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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to .
Commission file number: 000-27900
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ISOCOR
(Exact Name of Registrant as Specified in Its Charter)
CALIFORNIA 95-4310259
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3420 OCEAN PARK BOULEVARD
SANTA MONICA, CA 90405
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (310) 581-8100
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant based upon the closing sale price of the Registrant's Common
Stock on the The Nasdaq Stock Market on March 1, 1999 was
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approximately $52,856,949. Shares of Common Stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
There were 10,081,936 shares of Registrant's Common Stock issued and
outstanding as of March 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive
Proxy Statement for the Registrant's 1998 Annual Meeting of Shareholders
scheduled to be held on Thursday May 13, 1999 (the "1999 Proxy Statement").
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INTRODUCTORY STATEMENTS AND REFERENCES
References made in this Annual Report on Form 10-K to "ISOCOR," the
"Company" or the "Registrant" refer to ISOCOR and its subsidiaries. The ISOCOR
name and N-PLEX are registered trademarks of the Company. ISOPLEX and
MetaConnect are trademarks of the Company.
This Annual Report on Form 10-K contains forward-looking statements
that are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the risks
detailed below and included from time to time in the Company's other SEC reports
and press releases, copies of which are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein.
RISK FACTORS
Significant Fluctuations in Quarterly Results
The Company's quarterly operating results have in the past varied
significantly and are likely in the future to vary significantly based upon a
number of factors, including the introduction and market acceptance of new
products offered by the Company and its competitors, general changes in the
markets in which the Company competes, the volume, nature and timing of large
transactions with customers, the ability of the Company to offer and complete
large services related projects, the level of product and price competition, the
Company's success in expanding its direct sales force and indirect distribution
channels and the risks related to international operations, as well as other
factors. Quarterly revenues and operating results are dependent upon the volume,
nature and timing of orders and contracts during the quarter and are difficult
to forecast due to the length of the sales cycle. In addition, the Company
provides its software and services in a variety of ways, many of which result in
significantly different patterns of revenue recognition. Therefore, revenues and
operating results may vary significantly depending upon the nature of the orders
and contracts and their related pattern of revenue recognition. Further, the
Company typically generates a large percentage of its quarterly revenues during
the last few weeks of the quarter. A significant portion of the Company's
operating expenses are relatively fixed in the short term, and planned
expenditures are based on sales forecasts. If revenue levels are below
expectations, operating results are likely to be materially adversely affected.
In particular, net income, if any, may be disproportionately affected because
only a small portion of the Company's expenses varies with revenue in the short
term. There can be no assurance that the Company will achieve revenue growth in
the future or be profitable on an operating basis in any future period. Due to
the foregoing factors, the Company believes that period-to-period comparisons of
its results are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, it is likely that in some future
quarter the Company's revenues or operating results will be below the
expectations of public market analysts and investors. In such event, the price
of the Company's Common Stock could be materially adversely affected.
The Company has incurred losses during each fiscal year from
inception until the present with the exception of 1995 and 1996, during which it
was unprofitable during certain quarters. As
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a result, the Company had an accumulated deficit of $19.7 million as of December
31, 1998. There can be no assurance that the Company will be profitable in the
future.
Substantial Competition
The market for the Company's products is intensely competitive and
subject to rapid technological change and evolving standards. The Company
believes its long-term success will depend in part on its ability to be a leader
in developing and offering products that meet emerging industry or market
opportunities, to offer a broad range of high-performance, multi-platform,
messaging and directory infrastructure products, to maintain strong customer
support and sufficient distribution channels and to offer competitively priced
products. Both the messaging and directory infrastructure markets are fragmented
and a number of companies are participating in them with a variety of product
offerings featuring varying profiles and business models.
For directory infrastructure products, the Company's competition
primarily includes privately held software companies with specialized product
offerings such as Innosoft International, Inc., Zoomit Corporation and Control
Data Systems, Inc. The Company's messaging products face direct competition from
solution vendors and systems integrators such as Netscape Communications
Corporation ("Netscape"), Sun Microsystems, Inc. and Software.com.
In addition some major software providers such as Microsoft and Lotus
Development Corporation (subsidiary of International Business Machines
Corporation) have incorporated functionality into their product offerings
similar to that provided by the Company's products and therefore compete with
the Company indirectly by eliminating the need for their customers to identify
and purchase separate messaging solutions. The Company's Global Directory Server
contains elements that compete directly and indirectly with components and
complete products offered by Novell Inc. and other developers of directory
server-based software products. To the extent such companies provide such
functionality or products, the Company's business, financial condition and
results of operations could be materially adversely affected.
A variety of potential actions by any of the Company's competitors,
including reduction of product prices, increased promotion, announcement or
accelerated introduction of new or enhanced products, product giveaways or
product bundling could have a material adverse effect on the Company's business,
financial condition and results of operations. Large companies that compete with
the Company or that may compete with it in the future have substantial technical
and financial resources that allow them to develop, enhance or acquire
competitive products, and substantial marketing resources and presence to
promote these products aggressively. Moreover, the Company's current and
potential competitors may respond more quickly than the Company to new or
emerging technologies or changes in customer requirements. Accordingly, it is
possible that current or potential competitors could rapidly gain significant
market share.
Risks Associated with New Products
The Company has invested significant resources into the development
of new products and expects to continue to make these investments in the future.
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ISOCOR also plans to continue to enhance its products with new releases that
provide additional features and to make its products available on additional
hardware and operating system platforms. Any quality, reliability or
interoperability problems with new or enhanced products, or any other actual or
perceived problems in new or enhanced products, could have a material adverse
effect on market acceptance of such products. There can be no assurance that
such problems or perceived problems will not arise or, that even in the absence
of such problems, the new or enhanced products will receive market acceptance. A
failure of new or enhanced products to receive market acceptance for any reason
would have a material adverse effect on the Company's business prospects. See
"Item 1: Business - Products" and "- Product Development."
In addition, from time to time, the Company may introduce new
products which are designed to replace existing product lines. Such products may
not incorporate the full functionality of the products which they intend to
replace and/or may not be fully compatible with such products. In such an event,
the Company may be unable to sell such a new product to existing customers, be
forced to support multiple applications in a single product space and/or lose
the business of such customers entirely.
Dependence on Third-Party Distribution
The Company relies significantly on resellers for certain elements of
the marketing and for the distribution of its software products and expects such
reliance to continue and grow over time. The agreements in place with these
organizations are generally non-exclusive. These resellers are not within the
control of the Company, may distribute products other than the Company's
products and are not obligated to purchase products from the Company. There can
be no assurance that these resellers will place a high priority on the marketing
of the Company's products, and they may give a higher priority to other products
which may include products of the Company's competitors. This may result in a
lower sales effort applied to the Company's products and a consequent reduction
in the Company's operating results. In addition, in circumstances where the
Company's sales are made through resellers, the Company often does not enter
into product sales contracts with the end-users of its products. There can be no
assurance that the Company will retain any of its resellers, and there can be no
assurance that the Company will succeed in recruiting replacement or new
organizations to represent the Company's products. Any changes in the Company's
distribution channels may adversely affect sales and consequently may adversely
affect the Company's business, financial condition and results of operations.
See "Item 1: Business - Marketing, Sales and Distribution."
Risks Associated with Professional Services
Increasingly the Company's products are being sold to customers as a
part of a larger project involving substantial professional services. As a
result, the Company expects that a large portion of its revenues will come from
professional services and an increasing fraction of its software license
revenues will be dependent on the availability of associated services. Even if
demand for the Company's software products increase, the inability of the
Company to scale its professional services organization could have a material
adverse effect on its business, results of operations and financial condition.
Professional services projects can be extended and require the Company's
personnel to work with internally developed systems that are complex and unknown
to the Company. The Company, from time to time, prices its professional services
at a fixed price, offers discounts thereon, or bundles services with software
licenses. To the extent that the professional service projects require extended
implementation periods and/or the Company encounters delays in implementing
these projects it may have a material adverse effect on the Company's business,
financial condition and results of operations.
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Dependence on Key Personnel
The Company's success depends to a significant degree upon the
continued contributions of its key management and engineering personnel. The
success of the Company depends to a large extent upon its ability to retain and
continue to attract highly skilled personnel. Competition for employees in the
software industry is intense, and there can be no assurance that the Company
will be able to attract and retain enough qualified employees. If the business
of the Company increases, it may become increasingly difficult to hire, train
and assimilate the new employees needed. The Company's inability to retain and
attract key employees could have a material adverse impact on the Company's
business, financial condition and results of operations.
Expansion of Sales and Marketing Efforts
The Company intends to expand further its sales and marketing
efforts, which is a critical component of its strategy to expand revenues. There
can be no assurance that the Company will be successful in attracting or
retaining qualified direct and indirect sales personnel and third-party
distribution partners, that the expansion of the Company's sales and marketing
efforts will result in increased sales of the Company's products, that the cost
of such expansion will not exceed the revenues generated thereby, or that the
Company's sales and marketing organization will compete successfully against the
larger and better-funded sales and marketing organizations of the Company's
competitors. A failure in any of these areas could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Item 1: Business - Marketing, Sales and Distribution."
Ability to Respond to Rapid Technological Change
The Company's future success will depend significantly on its ability
to enhance continually its current software products and develop or acquire and
market new products which keep pace with technological developments and evolving
industry standards as well as respond to changes in customer needs. The
directory and messaging infrastructure markets are characterized by rapidly
changing technology, evolving industry standards and customer demands and
frequent new product introductions and enhancements. There can be no assurance
that the Company will be successful in developing or acquiring product
enhancements or new products to address changing technologies and customer
requirements adequately, that it will introduce such products on a timely basis
or that any such products or enhancements will be successful in the marketplace.
The Company's delay or failure in the development or acquisition of
technological improvements or the adaptation of its software products to
technological change could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1: Business -
Products" and "- Product Development."
The Company's software products are very complex as a result of
market requirements for a high level of functionality, support of diverse
operating environments and the need for
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interoperability and support for multiple technological standards. These
products may contain undetected errors or failures when first introduced or as
new versions are released. There can be no assurance that, despite testing by
the Company and by current and potential customers, errors will not be found in
new products after commencement of commercial shipments, resulting in loss of or
delay in market acceptance. Such loss or delay could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Item 1: Business - Products" and "- Product Development."
Risks Associated with Emerging Industries
The majority of the Company's products, including its N-PLEX product
line are used primarily in connection with Internet applications. The market for
Internet products and services is relatively immature and the basis for
competition within it shifts rapidly. In addition, the Internet is characterized
by rapid technological developments, changing industry standards and customer
demands, and frequent new product introductions and enhancements. To the extent
that the Company is unable to respond quickly to shifts in the basis of
competition on the Internet or changes in the competitive products, technology
and standards, the Company's business, results of operations and financial
condition could be adversely affected.
