<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 June 30, 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)
California 95-4310259
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3420 Ocean Park Blvd., Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 581-8100
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
10,354,420 Shares of Common Stock of the Registrant were outstanding as
of June 30, 1999
<PAGE> 2
ISOCOR
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998
and June 30, 1999........................................................................... 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1998 and 1999................................................................ 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1999......................................................... 5
Consolidated Statements of Comprehensive Income for the three and six
months ended June 30, 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............................. 17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders.....................................18
Item 6. Exhibits and Reports on Form 8-K....................................................... 19
Signature........................................................................................... 20
</TABLE>
2
<PAGE> 3
ISOCOR
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,656 $ 10,141
Marketable securities 9,456 9,010
Trade accounts receivable, net 8,900 6,498
Other current assets 1,805 3,306
-------- --------
Total current assets 29,817 28,955
Property and equipment, net 2,380 2,294
Other assets 928 1,300
-------- --------
Total assets $ 33,125 $ 32,549
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,009 $ 985
Accrued expenses 4,634 5,800
Deferred revenues 5,708 6,196
Other current liabilities 1,863 1,443
-------- --------
Total current liabilities 13,214 14,424
Other long-term liabilities 146 127
-------- --------
Total liabilities 13,360 14,551
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 10,354,420 shares at
December 31, 1998 and June 30, 1999, respectively 39,758 40,429
Notes receivable from shareholders (15) (15)
Accumulated deficit (19,749) (22,730)
Deferred compensation (56) (19)
Accumulated comprehensive income (loss) (173) 333
-------- --------
Total shareholders' equity 19,765 17,998
-------- --------
Total liabilities and shareholders' equity $ 33,125 $ 32,549
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE> 4
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Products $ 4,210 $ 4,664 $ 7,495 $ 8,681
Services 1,842 3,304 3,603 6,216
-------- -------- -------- --------
Total revenues 6,052 7,968 11,098 14,897
-------- -------- -------- --------
Cost of revenues:
Products 692 662 1,237 1,388
Services 934 2,087 1,854 4,296
-------- -------- -------- --------
Total cost of revenues 1,626 2,749 3,091 5,684
-------- -------- -------- --------
Gross profit 4,426 5,219 8,007 9,213
-------- -------- -------- --------
Operating expenses:
Engineering 1,475 1,411 2,930 2,806
Sales and marketing 3,012 3,561 6,572 6,829
Administration 801 1,375 1,612 2,336
-------- -------- -------- --------
Total operating expenses 5,288 6,347 11,114 11,971
-------- -------- -------- --------
Loss from operations (862) (1,128) (3,107) (2,758)
Income (loss) from currency fluctuations 86 (102) (77) (582)
Interest income 260 196 571 418
-------- -------- -------- --------
Loss before income taxes and minority interest (516) (1,034) (2,613) (2,922)
Provision for income taxes 20 33 37 79
-------- -------- -------- --------
Loss before minority interest (536) (1,067) (2,650) (3,001)
Minority interest -- -- -- (19)
-------- -------- -------- --------
Net loss $ (536) $ (1,067) $ (2,650) $ (2,982)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.05) $ (0.10) $ (0.27) $ (0.29)
======== ======== ======== ========
Weighted average shares outstanding 9,786 10,267 9,738 10,149
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE> 5
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June,
---------------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,650) $ (2,982)
Adjustments to reconcile net loss to net
cash used by operating activities:
Provision for doubtful accounts, returns and price protection 214 13
Depreciation and amortization 524 607
Amortization of deferred compensation 37 37
Minority interest 0 (19)
(Increase) / decrease in:
Trade accounts receivable 592 1,671
Other current assets (1,180) (1,755)
Other assets (78) (495)
Increase / (decrease) in:
Accounts payable (110) 74
Accrued expenses 540 1,259
Deferred revenues 664 928
Other current liabilities 1 0
Other long-term liabilities (16) 0
-------- --------
Net cash used by operating activities (1,462) (662)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (210) (544)
Purchase of marketable securities (27,293) (6,478)
Sale of marketable securities 21,545 5,924
Marketable securities at maturity 3,500 1,000
-------- --------
Net cash used by investing activities (2,458) (98)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of common stock, net 316 672
-------- --------
Net cash provided by financing activities 316 672
-------- --------
Effect of exchange rate changes on cash 146 573
-------- --------
Net increase (decrease) in cash (3,458) 485
Cash and cash equivalents, beginning of year 10,784 9,656
-------- --------
Cash and cash equivalents, end of period $ 7,326 $ 10,141
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE> 6
ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Loss $ (536) $(1,067) $(2,650) $(2,982)
Income/(loss) from foreign currency translation (112) 73 65 506
------- ------- ------- -------
Comprehensive Loss $ (648) $ (994) $(2,585) $(2,476)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
6
<PAGE> 7
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
June 30, 1999, and the consolidated statements of operations, of cash flows and
of comprehensive income for the three and six month periods ended June 30, 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
consolidated financial statements included in the Company's Annual Report on
Form 10-K, for the fiscal year ended 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, marketable securities
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 June 30,
1999, United States, Ireland and rest of Europe represented 25%, 34% and 41%,
and 18%, 39% and 43%, respectively, of the Company's net accounts receivable. At
December 31, 1998 and June 30, 1999, the Company held balances in U.S. banks of
approximately $1,805,000 and $989,000, respectively, which exceeded federally
insured limits. Cash equivalents and marketable securities are managed by major
investment firms in accordance with the Company's investment policy.
