who also
typically service many other business customers) will take steps to rectify any
failures as soon as possible. More generally, the Company does not believe that
its risks with regard to failures in the power grid or general communications,
building security and similar systems place the Company in a unique position
relative to year 2000 issues as compared to other businesses.
The Company is currently in the process of testing and upgrading, where
necessary, the current versions of its currently-offered software products to
address the year 2000 issue. The Company has completed its testing and year 2000
compliant versions of its current products are currently available. The Company
believes that a number of its older or obsolete products and/or versions are not
year 2000 compliant, and the Company currently does not intend to update such
products or versions. The Company has taken and plans to continue to take
appropriate steps to notify its customers and distribution channels about the
year 2000 issues associated with the Company's older and discontinued products.
The Company maintains on its website a list of the Company's current year
2000-compliant products (by product and version number). Customers under current
support and maintenance agreements with the Company will be entitled to upgrade
to a year 2000-compliant replacement product. The Company has completed a
mailing to its customers under support and maintenance agreements and has
conducted a general customer mailing (including the Company's distribution
channels and customers not under maintenance and support agreements) regarding
the Company's year 2000 upgrade plans and the possible solutions. The Company
has given certain of its customers warranties with respect to year 2000
compliance and may have to offer updates, workarounds or replacement products to
those customers. Through its website, the Company is encouraging customers not
under support and maintenance agreements to contact the Company regarding
possible upgrades or migration paths to address year 2000 issues. In addition to
the information contained on the Company's website, the Company's regular
newsletter contains similar information regarding year 2000 issues. In certain
cases, however, customers may need to make hardware and/or operating system
changes in order to implement a year 2000 solution. In other cases, the Company
will not be able to offer a solution. In the event that any of the products that
the Company has made year 2000-compliant suffer unanticipated failures as a
result of year 2000 problems, the Company would deploy its engineering and
technical support resources to implement a solution.
Some of the Company's products incorporate software code supplied by third
parties. The Company relies upon such vendors to ensure that such code is
updated to address year 2000 issues where appropriate. Because such third
parties license their code to others in addition to the Company, the Company
believes that such third parties will take measures to address any year 2000
issues with respect to such code. However, in the event that such third parties
do not take actions to make the code year 2000-compliant or their actions prove
insufficient, and where the Company has the right to make code modifications,
the Company believes that its technical personnel, who are familiar with the
code used in the Company's products, could make necessary modifications to
correct problems that arise.
The Company has not incurred substantial costs to date to address the year 2000
issue and does not expect the total costs of such project to be material to the
Company's financial position. To date, the Company has spent approximately
$300,000 in connection with actions taken by the Company to address year 2000
14
<PAGE> 15
problems and estimates remaining costs to be immaterial. Such costs are being
expensed as they are incurred and are being funded through operating cash flow.
Cost estimates are based on currently available information. Factors that could
affect these estimates include, but are not limited to, the availability and
cost of trained personnel to evaluate and implement necessary changes, the
ability to locate and correct noncompliant systems and the ability of the
Company's customers and service providers to successfully implement year 2000
compliant systems or fixes. Any failure by the Company to make its products year
2000 compliant could result in a decrease in sales of the Company's products
and/or possible claims against the Company by customers as a result of year 2000
problems caused by the Company's products. Despite the Company's efforts to
address the year 2000 impact on its internal systems, products and business
operations, the year 2000 issue may result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations.
EURO IMPACT
In January 1999, eleven European countries, including Ireland, Germany and
Italy, where the Company maintains significant operations, initiated the process
to replace their individual national currencies with a single, shared new
currency (the "Euro") as part of the program of European Economic and Monetary
Union. It is expected that this process will be completed at the latest by end
of June in the year 2002. Although transactions during this transitional period
may still be consummated in the individual currencies of the member countries,
the Company will be required to, and is currently in the process of,
implementing modifications to its accounting systems as well as its contracts
and other obligations in order to accommodate the Euro. The Company does not
currently believe that it will incur a material financial expense in connection
with such modifications. The introduction of the Euro, presents certain risks
for the Company including, risks associated with its reduced ability to adjust
pricing of its products based on local currencies, fluctuations in the Euro
based on economic turmoil in countries other than those in which the Company
does business and other risks normally associated with doing business in
international currencies, any of which could have an adverse effect on the
Company's business, financial condition and results of operations.
15
<PAGE> 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(a) Quantitative Information About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company maintains
an investment policy designed to ensure the safety and preservation of its
invested funds by limiting default risk, market risk, and reinvestment risk. As
of March 31, 1999, the Company had $11.9 million and $7.0 million of cash and
cash equivalents and short-term investments, respectively, with a weighted
average variable rate of 3.60% and 5.04%, respectively.
The Company attempts to mitigate default risk by attempting to invest in
high credit quality securities, by constantly positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor and by placing its portfolio under the management
of professional money managers who invest within specified parameters
established by the Board of Directors. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity
and maintains a prudent amount of diversification.
(b) Qualitative Information About Market Risk
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, Germany where the functional
currency is the German Mark and Italy, where the functional currency is the
Lira. In addition, 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.
16
<PAGE> 17
PART II Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
27.1-Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for which this
report has been filed.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by Janine M. Bushman, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
ISOCOR
Date: May 12, 1999 By: /s/JANINE M. BUSHMAN
-------------------------------------
Janine M. Bushman, Vice President,
Finance and Administration, and Chief
Financial Officer (Principal
Financial and Accounting Officer)
18
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits Page
- ------- -------- ----
<S> <C> <C>
27.1 Financial Data Schedule................................... 20
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE NINE MONTHS IN THE PERIOD ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,875
<SECURITIES> 6,999
<RECEIVABLES> 9,345
<ALLOWANCES> 1,916
<INVENTORY> 0
<CURRENT-ASSETS> 29,419
<PP&E> 8,543
<DEPRECIATION> 6,242
<TOTAL-ASSETS> 33,459
<CURRENT-LIABILITIES> 14,703
<BONDS> 0
0
0
<COMMON> 40,083
<OTHER-SE> (21,454)
<TOTAL-LIABILITY-AND-EQUITY> 33,459
<SALES> 6,928
<TOTAL-REVENUES> 6,928
<CGS> 726
<TOTAL-COSTS> 2,935
<OTHER-EXPENSES> 5,624
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> (222)
<INCOME-PRETAX> (1,888)
<INCOME-TAX> 45
<INCOME-CONTINUING> (1,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,914)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