Risk Associated with Software and Hardware and the Year 2000 Readiness
Much of the computer hardware and software currently deployed
experiences problems handling dates beyond the year 1999. This computer hardware
and software will need to be modified prior to the year 2000 in order to remain
functional. 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. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and the
Company's ability to implement such changes could have an adverse effect on
future results of operations. See "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations - Year 2000 Readiness"
Dependence on International Operations
International revenues accounted for approximately 77% of the
Company's revenues in 1998 and European revenues accounted for approximately 86%
of the Company's international revenues during the same period. The Company
expects that international sales will continue to account for a significant
portion of its total revenues in future periods. International sales are subject
to certain inherent risks, including unexpected changes in regulatory
requirements and tariffs, longer payment cycles, increased difficulties in
collecting accounts receivable and potentially adverse tax consequences.
Fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to end users in a particular country,
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leading to a reduction in sales in that country. In addition, sales in Europe
are adversely affected in the third quarter of each year as many customers and
end users reduce their business activities during the summer months. These
seasonal factors and currency fluctuation risks may have an effect on the
Company's quarterly results of operations. Further, because the Company has
operations in different countries, the Company's management must address
differences in regulatory environments and cultures. Failure to address these
risks successfully could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1: Business
- -- Marketing, Sales and Distribution" and "-- Product Development."
Dependence on Third-party Products
Certain of the Company's products incorporate technology obtained
from third parties, including elements of the Company's directory products.
Although the Company believes that its reliance on third-party products does not
pose a significant business risk, due to the time involved in developing an
internal alternative or licensing such technology from another third party, the
Company is dependent in the short term upon the ability of such third parties to
enhance their current products, to develop new products on a timely and
cost-effective basis to meet changing customer needs, to successfully implement
any programming changes necessary for handling the year 2000 issue and to
respond to evolving industry standards and other technological changes. Although
the Company believes there are alternative sources for such third-party
software, there can be no assurance that the Company would be able to replace
the functionality provided by such third-party software in the event that such
software becomes inaccessible to the Company, obsolete or incompatible with
future enhancements of the Company's software products or that, if the Company
could replace such functionality, that such replacement could be obtained at a
reasonable cost. The absence of or any significant delay in the replacement of
that functionality could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 1: Business
- -- Products."
Currency Fluctuations
While the Company's consolidated financial statements are prepared in
United States dollars, a substantial portion of the Company's worldwide
operations have a functional currency other than the United States dollar. In
particular, the Company maintains substantial development operations in Ireland
where the functional currency is the Irish Pound, in Germany where the
functional currency is the Deutsche Mark and in Italy, where the functional
currency is the Lira. A significant portion of the Company's revenues are also
denominated in currencies other than the United States dollar. Fluctuations in
exchange rates may have a material adverse effect on the Company's results of
operations and could also result in exchange losses. The impact of future
exchange rate fluctuations cannot be predicted adequately. To date, the Company
has not sought to hedge the risks associated with fluctuations in exchange
rates, but may undertake such transactions in the future. The Company does not
have a policy relating to hedging. There can be no assurance that any hedging
techniques implemented by the Company would be successful or that the Company's
results of operations will not be materially adversely affected by exchange rate
fluctuations. See "Item 1: Business -- Marketing, Sales and Distribution."
Risks Related to Euro
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.
Risks Associated with Intellectual Property
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The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
The Company generally enters into confidentiality and invention assignment
agreements with its employees and consultants. Additionally, the Company enters
into confidentiality agreements with certain of its customers and potential
customers and limits access to, and distribution of, its proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's technologies without
authorization, or to develop similar technologies independently. Furthermore,
the laws of certain countries in which the Company does business do not protect
the Company's software and intellectual property rights to the same extent as do
the laws of the United States. In its N-PLEX and Connectivity product lines,
ISOCOR has implemented a license key mechanism which disables use of the various
modules of the product unless proper number keys are provided by the customer
during the installation process. Otherwise, the Company does not include in its
software any mechanisms to prevent or inhibit unauthorized use, but generally
either requires the execution of an agreement that restricts copying and use of
the Company's products or provides for the same in a break-the-seal license
agreement. If unauthorized copying or misuse of the Company's products were to
occur to any substantial degree, the Company's business, financial condition and
results of operations could be materially adversely affected. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
similar technology.
While the Company has not received claims alleging infringement of
the proprietary rights of third parties that the Company believes would have a
material adverse effect on the Company's business, financial condition or
results of operations, there can be no assurance that third parties will not
claim that the Company's current or future products infringe the proprietary
rights of others. Any such claim, with or without merit, could result in costly
litigation or might require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company, or at all. See "Item 1: Business
- -- Proprietary Rights."
Risk of Increased Taxation; Loss of Grant Aid
The Company has significant operations and generates a substantial
portion of its taxable income in Ireland. Under an incentive tax program due to
terminate in 2010, the Company is taxed in Ireland on its "manufacturing income"
at a 10% rate, which is substantially lower than United States income tax rates.
For Irish tax purposes, most of the Company's operating income earned in Ireland
is considered "manufacturing income." To qualify for this 10% tax rate, the
Company must carry out "software development services" or "technical or
consultancy services" (as defined in the Irish Finance Act 1980) in Ireland and
qualify for an employment grant from the Industrial Authority of Ireland. If the
Company ceases to comply with these qualifications, all or a part of its taxable
profits may be subject to a 32% tax rate on its post disqualification date
taxable profits. Should this occur, or should Irish tax laws be rescinded or
changed, the Company's net income could be materially adversely affected. If the
Company could no longer qualify for this 10% tax rate, or if the Irish tax laws
were rescinded or changed, the Company's net income would be
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materially adversely impacted. In addition, if United States or other
international tax authorities were to challenge successfully the manner in which
profits are recognized among the Company and its subsidiaries or if the Company
were to transfer funds relating to income generated in lower tax jurisdictions
to the United States, the Company's effective tax rate could increase, and its
business, financial condition and results of operations could be materially
adversely affected.
During 1996, the Company secured Irish Industrial Development
Authority (the "IDA") grant aid in Ireland in the amount of $793,000 under an
incentive program designed to induce organizations to locate and conduct
business in Ireland. To qualify for this grant aid, the Company must satisfy
various conditions, including that the Company must maintain its current
ownership interest in its Irish subsidiary; the subsidiary must not establish or
carry on similar ventures outside Ireland; and the subsidiary must remain
solvent. The grants include remedy provisions which the IDA employs to pursue
partial revocation of amounts granted in the event the recipient of the grant
substantially vacates its presence in Ireland. While the Company's level of
employment within Ireland in 1997 and 1998 has declined, the Company's plans
include a commitment to a significant continuing presence in Ireland. There can
be no assurance that the IDA will not seek partial revocation of prior grants,
that the Company will continue to qualify for this grant aid or be eligible for
future grants or that the Company's results of operations will not be materially
adversely affected by the loss of grant aid.
During 1996, the Company also received grant aid from the
Technological Finance Authority - Berlin, under an incentive program to promote
research and development in small and medium sized German-owned companies
located in Berlin. The Company is no longer eligible to receive these grants.
Fluctuations in Market Price of Common Stock
Announcements of new products by the Company or its competitors and
quarterly variations in financial results could cause the market price of the
Company's Common Stock to fluctuate substantially. In addition, the stock market
has experienced price and volume fluctuations from time to time that have
affected market prices of many technology based companies that are not
necessarily related to the operating performance of such companies.
These broad market fluctuations may adversely affect the price of the Company's
Common Stock.
Blank Check Preferred Stock; Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to
2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock may have
the effect of delaying, deterring or preventing a change of control of the
Company without further action by the shareholders and may adversely affect the
voting and other rights of the holders of Common Stock. The Company has no
present plans to issue shares of Preferred Stock. The Company's Articles of
Incorporation and Bylaws provide, among other things, for the elimination of
cumulative voting with respect to the election of directors (effective at the
first annual meeting following the annual meeting at which the Company has 800
or more shareholders of record), the
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prohibition of actions taken by the Company's shareholders by written consent
and certain other procedures, including advance notice procedures with regard to
the nomination of candidates for election as directors, other than by or at the
direction of the Board of Directors which could have the effect of making it
more difficult for a third party to effect a change in the control of the Board
of Directors. In addition, these provisions could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of the outstanding voting stock of the
Company, and may make more difficult or discourage a takeover of the Company.
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PART I
ITEM 1. BUSINESS
General
ISOCOR was founded and incorporated in California in February 1991.
ISOCOR develops, markets and supports electronic messaging and directory
infrastructure software products and services that enable businesses to engage
in electronic communications over corporate networks and the Internet. ISOCOR's
products are available either as a complete, integrated package or as individual
components. ISOCOR's products and services are designed to support electronic
information exchange globally in an accurate, cost-effective and secure way,
while operating seamlessly across different environments.
ISOCOR's business strategy is to provide a focused range of products,
targeted at large corporations and Internet service providers, offering features
and performance to meet the wide range of customers' needs; to support open
architectures and legacy systems by providing solutions that are hardware and
software platform-independent and are based on open Internet standards.
Products
At present, the majority of the Company's products are based upon
internally developed technology. The Company believes that this decreases the
amount of time required to respond to market demand, differentiates its products
from those of its competitors in terms of features and quality, and decreases
its dependence on third-party suppliers.
ISOCOR has designed its software to conform to international
standards, allowing the Company's products to interoperate with many existing
products and services. Conformance with international standards has been
achieved through application of the experience of ISOCOR employees in standards
development to the design and testing of the Company's products.
The ISOCOR solution is implemented through two major product groups:
message servers and directories. Message servers handle the interchange of any
size or type of electronic document or information across and outside of a
customer's computer network and include products that allow leading proprietary
e-mail systems to interoperate. Directory products support enterprise-wide
directory listing, access and navigation, as well as connections to databases,
third-party directories, enterprise software environments and the Web.
Message Server Products
The Company's server software has been designed to provide high
performance while reducing hardware requirements. This has been achieved through
a design methodology that eliminates the overhead of protocol layering and
reduces the number of computer instructions required to perform common
operations. The design also reduces the risk that messages will be lost or will
not be duplicated in the event of external system breakdowns, such as loss of
power or
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hardware failures. This promotes high reliability of the electronic information
exchange and allows Internet service providers to utilize the software to offer
e-mail services to their customers.
N-PLEX, ISOCOR's Internet server product, provides robust message
management, administrative control and secure message transfer to the SMTP, POP3
and IMAP4 standards. Performance of Internet mail systems has been enhanced by
use of the ISOCOR-developed caching algorithms which reduces the use of
time-consuming DNS directory accesses over the Internet and makes full use of
Microsoft Windows NT operating system threading facilities for efficient
utilization of multiprocessor computer systems. In addition, N-PLEX has been
ported to the Sun Solaris UNIX operating system and is optimized for high levels
of performance. Security holes are eliminated by the proprietary ISOCOR design,
and authentication login facilities have been added using encryption technology
to prevent unauthorized access to the mail systems.