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.
Segment reporting
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.
7
<PAGE> 8
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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 June 30, 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 June 30, 1999, net of accumulated amortization of $162,000. 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 June 30,
1999 (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
(Unaudited)
<S> <C> <C>
Corporate notes ........................ $9,456 $8,010
U.S. Government obligations ............ 0 1,000
------ ------
$9,456 $9,010
====== ======
</TABLE>
4. ACCOUNTS RECEIVABLE
Trade accounts receivable, net of allowances as of December 31, 1998 and June
30, 1999 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
(Unaudited)
<S> <C> <C>
Accounts receivable .............................. $ 11,035 $ 8,554
Less: Allowance for doubtful accounts, returns and
price protection ................................. -- --
(2,135) (2,056)
-------- --------
$ 8,900 $ 6,498
======== ========
</TABLE>
8
<PAGE> 9
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and June 30, 1999 were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1999
----------------- -------------
(Unaudited)
<S> <C> <C>
Salaries and related expenses ........ $1,262 $2,025
Royalties ............................ 401 599
Commissions .......................... 461 703
Other ................................ 2,510 2,473
------ ------
$4,634 $5,800
====== ======
</TABLE>
6. INCOME TAXES
The sources of income/(loss) before income taxes for the three and six months
ended June 30, 1998 and 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
United States .......... $ (484) $(1,437) $(1,654) $(1,634)
Foreign ................ (32) 403 (959) (1,288)
------- ------- ------- -------
Loss before income taxes
and minority interest .. $ (516) $(1,034) $(2,613) $(2,922)
======= ======= ======= =======
</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
June 30, 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 1,788,013 and 2,080,774 shares at June
30, 1998 and 1999, respectively.
8. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended June 30, 1998 and 1999 was
approximately $42,000 and $123,000, respectively, relating to product sales to,
and software maintenance agreements with, an affiliate of a shareholder.
Revenues from this same affiliate for the six months ended June 30, 1998 and
1999 were approximately $192,000 and $256,000, respectively. Included in
accounts receivable as of December 31, 1998 and June 30, 1999 was $82,000 and
$166,000, respectively, relating to this affiliate. For the three months ended
June 30, 1998 and 1999 there were no operating expenses relating to consulting
services provided by this affiliate. Operating expenses relating to this same
affiliate for the six months ended June 30, 1998 and 1999 were $1,000 and $0,
respectively. The accounts payable balance as of December 31, 1998 and June 30,
1999 was $0, related to these consulting services.
9
<PAGE> 10
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
Revenues from a distributor that is also a shareholder for the six months ended
June 30,1998 and 1999 were approximately $45,000 and $0, respectively. In the
three months ended June 30, 1998 and 1999 there were no such revenues from this
same distributor.
Included in other assets as of June 30, 1999 was $500,000 for a loan to Paul
Gigg, Chief Executive Officer and $8,000 in accrued interest. The loan was made
pursuant to his relocation to the Los Angeles area and is collateralized by real
property currently owned by Mr. Gigg. Included in interest income for the three
months ended June 30, 1999 was approximately $8,000.
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; continued
broad deployment and use of the Internet for electronic messaging; 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 1999, 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 JUNE 30, 1999 AND 1998
Revenues. Total revenues were $7,968,000 and $6,052,000 for the three
months ended June 30, 1999 and 1998, respectively, representing an increase in
1999 of 32% over the same period one year ago.
On a geographic basis, revenues from North American sources accounted
for 21% and 34% of total revenues, while revenues in the Company's European
marketplace accounted for 66% and 48% of total revenues in the three months
ended June 30, 1999 and 1998, respectively. The remaining 13% and 18% percent of
revenues in the three months ended June 30, 1999 and 1998, respectively, were
generated from sources outside North America and Europe, primarily from Asia and
South America.
Product revenues were $4,664,000 and $4,210,000 for the three months
ended June 30, 1999 and 1998, respectively. ISOCOR's Internet Messaging product
line consists primarily of the N-PLEX products, which accounted for $2.7 million
or 57% of total product revenues in the three months ended June 30, 1999. This
amount represented an increase from the three months ended June 30, 1998 level
of $2.5 million. Directory revenues accounted for $324,000 or 7% of total
product revenues in the three months ended June 30, 1999, decreased from the
three months ended June 30, 1998 level of $645,000. The Company's worldwide
Internet Messaging and Directory business includes customers who are
implementing large-scale/complex software systems. These systems take time to
design, configure and implement. This has a delaying impact on the speed at
which the company recognizes its revenues, such that large projects will be
recognized as revenue over several quarters.
In the three months ended June 30, 1999 and 1998 product revenues
related to non-Internet related solutions were $1.7 million and $1.1 million,
respectively. This increase was primarily due to increased prices. While these
revenues increased between the three months ended June 30, 1999 and June 30,
1998, the Company believes that this marketplace and the related revenues will
continue to decline slowly throughout 1999 and beyond.
Service revenues were $3,304,000 and $1,842,000 for the three months
ended June 30, 1999 and 1998, respectively. The 79% increase from 1998 to 1999
resulted primarily from increased levels of custom services revenues largely
driven by the increased customer demand for ISOCOR's solutions incorporating
both products and services and 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 were the result of increased
volumes of software support and update services. The Company believes
11
<PAGE> 12
that custom services revenues are an important component of its offerings to the
market because customers are implementing large-scale/more complex software
systems.
Cost of Revenues. Cost of product revenues consists primarily of costs
of hardware purchased from third party vendors, media duplication, manuals and
packaging materials and personnel and facility costs associated with the
assembly operation and third party royalties relating to licensed technology.
The decrease in cost of product revenues to $662,000 in the three months ended
June 30, 1999 from $692,000 in the three months ended June 30, 1998 resulted
primarily from decreased third party royalties related to decreased volumes of
products sold of certain of the Company's royalty-bearing product lines
partially offset by increased hardware costs relating to certain of the
Company's product lines.
Cost of service revenues consists primarily of personnel-related costs
of providing custom services and software support and update services. The
increase in cost of service revenues to $2,087,000 for the three months ended
June 30, 1999 from $934,000 for the three months ended June 30, 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 $5,219,000 and $4,426,000 for the three
months ended June 30, 1999 and 1998, respectively, representing 65% and 73% of
revenues for those same periods, respectively. The principal reason for the
decline in the gross profit percentage between 1998 and 1999 is the combination
of a lower 1999 gross margin percentage on the services business and an
increasing percentage of total revenues attributable to the services business.
Gross profit from product sales was $4,002,000 and $3,518,000 for the
three months ended June 30, 1999 and 1998, respectively. This represents 86% and
84% of product sales for the three months ended June 30, 1999 and 1998,
respectively.
Gross profit from services was $1,217,000 and $908,000 for the three
months ended June 30, 1999 and 1998, respectively, representing 37% and 49% of
services revenues for those same periods, respectively. The decrease in gross
profit percentage between the periods was primarily driven by increased levels
of personnel, and thus associated costs, required to provide these services
Engineering. Engineering expenses were $1,411,000 and $1,475,000 for
the three months ended June 30, 1999 and 1998, respectively, representing 18%
and 24% of revenues for those same periods, respectively. The percentage
decrease is principally driven by the higher revenue base in the three months
ended June 30, 1999 versus June 30, 1998.