The N-PLEX Management Center manages ISOCOR's message servers,
providing the high level of service necessary for implementing mission-critical
electronic information exchange. The N-PLEX Management Center runs on the
Windows NT platform, performing remote management of components over TCP/IP,
thereby allowing the administrator to manage multiple sites simultaneously from
a central management station. The management facilities provided by the
Management Center include remote configuration, routing configuration, fault
notification, performance monitoring, system management and message tracking.
ISOPLEX message servers store and relay messages via the X.400
standard, allowing them to be implemented over prevailing network protocols
including TCP/IP and X.25. In addition, the Company's ISOPLEX servers run on a
variety of hardware platforms and operating systems. The management system can
be used on a remote basis over a networked set of servers, reducing the
personnel required to manage the ISOPLEX servers.
Directory Products
As systems increase in size and complexity, organizations
increasingly need to implement a central repository for the information required
to communicate across systems. The Global Directory Server ("GDS"), ISOCOR's
directory product, is designed to store and disseminate such information on both
a wide area and local area basis. This information may include E-mail addresses
and cryptographic material for digital signatures and message confidentiality
that are used invisibly by client software, as well as information that users
may access directly, such as telephone numbers, fax numbers, physical mail
addresses and pictures. The directory allows efficient and rapid updating of
this information for use at diverse locations, reducing errors and saving the
time and personnel resources required to maintain and distribute this data. This
distributed application architecture allows system managers to optimize the
location of information so that information required locally is on the local
server, while users continue to have transparent access to information on any
other server in the network.
GDS is standards-based and can synchronize stored information, such
as e-mail addresses, among proprietary systems communicating across different
e-mail systems. A number of client applications are compatible with GDS,
including Web browsers, and Internet clients through the use of LDAP
(Lightweight Directory Access Protocol) which can access GDS over the wide
variety of network connections including dial-up, Internet TCP/IP and X.25. GDS
can serve as an
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<PAGE> 14
easy-to-access information source, storing data from other sources such as
corporate databases, Web servers and other content sources.
As with other ISOCOR applications, GDS is supplemented by an
integrated set of directory tools, called the Global Directory Navigator, that
allows an administrator to exchange information with other databases, collect
accounting information and administer the system either remotely or locally.
In March 1996, the Company entered into an agreement with
International Computers Limited ("ICL") to license a portion of ICL's i500
directory server product for incorporation with ISOCOR's own communication
software technology to create ISOCOR's Global Directory Server product. This
bi-lateral crosslicensing agreement provides for the payment of royalties by the
Company based on sales of products incorporating the licensed i500 directory
server product.
MetaConnect, ISOCOR's meta-directory product, is designed to unify
data for effective intranet and Internet use, enabling an organization to
provide employees, customers and trading partners accurate, updated information
from existing data sources. This product manages the connections to disparate
directories and applications databases and joins the information together in one
meta-directory, which can be centrally managed as a unified resource across the
enterprise. The product is designed to use most existing Lightweight Directory
Access Protocol (LDAP v3) directory servers, including Microsoft Active
Directory, Netscape Directory Server, Novell's NDS and ISOCOR Global Directory
Server.
Marketing, Sales and Distribution
The Company sells its products both directly to end users and
indirectly through resellers, systems integrators and original equipment
manufacturers ("OEMs"). In North America, ISOCOR sells its products primarily
through a direct sales organization focused on Fortune 1000 companies and
service providers. Internationally, ISOCOR sells its products primarily through
a worldwide network of resellers.
The Company's international resellers consist primarily of systems
integrators and value added resellers ("VARs"). These resellers typically range
in size from several hundred staff down to half a dozen specialists in some
smaller countries. The Company selects resellers based on general experience in
electronic information exchange, data communications and systems integration,
and then trains them on the Company's software products and technologies at
ISOCOR's training centers in the U.S. and Ireland. In addition, ISOCOR sells to
some major accounts worldwide, including Internet service providers and large
telecommunications carriers which prefer to deal directly with the Company for
support. See "Introductory Statements and References: Risk Factors -- Dependence
on Third-Party Distribution."
The Company's reseller agreements generally grant resellers
non-exclusive rights to distribute the Company's products in each reseller's
defined geographic market. Each reseller is generally responsible for supporting
its end-user customers, while ISOCOR provides technical support to the reseller.
The Company provides price protection to its resellers such that, if the Company
reduces the price of its products, resellers are entitled to a credit for the
difference between the reduced price and the price they previously paid for
products that are held in the
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<PAGE> 15
reseller's inventory at the time of the price reduction and that were purchased
within the preceding 30 days. ISOCOR's resellers typically stock little
inventory, but instead obtain products from the Company on an as-needed basis.
To support its sales efforts, the Company conducts marketing programs
which include direct mail, public relations, advertising (including a Web site
on the global Internet (www.isocor.com)), worldwide trade shows and selected
joint marketing programs. The Company also sponsors meetings for its resellers
to provide them additional information and skills to market the Company's
products effectively. The sales, support and service functions for the Company's
products sold in North and South America are provided principally through the
Company's Santa Monica headquarters. European, Middle East and Asian markets are
serviced through ISOCOR sales and support offices in Berlin, Bern, Dublin,
London, Paris and Turin.
During 1998, international revenues accounted for 77% of the
Company's total revenues. Of these international revenues, 86% resulted from
sales to resellers or customers located primarily in Europe, with the remainder
resulting from sales to resellers or customers located in the rest of the world.
International sales may be subject to government controls and other risks,
including export licenses, federal restrictions on the export of critical
technology, changes in demand resulting from currency exchange fluctuations,
political instability, trade restrictions and changes in tariffs. To date, the
Company has experienced no material difficulties due to these factors. See
"Introductory Statements and References: Risk Factors --Dependence on
International Operations" and "-- Currency Fluctuations."
Customers
ISOCOR's products are used in a variety of industries. The Company
markets its products primarily to large and medium-sized corporate customers and
Internet service providers. During 1998, no single customer accounted for more
than 10% of the Company's revenues. During 1998, the following categories of
revenue accounted for more than 10% of total revenue: Services accounted for
40% of total revenues, internet messaging products accounted for 29% of total
revenues and X.400 products accounted for 15% of total revenues.
Customer and Reseller Support and Services
The Company offers its resellers and end-user customers standard
support and upgrade services. The agreements that provide for these services
vary among end users, resellers and OEMs, but generally provide that for an
annual fee the Company will provide customer support services by e-mail, fax or
telephone. These agreements also generally provide for software upgrades to the
licensed products as they are generally released by the Company. ISOCOR also
offers training, custom engineering and pre- and post-sale services to end users
and resellers. Professional services include network design consulting, product
installation, administrator training, custom application integration and turnkey
systems implementation. The Company has major customer support centers in Santa
Monica and Dublin. Additionally, local technical support is available at the
Company's regional offices in Berlin, Bern, London, Paris and Turin. In 1998,
provision by ISOCOR of all customer and reseller support and services accounted
for 40% of ISOCOR revenues.
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<PAGE> 16
Product Development
The Company has invested significant resources into the development
of new products and expects to continue to make these investments in the future.
ISOCOR also plans to continue to enhance its products with new releases that
provide additional features and to make its products available on additional
hardware and operating system platforms. See "Introductory Statements and
References: Risk Factors -- Risks Associated with New Products" and " -- Ability
to Respond to Rapid Technological Change."
Much computer hardware and software experiences problems handling
dates beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional. 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. Based on preliminary information, the Company expects to
implement successfully the systems and programming changes necessary to address
year 2000 issues and does not currently believe that the cost of such actions
will have a material effect on the Company's results of operations or financial
condition in future periods. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could result
in a material financial risk and the possibility that third parties might assert
claims against the Company with respect to such issues. Accordingly, there can
be no assurance that there will not be a delay in, or increased costs associated
with, the implementation of such changes, which could have an adverse effect on
future results of operations. See "Introductory Statements and References: Risk
Factors -- Risk Associated with Software and Hardware and the Year 2000
Readiness," and "Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company has development centers located in Berlin, Copenhagen,
Dublin and Santa Monica. The largest such facility is located in Dublin in order
to take advantage of lower costs in Ireland, IDA tax incentives and grants and
the strong Irish educational structure. The presence of development facilities
in the U.S. and Europe enhances access to both American and European markets and
technology. ISOCOR invests substantial management time and resources in quality
assurance testing for all of its products. Quality assurance testing takes place
at the Berlin, Dublin and Santa Monica facilities. See "Introductory Statements
and References: Risk Factors -- Risk of Increased Taxation; Loss of Grant Aid."
As of December 31, 1998, the Company employed 69 persons in the
product development function. The product development organization consists of
separate product units, each with expertise in specific areas. Engineering
expenses were $5.9 million in 1998.
Competition
The market for the Company's products is intensely competitive and
subject to rapid technological change and evolving standards. The Company
believes its long-term success will depend in part on its ability to be a leader
in developing and offering products that meet emerging industry or market
opportunities, to offer a broad range of high-performance, multi-platform,
messaging and directory infrastructure products, to maintain strong customer
support and sufficient distribution channels and to offer competitively priced
products. Both the messaging
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<PAGE> 17
and directory infrastructure markets are fragmented and a number of companies
are participating in them with a variety of product offerings featuring varying
profiles and business models.
For directory infrastructure products, the Company's competition
primarily includes privately held software companies with specialized product
offerings such as Innosoft International, Inc., Zoomit Corporation and Control
Data Systems, Inc. The Company's messaging products face direct competition from
solution vendors and systems integrators such as Netscape Communications
Corporation ("Netscape"), Sun Microsystems, Inc. and Software.com.
In addition some major software providers such as Microsoft and Lotus
Development Corporation (subsidiary of International Business Machines
Corporation) have incorporated functionality into their product offerings
similar to that provided by the Company's products and therefore compete with
the Company indirectly by eliminating the need for their customers to identify
and purchase separate messaging solutions. The Company's Global Directory Server
contains elements that compete directly and indirectly with components and
complete products offered by Novell Inc. and other developers of directory
server-based software products. To the extent such companies provide such
functionality or products, the Company's business, financial condition and
results of operations could be materially adversely affected.
A variety of potential actions by any of the Company's competitors,
including reduction of product prices, increased promotion, announcement or
accelerated introduction of new or enhanced products, product giveaways or
product bundling could have a material adverse effect on the Company's business,
financial condition and results of operations. Large companies that compete with
the Company or that may compete with it in the future have substantial technical
and financial resources that allow them to develop, enhance or acquire
competitive products, and substantial marketing resources and presence to
promote these products aggressively. Moreover, the Company's current and
potential competitors may respond more quickly than the Company to new or
emerging technologies or changes in customer requirements. Accordingly, it is
possible that current or potential competitors could rapidly gain significant
market share.
See "Introductory Statements and References: Risk Factors -- Risks
Associated with New Products," " -- Substantial Competition" and "-- Ability to
Respond to Rapid Technological Change."
Proprietary Rights
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third party
nondisclosure agreements and other methods to protect its proprietary rights.
The Company generally enters into confidentiality and invention assignment
agreements with its employees and consultants. Additionally, the Company enters
into confidentiality agreements with its customers and potential customers and
limits access to, and distribution of, its proprietary information. In its
N-PLEX and Connectivity product lines, ISOCOR has implemented a key license
mechanism which disables use of the various modules of the product unless proper
number keys are provided by the customer during the installation process.
Otherwise, the Company does not include in its software any mechanisms to
prevent or inhibit unauthorized use, but generally either requires the execution
of an agreement that restricts
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<PAGE> 18
copying and use of the Company's products or provides for the same in a
shrinkwrap license agreement. There can be no assurance that the Company's means
of protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. See "Introductory
Statements and References: Risk Factors -- Risks Associated with Intellectual
Property."
While the Company has not received claims alleging infringement of
the proprietary rights of third parties which the Company believes would have a
material adverse effect on the Company's business, financial condition and
results of operations, nor is it aware of any similar threatened claims, there
can be no assurance that third parties will not claim that the Company's current
or future products infringe the proprietary rights of others. Any such claim,
with or without merit, could result in costly litigation or might require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company, or at all.
Manufacturing
The Company contracts with third parties to manufacture the media
containing its software, which consists of diskette and tape duplication and
printing of manuals and boxes. Assembly is performed by the Company at its
Dublin and Berlin facilities. The raw materials and services associated with
manufacturing the media are generally available through a number of sources.
Finished products are generally shipped from Ireland to customers in Europe, the
Middle East and Asia, and to the Company's United States facility. The Company's
United States facility generally distributes products to customers in North and
South America. The Connectivity products are generally shipped directly from
Berlin to customers in Germany, and otherwise to the Company's Irish and United
States facilities for further distribution.
Employees
As of December 31, 1998, the Company employed 255 persons, including
69 in product development and engineering (including 10 in Berlin, three in
Copenhagen, 43 in Dublin and 13 in Santa Monica), 90 in professional services
and pre- and post-sales customer support, 10 in North American sales, 20 in
international sales, 15 in marketing, eight in assembly, and 43 in
administration. The Company also retains consultants from time to time,
primarily in the area of engineering, to assist with particular areas of
software development for limited periods of time. None of the Company's
employees is currently represented by a labor union, and the Company considers
its relations with its employees to be good.
ITEM 2. PROPERTIES
ISOCOR's corporate offices are located in Santa Monica, California,
where the Company currently leases approximately 19,000 square feet under a
sublease expiring in 2001. The Company's Santa Monica facility houses its
corporate offices and engineering, sales and marketing departments.
Additionally, the Company leases approximately 2,900 square feet in Pennsauken,
New Jersey for a presales and services office under a lease which expires in
2001, and approximately 7,500 square feet of total space in Berlin for
engineering and sales offices,
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<PAGE> 19
including two offices with approximately 2,000 square feet with leases expiring
in 1999, and an approximately 500 foot satellite space leased month to month. In
addition, the Company leases approximately 6,000 square feet in Turin for sales,
pre-sales and services under a lease expiring in 2000. The Company also leases
550 square feet in Turin and 1,100 square feet in Milan for staff and
consultants under leases which expire in 1999. The Company also leases office
space for its major engineering facility in Dublin, consisting of approximately
24,000 square feet under a sublease expiring in mid 1999. In addition, the
Company leases approximately 1,000 square feet each of office facilities in
London, Paris, Copenhagen, Bern, and Zurich. The Bern and Zurich facilities are
sales offices, while the offices in London and Paris perform pre-sales marketing
and support. The London and Paris leases expire in 2002 and 2000, respectively.
The leases for the facilities in Copenhagen, Bern and Zurich are month to month
leases. The Company believes that these facilities are adequate for the
Company's current needs and that suitable additional space, if needed, should be
available on commercially reasonable terms to accommodate expansion of the
Company's operations. See Note 7 to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal
proceedings in the normal course of business. The Company is not currently
involved in any litigation which, in management's opinion, would have a material
adverse effect on its business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
INFORMATION
(a) Market Information
The following table shows the high and low bid prices of the
Company's Common Stock for the fiscal years ended December 31, 1997 and 1998 as
reported on The Nasdaq Stock Market:
<TABLE>
<CAPTION>
1997
----
High Low
------ ------
<S> <C> <C>
First Quarter (ended 3/31/97) $6.750 $3.750
Second Quarter (ended 6/30/97) 3.500 2.000
Third Quarter (ended 9/30/97) 3.625 2.188
Fourth Quarter (ended 12/31/97) 3.625 1.750
1998
----
First Quarter (ended 3/31/98) $3.750 $1.688
Second Quarter (ended 6/30/98) 3.625 2.250
Third Quarter (ended 9/30/98) 3.813 2.000
Fourth Quarter (ended 12/31/98) 4.750 1.250
</TABLE>
The Closing price of the Company's Common Stock on The Nasdaq Stock
Market on March 1, 1999 was $6.125.
Future stock prices may be subject to volatility, particularly on a
quarterly basis. Any shortfall in revenues or net income from amounts expected
by securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's stock.
(b) Holders
The Company's Common Stock is traded on the Stock Market under the
symbol ICOR. As of March 1, 1999, the Company had approximately 132 shareholders
of record.
(c) Dividends
Prior to being combined with the Company in a transaction accounted
for as a "pooling of interests, the predecessor company of ISOCOR GmbH paid
certain dividends to its shareholders. Notwithstanding that, the Company has not
paid dividends on its Common Stock at any time during the past two (2) fiscal
years and has no present plans to do so in the future.
(d) Report of offering securities and use of proceeds therefrom
In connection with its initial public offering in 1996, the Company
filed a Registration Statement on Form S-1, SEC File No. 333-606 (the
"Registration Statement"), which was
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<PAGE> 21
declared effective by the Commission on March 13, 1996. The Company registered
2,300,000 shares of its Common Stock, $0.001 par value per share. The offering
commenced on March 14, 1996 and did not terminate until all of the registered
shares had been sold. The aggregate offering price of the registered shares was
$20,700,000. The managing underwriters of the offering were Hambrecht & Quist
and Furman Selz LLP.
The Company incurred the following expenses in connection with the
offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions $1,449,000
Other expenses 981,000
----------
Total Expenses $2,430,000
</TABLE>
All of such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total
expenses above were approximately $18,300,000. From March 14, 1996 to December
31, 1998, the Company used such net offering proceeds, in direct or indirect
payments to others, as follows:
<TABLE>
<S> <C>
Purchase and installment of machinery and equipment $ 2,058,000
Working Capital 13,821,000
Investment in short-term, interest-bearing obligations 289,000
Repayment of short-term liabilities 1,368,000
Application to short-term assets 764,000
-----------
Total $18,300,000
</TABLE>
Each of such amounts is a reasonable estimate of the application of
the net offering proceeds. This use of proceeds does not represent a material
change in the use of proceeds described in the prospectus of the Registration
Statement.
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<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues ........................................ $ 13,541 $ 20,774 $ 26,394 $ 22,018 $ 23,279
Gross profit .......................................... 10,720 16,180 21,326 16,351 15,421
Income (loss) from operations ......................... (120) 586 (33) (9,068) (7,158)
Net income (loss) ..................................... $ (10) $ 319 $ 483 $ (7,904) $ (6,165)
======== ======== ======== ======== ========
Net income (loss) per share ........................... $ (0.01) $ 0.19 $ 0.06 $ (0.83) $ (0.63)
======== ======== ======== ======== ========
Weighted average shares outstanding ................... 1,567 1,652 7,733 9,485 9,737
======== ======== ======== ======== ========
Net income (loss) per share, assuming dilution ......... $ (0.01) $ 0.04 $ 0.05 $ (0.83) $ (0.63)
======== ======== ======== ======== ========
Weighted average shares outstanding and dilutive shares 1,567 7,783 9,808 9,485 9,737
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Total assets .......................................... $12,484 $19,494 $41,298 $34,223 $33,125
Long-term liabilities ................................. 110 606 187 133 146
Total shareholders' equity ............................ $ 8,697 $12,487 $33,204 $25,684 $19,765
Cash dividends declared per common share(1)............ $ 0.09 - - - -
</TABLE>
(1) In 1994, cash dividends were declared and subsequently paid by the
predecessor company of ISOCOR GmbH, a corporation later combined with ISOCOR in
a transaction accounted for as a "pooling of interests." Therefore, although the
Company has not paid dividends on its Common Stock and has no plans to pay cash
dividends to its shareholders in the near future, due to the disclosure rules
for poolings of interest which require presentation as though the combination
had been consummated for all periods presented, some cash dividends are shown
above.
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<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The consolidated financial statements of the Company contained in
this report have been retroactively restated for all periods presented to
include the financial position, results of operations and cash flows of NetCS
Informationstechnik GmbH ("NetCS'), which was acquired on August 29, 1996, in
accordance with the pooling-of-interests method of accounting. In 1997, NetCS
Informationstechnik GmbH's legal name was changed to ISOCOR GmbH.
Revenues. Total revenues were $26.4 million, $22.0 million, and $23.3
Million in 1996, 1997 and 1998 respectively, representing a decrease of 17% in
1997 and an increase of 6% in 1998.
On a geographic basis, revenues from North American sources accounted
for 22%, 33% and 23% of total revenues, while revenues in the Company's European
marketplace accounted for 71%, 58% and 66% of total revenues in 1996, 1997 and
1998 respectively. The remaining percentages of revenue of 7%, 9% and 11%, in
1996, 1997 and 1998 respectively, were generated from sources outside North
America and Europe, primarily from Australasia and South America.
Product revenues were $21.3 million, $15.6 million, and $14.0 million
in 1996, 1997 and 1998 respectively, representing a decrease of 27% in 1997 and
a decrease of 10% in 1998.
The 27% decrease in product revenues from 1996 to 1997 was mainly due
to decreased volumes of, and declining prices for, the Company's older
non-Internet related products and Connectivity products, partially offset by
increased volumes in the Company's products driven by the increased demand for
software solutions as a result of the increased business usage of the Internet.