Sales and Marketing. Sales and marketing expenses were $3,561,000 and
$3,012,000 for the three months ended June 30, 1999 and 1998, respectively,
representing 45% and 50% of revenues for those same periods, respectively. The
absolute increase is principally due to the Company's acquisition of a 60%
interest in an Italy based services company in the third quarter of 1998. The
percentage decrease is primarily driven by the higher revenue base in the three
months ended June 30, 1999 versus June 30, 1998.
Administration. Administration expenses were $1,375,000 and $801,000
for the three months ended June 30, 1999 and 1998, respectively, representing
17% and 13% of revenues for those same periods, respectively. The absolute
increase is primarily attributable to the increased operating expenses
associated with increased consulting and outside service fees.
Income (loss) from currency fluctuations. Income (loss) from currency
fluctuations was $(102,000) and $86,000 for the three months ended June 30, 1999
and 1998, respectively. The fluctuation during the three months ended June 30,
1999 resulted principally in Ireland due to the strength of the US dollar
against local currencies.
Interest income. Interest income was $196,000 for the three months
ended June 30, 1999 as compared with $260,000 in the same period in 1998. The
decrease is primarily related to decreased levels
12
<PAGE> 13
of marketable securities during the three months ended June 30, 1999 as compared
to the same period in 1998.
Provision for Income Taxes. The income tax provision was $33,000 and
$20,000 for the three months ended June 30, 1999 and 1998, respectively, on
pre-tax losses of $1,034,000 and $516,000 for the three months ended June 30,
1999 and 1998, respectively, which resulted from taxes on the Company's foreign
operations.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenues were $14,897,000 and $11,098,000 for the six
months ended June 30, 1999 and 1998, respectively, representing an increase in
1999 of 34% over the same period one year ago. Revenues from domestic sources
accounted for approximately 28% and 34% of total revenues in the six months
ended June 30, 1999 and 1998, respectively, while the Company's international
revenues accounted for 72% and 66%, respectively, of the Company's total
revenues in the same periods.
Product revenues were $8,681,000 and $7,495,000 for the six months
ended June 30, 1999 and 1998, respectively. ISOCOR's Internet Messaging product
line consists primarily of the N-PLEX products, which accounted for $4.2 million
or 49% of total product revenues in the six months ended June 30, 1999. This
amount represented an increase from the six months ended June 30, 1998 level of
$3.7 million. Directory revenues accounted for $2 million or 22% of total
product revenues in the six months ended June 30, 1999, increased from the six
months ended June 30, 1998 level of $1.1 million. 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. The Company's worldwide Internet Messaging and Directory
business includes customers who are implementing large-scale/complex software
systems. These systems take time to design, configure and implement. This has a
delaying impact on the speed at which the company recognizes its revenues, such
that large projects will be recognized as revenue over several quarters.
In the six months ended June 30, 1999 and 1998 product revenues driven
by the demand for non-Internet related solutions were $2.5 million and $2.7
million of product revenues, respectively. This decrease was primarily due to
decreased volumes of the Company's products related to a continuing shift in
market demand away from the Company's older non-Internet related product lines,
partially offset by increased prices. The Company believes that this marketplace
and the related revenues will continue to decline slowly throughout 1999 and
beyond.
Service revenues were $6,216,000 and $3,603,000 for the six months
ended June 30, 1999 and 1998, respectively. The 73% increase from 1998 to 1999
resulted primarily from increased levels of custom services revenues largely
driven by the increased customer demand for ISOCOR's solutions incorporating
both products and services and 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.
As of June 30, 1999 and 1998 the Company had approximately $6.5 million
and $0.7 million, respectively, of orders in backlog.
Cost of Revenues. Cost of product revenues consists primarily of costs
of hardware purchased from third party vendors, media duplication, manuals and
packaging materials, and third party royalties relating to licensed technology.
The increase in cost of product revenues from $1,237,000 to $1,388,000 in the
six months ended June 30, 1998 to June 30, 1999, respectively, resulted
primarily from increased hardware costs relating to certain of the Company's
product lines.
Cost of service revenues consists primarily of personnel-related costs
of providing custom services and software support and update services. The
increase in cost of service revenues between the six months ended June 30, 1999
from the six months ended June 30, 1998 resulted primarily from increased
personnel-
13
<PAGE> 14
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 $9,213,000 and $8,007,000 for the six
months ended June 30, 1999 and 1998, respectively, representing 62% and 72% of
revenues for those same periods, respectively.