ISOCOR believes that the major driver for the decline in demand for non-Internet
related software solutions was the rapid emergence and explosion of business use
of the Internet. In 1996, product revenues driven by the demand for non-Internet
related solutions were $12.4 million, or 58% of product revenues, while in 1997
these revenues fell to $4.9 million or 31% of product revenues.
Connectivity product revenues were $3.9 million and $719,000 in 1996 and 1997,
respectively.
The 10% decrease in product revenues from 1997 to 1998 was mainly due
to decreased volumes of the Company's products related to a continuing shift in
market demand away from the Company's older non-Internet related products lines,
partially offset by increased average prices of the Company's Internet products
driven by the increased demand for software solutions as a
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<PAGE> 24
result of the increased business usage of the Internet. 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 2000 and beyond. In 1998,
product revenues driven by the demand for non-Internet related solutions were
25% of product revenues. ISOCOR's Internet related product lines are primarily
Internet Messaging and Directory. The Internet Messaging product line consists
primarily of the N-PLEX products and accounted for 49% and 43% of total product
revenues in 1998 and 1997, respectively. ISOCOR's Directory products accounted
for 16% and 15% of total product revenues in 1998 and 1997, respectively. 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 December 31, 1998 the Company
had approximately $5.5 million of orders in backlog, which compares to the
December 31, 1997 and 1996 levels of less than $500,000.
Service revenues were $5.1 million, $6.4 million and $9.3 million in
1996, 1997 and 1998 respectively, representing increases of 25% and 45% in 1997
and 1998, respectively. Service revenues include software support and update
fees, custom engineering, installation and training. The increase in 1997 from
1996 was primarily due to increased volumes of software support and update
service fees. The increase in 1998 from 1997 was primarily due to increased
volumes of custom engineering 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 service fees. The Company
believes that services revenues are becoming 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 revenues of $5.1 million, $5.7 million, and
$7.9 in 1996, 1997 and 1998, respectively includes both cost of product revenues
and cost of service revenues. Cost of product revenues consists primarily of
product media duplication, manuals and packaging materials, personnel and
facility costs associated with the assembly operation, and third-party royalties
relating to licensed technology costs of hardware purchased from third-party
vendors. Cost of service revenues consists primarily of personnel-related costs
of providing software support and update, custom engineering, installation and
training services.
Cost of product revenues were $2.7 million, $2.9 million and $2.8
million in 1996, 1997 and 1998, respectively. Cost of product revenues increased
from 1996 to 1997 primarily as a result of increased third-party royalties on
one of the Company's product lines associated with the growth in demand driven
by the Internet and a $310,000 write-down of third-party prepaid royalties
relating to a specific product technology which the Company believed was
non-strategic, which was partially offset by a reduction in costs relating to
hardware purchased from third-party vendors as a result of decreased sales of
these components. Cost of product revenues decreased from 1997 to 1998 primarily
as a result of decreased third-party royalties on one of the Company's product
lines and the 1997 write-down of third-party royalties relating to a specific
product technology which the Company believed was non-strategic, both of which
were partially offset by increased costs relating to hardware purchased from
third-party vendors as a result of increased sales of these components.
Cost of services revenues were $2.4 million, $2.8 million and $5.1
million in 1996, 1997 and 1998, respectively. Cost of services revenues
increased due to increased costs associated with supporting higher levels of
service revenues during these periods.
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<PAGE> 25
Gross Profit. Gross profit was $21.3 million, $16.4 million and $15.4
million representing 81%, 74% and 66% of revenues in 1996, 1997 and 1998,
respectively. The decline in the gross profit percentage from 1996 to 1997 is
primarily attributable to a decrease in the product gross margin percentage. The
decline in the gross profit percentage from 1997 to 1998 is primarily
attributable to a decline in services gross margin percentage combined with the
impact of an increasing percentage of services revenues to total revenues, and
to a lesser extent by a decline in the product gross profit percentage.
Gross profit from product sales was $18.6 million, $12.8 million and
$11.2 million in 1996, 1997 and 1998, respectively, representing 87%, 82% and
80% of product revenues in 1996, 1997 and 1998, respectively. The absolute
decrease in gross profit from 1996 to 1997 was primarily a result of decreased
product revenues as discussed above, coupled with increased third-party
royalties on one of the Company's product lines associated with the growth in
demand driven by the Internet and a 1997 $310,000 write-down of third-party
prepaid royalties relating to a specific product technology which the Company
believed was non-strategic. The absolute decrease in gross profit from 1997 to
1998 was primarily a result of decreased product revenues as discussed above and
increased costs of hardware purchased from third-party vendors as a result of
increased sales of these components, both of which were partially offset by
decreased third-party royalties on one of the Company's product lines and the
1997 write-down of third-party royalties relating to a specific product
technology which the Company believed was non-strategic.
Gross profit from services was $2.7 million, $3.6 million and $4.2
million in 1996, 1997 and 1998, respectively, representing 53%, 56% and 46% of
services revenues in 1996, 1997 and 1998, respectively. The increase in the
gross profit from services percentage from 1996 to 1997 is primarily due to
increased services revenues without a corresponding increase in personnel costs
associated with providing these services. The decrease in the gross profit from
services percentage from 1997 to 1998 is primarily due to increased levels of
personnel required to provide those services and is partially attributable to
the Company's mid 1998 acquisition of a 60% interest in System Wizards, S.p.A.
Engineering. Engineering expenses were $9.0 million, $7.9 million and
$5.9 million in 1996, 1997 and 1998, respectively, representing 34%, 36% and 25%
of revenues in 1996, 1997 and 1998, respectively. Engineering expenditures
consist primarily of personnel costs, facilities costs, equipment costs and
related costs required to conduct the Company's development efforts, which
include costs related to engineering, product management, technical writing and
quality assurance. The dollar decrease in engineering expenses in 1997 resulted
principally from decreased levels of personnel involved in these activities, and
relate primarily to the continued reduction in and stabilization of development
of the Company's older non-Internet based products. The dollar decrease in
engineering expenses in 1998 resulted principally from decreased levels of
personnel involved in these activities, including the continued reduction in
development of the Company's older non-Internet based products. During 1996,
1997 and 1998, there were approximately 136, 106 and 74 people on average,
respectively, involved in engineering activities. To date, all software
development costs have been expensed as incurred, as the impact of software
development costs that qualify for capitalization under Financial Accounting
Standard No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," have been immaterial to the financial statements.
The Company believes that significant
-25-
<PAGE> 26
investments in research and development are required for the Company to remain
competitive. While the Company intends to continue to place emphasis on its
research and development efforts in the future to remain competitive, the
Company anticipates it will continue to moderate these expenses during 1999,
relative to prior periods, and that these expenses may not vary directly with
the level of revenues for that same period.
Sales and Marketing. Sales and marketing expenses were $10.1 million,
$14.0 million and $13.1 million in 1996, 1997 and 1998, respectively,
representing 38%, 63% and 56% of revenues in 1996, 1997 and 1998, respectively.
Sales and marketing expenses include personnel and associated costs relating to
selling, sales support and marketing activities, including marketing programs
such as trade shows and other promotional costs. In 1997, the increase over 1996
in total dollars in sales expenses resulted primarily from expansion of the
Company's sales and support organizations and marketing is due to costs
associated with increased levels of personnel being involved with marketing
activities on a worldwide basis, as well as an increase in marketing program
costs. In 1998, the decrease in sales and marketing expenses is 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. During
1996, 1997 and 1998, there were approximately 77, 95 and 88 people on average,
respectively, primarily involved in sales activities. The Company intends to
increase its sales and marketing spending in 1999.
Administration. Administration expenses were $2.7 million, $3.0
million and $3.6 million in 1996, 1997 and 1998, respectively, representing 10%,
13% and 15% of revenues in 1996, 1997 and 1998, respectively. From 1996 to 1997
the dollar increases were primarily due to higher levels of staffing. From 1997
to 1998 the dollar increase were primarily due to increased levels of
professional services fees. During 1996, 1997 and 1998, there were approximately
29, 38 and 39 people on average, respectively, primarily involved in
administrative activities. The Company expects to increase the dollar amount of
its administration expenditures in the future to support potential growth and to
continue to meet the reporting and investor relations requirements imposed on a
public company.
Agency Grants. In 1992, 1994 and 1996 the Company secured grant aid
in the amounts of $750,000, $850,000 and $793,000, respectively, from the IDA
under an incentive program designed to induce organizations to locate and
conduct business in Ireland. These grants are for six years each and are
primarily dependent upon the creation and fulfillment of new jobs within the
Company in Ireland. The Company reflected as reductions of operating expenses
$413,000, $69,000 and $0 relating to these grants in 1996, 1997 and 1998,
respectively. The Company has decreased its level of employment in Ireland in
1997 and 1998. However the Company is committed to retaining a significant and
continuing presence in Ireland. The Company also received grant aid from the
Technological Finance Authority - Berlin under an incentive program to promote
research and development in small and medium-sized German-owned companies
located in Berlin. The Company reflected as reductions of operating expenses
$87,000, $0 and $0 relating to these grants in 1996, 1997 and 1998,
respectively. As of August 31, 1996, the Company is no longer eligible to
receive grants from the Technological Finance Authority - Berlin. The Company
expects the level of grant aid it receives from differing sources to vary from
year to year, primarily dependent upon its employment level in Ireland.
-26-
<PAGE> 27
Severance Costs. Severance costs of $681,000 in 1997 represent the
costs accrued with respect to 35 terminated employees due to the restructuring
activities completed in 1997. The total severance costs incurred were $364,000
for engineering, $190,000 for sales and marketing, and $127,000 for
administration.
Acquisition Costs. Acquisition costs of $227,000 in 1996 represent
the direct costs, primarily legal and accounting, of the business combination of
NetCS Informationstechnik GmbH and ISOCOR.
Income (Loss) from Currency Fluctuations. Income (loss) from currency
fluctuations was $(82,000), $39,000 and $241,000 in 1996, 1997 and 1998,
respectively. The differences resulted from changes in foreign currency rates.
Interest Income. Interest income was $1.0 million, $1.2 million and
$1.0 million in 1996, 1997 and 1998, respectively. The increase in 1997 resulted
primarily from interest earned for the full twelve months of 1997 on the cash
equivalents and marketable securities related to the Company's initial public
offering in March 1996, partially offset by declining cash equivalents and
marketable securities balances in 1997. The decrease in 1998 is primarily
related to decreased levels of cash, cash equivalents and marketable securities.
Provision for Income Taxes. During 1997 and 1998, the Company did not
generate taxable income in the United States. In 1996, the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States, which resulted in a significant reduction in income tax expense
for that year. The Company has significant operations and generates a
substantial portion of its taxable income in Ireland. Under a tax holiday due to
terminate in 2010, the Company is taxed in Ireland on its "manufacturing income"
at a 10% rate. For Irish tax purposes, most of the Company's operating income
earned in Ireland is considered "manufacturing income." To qualify for this 10%
rate, the Company must carry out "software development services" or "technical
or consultancy services" (as defined in the Irish Finance Act 1980) in Ireland
and qualify for an employment grant from the IDA. If the Company ceases to
comply with these qualifications, all or a part of its taxable profits may be
subject to a 32% tax rate on its post disqualification date taxable profits.
Should this occur, or should Irish tax laws be rescinded or changed, the
Company's net income could be materially adversely affected.
Liquidity and Capital Resources
Prior to the Company's initial public offering in March 1996, the
Company financed its operations primarily through private sales of equity
securities. The Company received net proceeds of approximately $1.8 million in
1996 from the private sale of equity securities. In March 1996, the Company
completed a public offering and sale of 2,300,000 shares of its Common Stock,
resulting in net proceeds to the Company of approximately $18.3 million. Funds
from the Company's equity financings continue to be used to fund the expansion
of the Company's infrastructure and internal operations, including purchases of
capital equipment and the hiring of additional personnel.
The Company generated (used) cash from operating activities of
$446,000, $(4,718,000) million and $266,000 in 1996, 1997 and 1998,
respectively. Operating cash flows in 1998 relative to 1997 were positively
affected by a decreased operating loss (net of adjustments to due depreciation
and amortization and the provision for doubtful accounts, returns and price
protection) and increased cash flow relative to a decreased level of other
current assets and an increased level of other accrued expenses and deferred
revenues. Operating cash flows in 1997 relative
-27-
<PAGE> 28
to 1996 were negatively affected by a significantly increased operating loss
(net of adjustments due to depreciation and amortization and the provision for
doubtful accounts, returns and price protection), partially offset by a
decreased level of revenues. Cash flow from operations can vary significantly
from quarter to quarter depending upon the timing of operating cash receipts and
payments, especially accounts receivable and accounts payable. In addition, the
Company typically generates a large percentage of its quarterly revenues during
the last few weeks of the quarter, which when coupled with payment terms in
excess of 90 days on some of the larger sales tends to give rise to increases in
accounts receivable. The Company expects that certain of the Company's larger
sales will continue to have longer payment terms, thus slowing the cash flow
cycle. The Company does not believe these longer payment terms are likely to
have a material adverse effect on the collectibility of the related receivables.
The Company currently anticipates that the Company's available cash,
cash equivalents and marketable securities resources ($19.1 million as of
December 31, 1998), will be sufficient to meet its working capital and capital
expenditure requirements through at least the end of 2000.
Year 2000 Readiness
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 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
-28-
<PAGE> 29
systems upon which the Company relies, such as payroll and banking services,
could, however, be disruptive to the Company's business operations if such
systems were unavailable for an extended period of time. The Company is in the
process of making inquiries with the providers of such types of services to
determine their year 2000 readiness. However, the Company believes that its
business operations would not be materially adversely effected by short
disruptions in such services and that the providers of such services (who also
typically service many other business customers) will take steps to rectify any
failures as soon as possible. More generally, the Company does not believe that
its risks with regard to failures in the power grid or general communications,
building security and similar systems place the Company in a unique position
relative to year 2000 issues as compared to other businesses.
The Company is currently in the process of testing and upgrading,
where necessary, the current versions of its currently-offered software products
to address the year 2000 issue. The Company intends to complete testing of all
of those products by March 31, 1999 and expects those versions to be year 2000
compliant by June 30, 1999. The Company estimates that as of February 28, 1999
that Year 2000 compliant versions of its products are currently available in
support of approximately 95% of its $14 million of product revenues for the year
ended December 31, 1998. The Company believes that a number of its older or
obsolete products and/or versions are not year 2000 compliant, and the Company
currently does not intend to update such products or versions. The Company has
taken and plans to continue to take appropriate steps to notify its customers
and distribution channels about the year 2000 issues associated with the
Company's products. The Company maintains on its website a list of the Company's
current year 2000 compliant products (by product and version number). Customers
under current support and maintenance agreements with the Company will be
entitled to upgrade to a year 2000 compliant replacement product. The Company
recently completed a mailing to its customers under support and maintenance
agreements regarding the Company's year 2000 upgrade plans. The Company has
given certain of its customers warranties with respect to year 2000 compliance
and may have to offer updates, workarounds or replacement products to those
customers. Through its website, the Company is encouraging customers not under
support and maintenance agreements to contact the Company regarding possible
upgrades or migration paths to address year 2000 issues. In addition to the
information contained on the Company's website, the Company's regular newsletter
contains similar information regarding year 2000 issues, and the Company plans
to conduct a general customer mailing (including the Company's distribution
channels and customers not under maintenance and support agreements) regarding
such issues and the possible solutions. In certain cases, however, customers may
need to make hardware and/or operating system changes in order to implement a
year 2000 solution. In other cases, the Company will not be able to offer a
solution. The Company plans to publish information regarding the older or
obsolete products and versions that the Company does not intend to upgrade for
year 2000 compliance. In the event that any of the products that the Company has
made or intends to make year 2000 compliant suffer unanticipated failures as a
result of year 2000 problems, the Company would deploy its engineering and
technical support resources to implement a solution.
Some of the Company's products incorporate software code supplied by
third parties. The Company is currently working with such vendors to ensure that
such code is updated to address year 2000 issues where appropriate. Because such
third parties license their code to others in addition to the Company, the
Company believes that such third parties will take measures to address any year
2000 issues with respect to such code. However, in the event that such third
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<PAGE> 30
parties do not take actions to make the code year 2000 compliant or their
actions prove insufficient, and where the Company has the right to make code
modifications, the Company believes that is technical personnel, who are
familiar with the code used in the Company's products, could make necessary
modifications to correct problems that arise.
The Company has not incurred substantial costs to date to address the
year 2000 issue and does not expect the total costs of such project to be
material to the Company's financial position. To date, the Company has spent
approximately $325,000 in connection with actions taken by the Company to
address year 2000 problems. The Company estimates remaining costs to be
approximately $20,000. Such costs are being expensed as they are incurred and
are being funded through operating cash flow. Cost estimates are based on
currently available information. Factors that could affect these estimates
include, but are not limited to, the availability and cost of trained personnel
to evaluate and implement necessary changes, the ability to locate and correct
noncompliant systems and the ability of the Company's customers and service
providers to successfully implement year 2000 compliant systems or fixes. Any
failure by the Company to make its products year 2000 compliant could result in
a decrease in sales of the Company's products and/or possible claims against the
Company by customers as a result of year 2000 problems caused by the Company's
products. Despite the Company's efforts to address the year 2000 impact on its
internal systems, products and business operations, the year 2000 issue may
result in a material disruption of its business or have a material adverse
effect on the Company's business, financial condition or results of operations.
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 7A. 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 investment risk. As of December 31, 1998, the Company had
$9.7 million and $9.5 million of cash and cash equivalents and
marketable securities, respectively, with a weighted average variable
rate of 3.70% and 5.55%, respectively.
The Company attempts to mitigate default risk by attempting to invest
in high credit quality securities and 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.
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<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets ............................................... 32
Consolidated Statements of Operations ..................................... 33
Consolidated Statements of Shareholders' Equity ........................... 34
Consolidated Statements of Cash Flows ..................................... 35
Consolidated Statements of Comprehensive Income ........................... 36
Notes to Consolidated Financial Statements ................................ 37
Report of Independent Accountants ......................................... 54
</TABLE>
-31-
<PAGE> 32
ISOCOR
CONSOLIDATED BALANCE SHEETS
(in thousands, except numbers of shares)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,784 $ 9,656
Marketable securities 9,677 9,456
Trade accounts receivable, net 9,100 8,900
Other current assets 1,993 1,805
-------- --------
Total current assets 31,554 29,817
Property and equipment, net 2,405 2,380
Other assets 264 928
-------- --------
Total assets $ 34,223 $ 33,125
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 839 $ 1,009
Accrued expenses 3,667 4,634
Deferred revenues 3,678 5,708
Other current liabilities 222 1,863
-------- --------
Total current liabilities 8,406 13,214
Other long-term liabilities 133 146
-------- --------
Total liabilities 8,539 13,360
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity:
Preferred stock, undesignated, authorized 2,000,000 shares, none issued - -
or outstanding
Common stock, no par value, authorized 50,000,000 shares, issued and
outstanding 9,551,931 and 9,888,038
shares in 1997 and 1998, respectively 39,359 39,758
Notes receivable from shareholders (56) (15)
Accumulated deficit (13,584) (19,749)
Deferred compensation (130) (56)
Accumulated comprehensive income (loss) 95 (173)
-------- --------
Total shareholders' equity 25,684 19,765
-------- --------
Total liabilities and shareholders' equity $ 34,223 $ 33,125
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-32-
<PAGE> 33
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Products $ 21,288 $ 15,620 $ 13,959
Services 5,106 6,398 9,320
-------- -------- --------
Total revenues 26,394 22,018 23,279
Cost of revenues:
Products 2,663 2,863 2,787
Services 2,405 2,804 5,071
-------- -------- --------
Total cost of revenues 5,068 5,667 7,858
-------- -------- --------
Gross profit 21,326 16,351 15,421
-------- -------- --------
Operating expenses:
Engineering 9,041 7,867 5,885
Sales and marketing 10,142 13,973 13,138
Administration 2,676 2,967 3,556
Agency grants (500) (69) -
Severance costs - 681 -
-------- -------- --------
Total operating expenses 21,359 25,419 22,579
-------- -------- --------
Loss from operations (33) (9,068) (7,158)
Acquisition costs (227) - -
Income (loss) from currency fluctuations (82) 39 241
Interest income 1,010 1,170 1,008
-------- -------- --------
Income (loss) before income taxes and minority interest 668 (7,859) (5,909)
Provision for income taxes 185 45 237
-------- -------- --------
Income (loss) before minority interest 483 (7,904) (6,146)
Minority Interest - - 19
-------- -------- --------
Net income (loss) $ 483 $ (7,904) $ (6,165)
======== ======== ========
Net income (loss) per share, assuming no dilution $ 0.06 $ (0.83) $ (0.63)
======== ======== ========
Weighted average shares outstanding 7,733 9,485 9,737
======== ======== ========
Net income (loss) per share, assuming dilution $ 0.05 $ (0.83) $ (0.63)
======== ======== ========
Weighted average shares outstanding and dilutive shares 9,808 9,485 9,737
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 34
ISOCOR
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(in thousands, except numbers of shares)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
-------------------------------------------------------------------------------------
Number of Number of Number of