Gross profit from product sales was $7,293,000 and $6,258,000 for the
six months ended June 30, 1999 and 1998, respectively, representing 84% and 83%
of product sales for the six months ended June 30, 1999 and 1998, respectively.
Gross profit from services was $1,920,000 and $1,749,000 for the six
months ended June 30, 1999 and 1998, respectively, representing 30% and 49% 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 $2,806,000 and $2,930,000 for
the six months ended June 30, 1999 and 1998, respectively, representing 19% and
26% of revenues for those same periods, respectively. The absolute decrease in
engineering expenses resulted principally from decreased personnel and related
expenses, which is further affected on a percentage basis by the higher revenue
in the six months ended June 30, 1999.
Sales and Marketing. Sales and marketing expenses were $6,829,000 and
$6,572,000 for the six months ended June 30, 1999 and 1998, respectively,
representing 46% and 59% of revenues for those same periods, respectively. The
increase in sales and marketing expenses resulted principally from the Company's
acquisition of a 60% interest in an Italy based services company in the third
quarter of 1998, partially offset by a decrease in the level of personnel
involved and expenses associated with sales and marketing efforts. The decrease
in sales and marketing expenses as a percentage of revenues is affected by the
higher revenue in the six months ended June 30, 1999.
Administration. Administration expenses were $2,336,000 and $1,612,000
for the six months ended June 30, 1999 and 1998, respectively, representing 16%
and 15% of revenues for those same periods, respectively. The absolute increase
in administration expenses resulted principally from the increased operating
expenses associated with increased consulting and professional service fees.
Loss from currency fluctuations. Loss from currency fluctuations was
$(582,000) and $(77,000) for the six months ended June 30, 1999 and 1998,
respectively. The fluctuation during these periods resulted principally in
Ireland due to the strength of the US dollar against local currencies.
Interest income. Interest income was $418,000 for the six months ended
June 30, 1999 as compared with $571,000 in the same period in 1998. The decrease
is primarily related to decreased levels of marketable securities during the six
months ended June 30, 1999 as compared to the same period in 1998.
Provision for Income Taxes. The income tax provision was $79,000 and
$37,000 for the six months ended June 30, 1999 and 1998, respectively, on
pre-tax losses of $2,922,000 and $2,613,000, respectively which resulted from
taxes on the Company's foreign operations.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash usage from operating activities of $662,000 and $1,462,000
for the six months ended June 30, 1999 and 1998, respectively, decreased period
over period by $800,000. Operating cash flows for the six months ended June 30,
1999 compared to the six months ended June 30, 1998 positively affected by an
increased cash flow relative to a decreased level of trade accounts receivable,
increased level of accounts payable and deferred revenues offset by an increased
operating loss (net of adjustments due to depreciation and amortization and the
provision for doubtful accounts, returns and price protection) and 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 June 30, 1999, total accounts receivable, net was $6,498,000 compared to
$8,900,000 at December 31, 1998. This lower accounts receivable balance at June
30, 1999 is partially attributable to increased cash collections in the six
months ended at that same date. Certain portions of the Company's larger sales
have payment terms up to 120 days, 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 June 30, 1999, the Company had $10,141,000 in cash and cash equivalents,
and $9,010,000 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. The
Company has substantially completed its assessment of the impact of the year
2000 problem upon such systems, and 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 completing the
process of 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
completing its process of making inquiries with the providers of such types of
services to determine their year 2000 readiness. 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.
15
<PAGE> 16
The Company its testing and upgrading, where necessary, of the current versions
of its currently-offered software products to address the year 2000 issue and
year 2000 compliant versions of its current products are 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 are 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.
The Company believes that its customers are currently undergoing evaluations of
their needs to achieve Year 2000 compliance and in are various states of
readiness. The Company believes that for some customers, this may slow down
their software purchases as they devote more time to preparing and testing their
systems for year 2000 readiness, versus evaluating and implementing new systems.
Therefore, such customers may choose to defer system investments during 1999,
negatively impacting the Company's revenues. Because Year 2000 related impacts
on customer purchasing decisions are unprecedented, the Company has a limited
ability to forecast accurately the impact of the Year 2000 issue on its
revenues.