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 1,875,000 $ 4,846 2,066,655 $ 8,341 857,142 $ 4,450
Initial public offering (IPO), net of
offering costs of $2,430
Conversion of preferred stock to (1,875,000) (4,846) (2,066,655) (8,341) (857,142) (4,450)
common stock at IPO
Issuance of common stock
Amortization of stock option
deferred compensation
Payments received on notes receivable
Net income
Currency translation
----------- ----------- ----------- ----------- ----------- -------
Balances, December 31, 1996 - - - - - -
Issuance of common stock
Amortization of stock option
deferred compensation
Issuance of notes receivable,
net of payments received
Net loss
Currency translation
----------- ----------- ----------- ----------- ----------- -------
Balances, December 31, 1997 - $- - $ - - $-
Issuance of common stock
Amortization of stock option
deferred compensation
Payments received on notes receivable
Net loss
Currency translation
----------- ----------- ----------- ----------- ----------- -------
Balances, December 31, 1998 - $ - - $ - - $ -
=========== =========== =========== =========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
Series D
Preferred Stock Common Stock
-------------------------------------------------------
Number of Number of Notes Deferred
Shares Amount Shares Amount Receivable Compensation
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 150,000 $ 653 1,661,967 $ 601 $ (45) $ (280)
Initial public offering (IPO), net of 2,300,000 18,270
offering costs of $2,430
Conversion of preferred stock to (150,000) (653) 5,007,130 18,290
common stock at IPO
Issuance of common stock 346,144 1,886
Amortization of stock option
deferred compensation 75
Payments received on notes receivable 19
Net income
Currency translation
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1996 - - 9,315,241 39,047 (26) (205)
Issuance of common stock 236,690 312
Amortization of stock option
deferred compensation 75
Issuance of notes receivable,
net of payments received (30)
Net loss
Currency translation
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1997 - $ - 9,551,931 39,359 (56) (130)
Issuance of common stock 336,107 399
Amortization of stock option
deferred compensation 74
Payments received on notes receivable 41
Net loss
Currency translation
----------- ----------- ----------- ----------- ----------- -----------
Balances, December 31, 1998 - $ - 9,888,038 $ 39,758 $ (15) $ (56)
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Accumulated Comprehensive
Deficit Income (loss) Total
----------- ------------- -----------
<S> <C> <C> <C>
Balances, December 31, 1995 $ (6,163) $ 84 $ 12,487
Initial public offering (IPO), net of 18,270
offering costs of $2,430
Conversion of preferred stock to 0
common stock at IPO
Issuance of common stock 1,886
Amortization of stock option
deferred compensation 75
Payments received on notes receivable 19
Net income 483 483
Currency translation (16) (16)
----------- ----------- -----------
Balances, December 31, 1996 (5,680) 68 33,204
Issuance of common stock 312
Amortization of stock option
deferred compensation 75
Payments received on notes receivable (30)
Net loss (7,904) (7,904)
Currency translation 27 27
----------- ----------- -----------
Balances, December 31, 1997 (13,584) 95 $ 25,684
Issuance of common stock 399
Amortization of stock option
deferred compensation 74
Payments received on notes receivable 41
Net loss (6,165) (6,165)
Currency translation (268) (268)
----------- ----------- -----------
Balances, December 31, 1998 $ (19,749) $ (173) $ 19,765
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-34-
<PAGE> 35
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $ 483 $ (7,904) $ (6,165)
Adjustments to reconcile net income (loss) to net cash (used)
provided by operating activities
Provision for doubtful accounts, returns and price
protection ............................................. 2,771 2,916 2,012
Depreciation and amortization ............................ 1,304 1,373 1,419
Amortization of deferred compensation .................... 75 75 74
Deferred rent ............................................ (21) (26) 0
(Increase)/decrease in:
Trade accounts receivable .............................. (5,322) (1,735) (598)
Other current assets ................................... 104 (538) 624
Other assets ........................................... (81) (5) 51
Increase/(decrease) in:
Accounts payable ....................................... (220) 105 (139)
Accrued expenses ....................................... 615 467 1,222
Deferred revenues ...................................... 1,220 1,176 1,908
Product development obligation ......................... (445) (380) 0
Other current liabilities .............................. 34 (224) (46)
Other long-term liabilities ............................ (71) (18) (96)
-------- -------- --------
Net cash (used) provided by operating activities .... 446 (4,718) 266
-------- -------- --------
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired ............. 0 0 (675)
Purchase of property and equipment .......................... (1,782) (952) (1,051)
Purchase of marketable securities ........................... (11,739) (13,669) (32,231)
Sale of marketable securities ............................... 0 1,000 28,453
Marketable securities at maturity ........................... 0 14,731 3,999
Sale of minority interest in non-consolidated subsidiary .... 547 0 0
-------- -------- --------
Net cash (used) provided by investing activities .... (12,974) 1,110 (1,505)
-------- -------- --------
Cash flows from financing activities:
Proceeds from the sale of stock ............................. 22,595 285 438
Costs related to initial public offering .................... (2,430) 0 0
-------- -------- --------
Net cash provided by financing activities ........... 20,165 285 438
-------- -------- --------
Effect of exchange rate changes on cash ....................... (143) 733 (327)
-------- -------- --------
Net increase (decrease) in cash ..................... 7,494 (2,590) (1,128)
Cash and cash equivalents, beginning of year .................. 5,880 13,374 10,784
-------- -------- --------
Cash and cash equivalents, end of year ........................ $ 13,374 $ 10,784 $ 9,656
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid ........................................... $ 100 $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-35-
<PAGE> 36
ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
( in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss) $ 483 $(7,904) $(6,165)
Income (loss) from foreign currency translation (16) 27 (268)
------- ------- -------
Comprehensive income (loss) $ 467 $(7,877) $(6,433)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-36-
<PAGE> 37
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
ISOCOR (the "Company") develops, markets and supports electronic messaging
and directory infrastructure software products and services that enable
businesses to engage in electronic communications over corporate networks and
the Internet.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. Intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying value of
these instruments approximate market value because of their short maturity.
Marketable securities
The Company invests excess cash in a diversified portfolio consisting of a
variety of securities including commercial paper, corporate notes and U.S.
Government obligations all with maturities of one year or less. All of the
Company's marketable securities have been classified as "available-for-sale"
securities and are reported at fair value based on quoted market prices as
required by Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities."
Concentration of credit risk
-37-
<PAGE> 38
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash, cash equivalents and
accounts receivable. The Company's accounts receivable are derived from sales
directly to customers and indirectly through resellers, systems integrators and
OEMs. The Company performs ongoing credit evaluations of its customers before
granting uncollateralized credit and to date has not experienced any unusual
credit related losses. At December 31, 1997 and 1998, United States, Ireland and
Other Europe represented 53%, 34%, 13% and 25%, 34% and 41%, respectively of the
Company's net accounts receivable. At December 31, 1997 and 1998, the Company
had balances held in U.S. banks of approximately $1,486,000 and $1,805,000
respectively, which exceeded federally insured limits. Cash equivalents are
managed by major investment firms in accordance with the Company's investment
policy.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over estimated useful
lives of three to five years. Maintenance and repairs are expensed as incurred,
while renewals and betterments are capitalized. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and the related
accumulated depreciation, and any resulting gain or loss is included in
operations.
Foreign currency translation
Results of operations for foreign entities are translated using the
average exchange rates during the period. Foreign entities' assets and
liabilities are translated to U.S. dollars using the exchange rates in effect at
the balance sheet date, and resulting translation adjustments are recorded in a
separate component of shareholders' equity. Actual gains or losses incurred on
currency transactions in other than the entities' functional currencies are
included in operations in the current period.
Comprehensive income
In January 1998, the Company adopted the provisions of 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. When
the Company enters into a license agreement with a customer requiring
significant customization of the software products, the Company
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<PAGE> 39
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. Amounts received in connection with a product development arrangement
(See Note 12) under which the Company is committed to specific efforts are
recognized as reductions in associated product development costs as those costs
are incurred.
Segment reporting
In 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" for the years ended
December 31, 1996, 1997 and 1998. 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.
Agency grants
Agency grants are recognized as reductions in operating expenses as earned
under the respective terms of the agreements.
Software development costs
Costs related to the conceptual formulation and design of software
products are expensed as engineering expense. Based on the Company's development
process, technological feasibility is established upon completion of a working
model. To date, costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
immaterial.
Excess of cost over net assets acquired
The excess of cost over net assets acquired is amortized over the
estimated useful life of one to five years using the straight line method. The
Company periodically reviews and evaluates whether there has been a permanent
impairment in the value of intangibles. Factors considered in the evaluation
include current operating results, trends and anticipated undiscounted cash
flows.
Income taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-
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<PAGE> 40
end based on enacted tax laws and statutory tax rates applicable to the periods
in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense represents the
tax payable in connection with the current period operations plus or minus the
change during the period in deferred tax assets and liabilities. (See Note 11).
Computation of net income (loss) per common share
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share is computed
by dividing net income (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 and preferred stock are
excluded from the computation when their effect is antidilutive.
The following is a reconciliation of the numerator and denominator of the
basic and diluted earnings per share (EPS) computations for the years ended
December 31 (in thousands).
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted EPS-
Net income (loss) $ 483 $(7,904) $(6,165)
Denominator:
Denominator for basic EPS-
Weighted average shares 7,733 9,485 9,737
Effect of dilutive securities:
Stock options 989 - -
Preferred Stock 1,086 - -
------- ------- -------
Denominator for diluted EPS-
Adjusted weighted average shares
And assumed conversions: 9,808 9,485 9,737
======= ======= =======
</TABLE>
Securities that could potentially dilute basic EPS in the future that were
not included in the computation of diluted EPS because to do so would have been
antidilutive were -0-, 2,050,265 and 2,339,291 shares in 1996, 1997 and 1998,
respectively.
All per share information has been given retroactive effect for the 1 for
2.5 reverse stock split which occurred on January 26, 1996 for all outstanding
shares of common and preferred stock. All of the 475,000 common shares of the
Company issued to effect the business combination with
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<PAGE> 41
NetCS have been fully weighted for all periods presented for the computation of
the weighted average number of shares outstanding as required for "pooling of
interests" accounting treatment.
2. INITIAL PUBLIC OFFERING
In March 1996, the Company completed the public offering and sale of
2,300,000 shares of its common stock at $9 per share resulting in net proceeds
to the Company of approximately $18,270,000 after offering costs, underwriting
discounts and commissions. The Company's shares are traded on The Nasdaq Stock
Market under the symbol "ICOR."
3. MARKETABLE SECURITIES
The Company held the following positions as of December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998 Maturities
------ ------ -----------
<S> <C> <C> <C>
Corporate notes.................... $8,182 $9,456 1-10 months
U.S. Government obligations........ 1,495 0 1-6 months
------ ------
$9,677 $9,456
====== ======
</TABLE>
Realized gains and losses are based on the book value of the specific
securities sold and were immaterial during the years ended December 31, 1996,
1997 and 1998. At December 31, 1997 and 1998, the difference between cost and
market value of the Company's marketable securities was not material.