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
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.
16
<PAGE> 17
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.
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 June 30, 1999, the Company had $10.1 million of cash and cash equivalents and
$9.0 million in short-term investments with a weighted average variable rate of
3.35% and 4.96%, 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.
17
<PAGE> 18
PART II Other Information
Item 4. - Submission of Matters to a Vote of Security Holders
The Company submitted a definitive proxy statement to its shareholders
of record as of April 2, 1999 for purposes of its Annual Meeting of
Shareholders, which was subsequently held on May 13, 1999. The matters voted on
and the results of such voting were as follows:
A. Election of Janine M. Bushman, Dennis Cagan, Andre deFusco, Andrew
De Mari, Paul Gigg, G. Bradford Jones and Bill Yundt as directors of the Company
each to serve for a one-year term:
<TABLE>
<CAPTION>
BROKER
NOMINEE FOR AGAINST WITHHELD ABSTAIN NON-VOTES
- ------- --------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Janine M. Bushman 8,479,333 70,160 0 0 0
Dennis Cagan 8,478,862 70,631 0 0 0
Andre deFusco 8,478,862 70,631 0 0 0
Andrew De Mari 8,478,862 70,631 0 0 0
Paul Gigg 8,479,333 70,160 0 0 0
G. Bradford Jones 8,479,333 70,160 0 0 0
Bill Yundt 8,479,333 70,160 0 0 0
</TABLE>
B. To adopt a 1999 Stock Option Plan and to authorize 350,000 shares
reserved for issuance thereunder, together with an automatic increase of 300,000
shares at the beginning of each fiscal year during the term of the plan:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTES
--- ------- -------- ------- ---------
<S> <C> <C> <C> <C>
3,707,220 220,124 0 25,281 4,596,868
</TABLE>
C. Authorization of amendments to the Company's 1996 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance thereunder
by 250,000 shares to an aggregate of 500,000 shares:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTES
--- ------- -------- ------- ---------
<S> <C> <C> <C> <C>
3,861,319 63,025 0 28,281 4,596,868
</TABLE>
18
<PAGE> 19
D. Authorization of amendments to the Company's 1996 Directors' Stock
Option Plan (1) to increase the number of shares subject to the First Option to
25,000 shares, (2) to increase the number of shares subject to the Subsequent
Options to 6,250, and (3) to provide an additional option grant of 15,000 shares
for any director elected to the Company's Board of Directors during 1999, but
prior to the effectiveness of the increase in the size of the First Option
described above.
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTES
--- ------- -------- ------- ---------
<S> <C> <C> <C> <C>
8,354,590 170,495 0 24,408 0
</TABLE>
E. Ratification of the appointment of PricewaterhouseCoopers LLP as the
independent auditors for the Company for the fiscal year ending December 31,
1999:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTES
--- ------- -------- ------- ---------
<S> <C> <C> <C> <C>
8,526,141 16,150 0 7,202 0
</TABLE>
10,181,270 shares of the Company's Common Stock were outstanding as of
the record date.
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.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report on Form 10-Q to be signed on its
behalf by Janine M. Bushman, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
ISOCOR
Date: August 13, 1999 By: /s/ JANINE M. BUSHMAN
----------------------------------
Janine M. Bushman, Vice President,
Finance and Administration, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
Exhibit
Number Exhibits Page
- ------ -------- ----
27.1 Financial Data Schedule.............................. 22
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS IN THE PERIOD ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,141
<SECURITIES> 9,010
<RECEIVABLES> 8,554
<ALLOWANCES> 2,056
<INVENTORY> 0
<CURRENT-ASSETS> 28,955
<PP&E> 8,612
<DEPRECIATION> 6,318
<TOTAL-ASSETS> 32,549
<CURRENT-LIABILITIES> 14,424
<BONDS> 0
0
0
<COMMON> 40,429
<OTHER-SE> (22,431)
<TOTAL-LIABILITY-AND-EQUITY> 32,549
<SALES> 14,897
<TOTAL-REVENUES> 14,897
<CGS> 1,388
<TOTAL-COSTS> 5,684
<OTHER-EXPENSES> 11,971
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> (418)
<INCOME-PRETAX> (2,922)
<INCOME-TAX> 79
<INCOME-CONTINUING> (3,001)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,982)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