4. ACCOUNTS RECEIVABLE
Trade accounts receivable, net of allowances as of December 31 were
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Accounts receivable .................. $ 10,609 $ 11,035
Less: Allowance for doubtful accounts,
returns and price protection ......... (1,509) (2,135)
-------- --------
$ 9,100 $ 8,900
======== ========
</TABLE>
As of December 31, 1997 and 1998, approximately 47% and 75% of the
Company's trade accounts receivable were from customers located in Europe,
respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment as of December 31 consisted of the following
(dollars in thousands).
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Computer equipment ........... $ 5,180 $ 6,575
Office equipment and furniture 1,876 2,187
------- -------
7,056 8,762
Less accumulated depreciation (4,651) (6,382)
------- -------
$ 2,405 $ 2,380
======= =======
</TABLE>
-41-
<PAGE> 42
For the years ended December 31, 1996, 1997 and 1998, depreciation expense
was $1,276,000, $1,362,000 and $1,107,000, respectively.
6. ACQUISITIONS
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. As of December 31, 1998, $165,000 is included in other current liabilities
and $48,000 is included in other long-term liabilities in the accompanying
consolidated balance sheets 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 December 31, 1998, net of accumulated
amortization of $79,000. 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 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.
In October 1995, the Company acquired a 60 percent interest in a
sales and distribution company located in Switzerland for 29,658 shares of
Preferred Series B stock and $279,000 in cash. The transaction was recorded as a
purchase and, accordingly, the purchase price was allocated to assets acquired
and liabilities assumed based upon their fair values. The $355,000 paid in
excess of the net assets acquired is being amortized using the straight line
method over an estimated useful life of five years and is included in other
assets in the accompanying consolidated balance sheets as of December 31, 1997
and 1998, net of accumulated amortization of $122,000 and $188,000,
respectively. The Company is committed to purchase the remaining 40 percent of
this sales and distribution company between the dates of January 9, 1998 and
January 8, 2000, at a price approximating net revenues for the four quarters
preceding the Company's exercise of its option to purchase the remaining 40%,
subject to various adjustments and maximums.
Pursuant to a Stock Purchase Agreement dated August 29, 1996 by and among
ISOCOR B.V., a wholly owned subsidiary of the Company, NetCS Informationstechnik
GmbH, a corporation organized under the laws of the Federal Republic of Germany
("NetCS") and the stockholders of NetCS (the "Purchase Agreement"), the Company
acquired all of the outstanding quota interests (shares) in NetCS in exchange
for an aggregate of 475,000 shares of the
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<PAGE> 43
Company's common stock. The acquisition has been accounted for under "pooling of
interests" accounting treatment, and therefore, as required by Accounting
Principles Board Statement No. 16, the financial statements for 1996 herein have
been restated as though the acquisition had been effected for all periods
presented.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its offices and operating facilities under various
operating leases which expire at various dates through 2002. Certain leases
contain free rent periods and renewal options and provisions to increase monthly
rentals at specified intervals. The consolidated statements of operations
reflect rent expense on a straight-line basis over the term of the respective
leases.
Total rental expense for the years ended December 31, 1996, 1997 and 1998
was $1,128,000, $1,418,000 and $1,593,000 respectively.
Future minimum rental commitments under operating leases are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
For the years ending December 31:
---------------------------------
<S> <C>
1999 ............................ $1,414
2000 ............................ 756
2001 ............................ 317
2002 ............................ 93
------
$2,580
======
</TABLE>
As more fully described in Note 6, the Company is committed to purchase
the remaining 40 percent interest not already owned by the Company of a sales
and distribution company located in Switzerland and a services company located
in Italy.
From time to time, the Company is involved in various legal proceedings in
the normal course of business. The Company is not currently involved in any
litigation which, in management's opinion, would have a material adverse effect
on its business, operating results, financial condition or cash flows.
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. Based on preliminary information, the Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues and does not currently believe that the cost of such
actions will have a material effect on the Company's results of operations or
financial condition in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could result in a material financial risk and the possibility that third parties
might assert claims against the Company with respect to such issues.
Accordingly, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of such changes, which could
have an adverse effect on future results of operations.
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<PAGE> 44
8. ACCRUED EXPENSES
Accrued expenses at December 31 were (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Salaries and related expenses .................. $1,197 $1,262
Royalties ...................................... 499 401
Commissions .................................... 464 461
Corporate and sales taxes ...................... 184 351
Other .......................................... 1,323 2,159
------ ------
$3,667 $4,634
====== ======
</TABLE>
9. LONG-TERM LIABILITIES
Long term liabilities at December 31 were (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Minority interest ................................ $ 79 $ 98
Deferred purchase payments ....................... 0 48
Deferred rent .................................... 6 0
Deferred tax liability ........................... 48 0
---- ----
$133 $146
==== ====
</TABLE>
10. SEVERANCE COSTS
In June and October 1997, the Company approved and completed a
restructuring of its United States and European operations pursuant to which
certain employees were terminated. A total of $681,000 in severance costs were
charged to operating expenses in 1997, of which $364,000 relates to engineering,
$190,000 to sales and marketing, and $127,000 to administration. The total
number of employees terminated was 35 within the following categories: 22 in
engineering, 12 in sales and marketing, and one in administration.
Approximately, $671,000 and $10,000 were paid in 1997 and 1998, respectively. No
amounts remain in the consolidated balance sheet as of December 31, 1998.
11. INCOME TAXES
The sources of income (loss) before income taxes for years ended December
31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
United States ........................... $ (182) $(1,881) $(4,516)
Foreign ................................. 850 (5,978) (1,393)
------- ------- -------
Income (loss) before income taxes ....... $ 668 $(7,859) $(5,909)
======= ======= =======
</TABLE>
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<PAGE> 45
The components of the provision for income taxes for the years ended
December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Current:
U.S. Federal ................. $ 18 $ - $ -
State ........................ 5 1 1
Foreign ...................... 254 52 249
----- ----- -----
277 53 250
----- ----- -----
Deferred-foreign ............. (92) (8) (13)
----- ----- -----
Total ............................. $ 185 $ 45 $ 237
===== ===== =====
</TABLE>
The Company's provision for income taxes is primarily attributable to
taxable income in foreign jurisdictions, as the Company did not generate taxable
income in the United States in 1997 and 1998, and in 1996 the Company utilized
$390,000 of tax loss carryforwards to offset income otherwise taxable in the
United States.
The components of the Company's net deferred taxes as of December 31 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for inventory, sales
returns and doubtful accounts ......... $ 320 $ 384
Accrued vacation ........................... 63 56
Deferred revenues .......................... 954 1,584
Property and equipment ..................... 194 141
Net operating loss carryforward ............ 1,258 2,861
Other ...................................... 36 54
------- -------
Total deferred tax assets 2,825 5,080
Valuation allowance .............................. (2,825) (5,080)
------- -------
Net deferred tax assets ............... - -
Deferred tax liability, property,
equipment and computer software (48) -
------- -------
Net deferred taxes .................... $ (48) $ 0
======= =======
</TABLE>
-45-
<PAGE> 46
The valuation allowance on deferred tax assets increased by $67,000,
$341,000 and $2,255,000 in 1996, 1997 and 1998, respectively. SFAS No. 109,
"Accounting for Income Taxes," requires that management evaluate a variety of
factors in reaching a conclusion regarding whether a valuation allowance against
deferred tax assets is required. The Company has considered a number of factors
which impact the likelihood that the deferred tax assets will be recovered,
including the Company's history of operating losses for federal and state tax
reporting purposes and the likelihood that U.S. operations will generate taxable
income during the carryforward period for unused net operating loss
carryforwards. Management is unable to project significant taxable income from
U.S. operations during the next two years and beyond and has therefore
concluded, based upon a weighting of all available evidence, that it is more
likely than not that deferred tax assets will not be realized. Accordingly, the
Company has established a full valuation allowance against its U.S. federal
deferred tax assets. Management evaluates on a quarterly basis the
recoverability of the deferred tax assets and the level of valuation allowance.
At such time as it is determined more likely than not that deferred tax assets
are realizable, the valuation allowance would be appropriately reduced.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal and state income tax reporting purposes of approximately $7.5
million and $3.5 million, respectively. These carryforwards, if unused, expire
in various periods from 1999 to 2010.
The overall effective tax rate differs from the statutory tax rate for the
years ended December 31 as follows:
<TABLE>
<CAPTION>
% of Pretax Income
----------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Tax provision based on the federal statutory rate .. 34.0% 34.0% 34.0%
U.S. loss not providing current tax benefit ........ (31.3) (34.0) (34.0)
Foreign taxes, net ................................. 25.0 .6 4.0
------ ------ ------
Effective tax rate ................................. 27.7% .6% 4.0%
====== ====== ======
</TABLE>
The Company has significant operations and generates a substantial portion
of its taxable income in Ireland. Under a tax holiday due to terminate in 2010,
the Company is taxed in Ireland on its "manufacturing income" at a 10% rate. To
qualify for this 10% tax rate, the Company must carry out "software development
services" or "technical or consultancy services" (as defined in the Irish
Finance Act 1980) in Ireland and qualify for an employment grant from the IDA.
If the Company ceases to comply with these qualifications, all or a part of its
taxable profits may be subject to a 32% tax rate on its post disqualification
date taxable profits. Should this occur, or should Irish tax laws be rescinded
or changed, the Company's net income could be materially adversely affected.
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<PAGE> 47
12. SHAREHOLDERS' EQUITY
Preferred Stock
At December 31, 1998, the Company has 2,000,000 shares of undesignated
Preferred Stock authorized but none issued or outstanding. On March 14, 1996,
the date of the initial public offering, all outstanding shares of Series A, B,
C and D Preferred Stock were canceled upon their automatic conversion to Common
Stock. Series A, B, C and D Preferred Stock had stated annual dividend rates of
$.22500, $.32175, $.39375 and $.90 per share, respectively. No dividends were
ever declared or paid.
The Series A, B, C and D Preferred Stock had a $2.50, $3.575, $4.375 and
$10.00 liquidation preference over shares of Common Stock, respectively, and
were redeemable anytime after July 19, 1998, upon written consent to redemption
of a majority of the holders, at liquidation preference, plus declared and
unpaid dividends, if any.
In connection with the issuance of Series C Preferred Stock in November
1993, the Company provided the investor an option to purchase equity securities
of the Company under certain conditions associated with sales by the investor
and its affiliates of the Company's products in excess of specified minimum
levels. The investor exercised that option and purchased 39,942 shares of Common
Stock upon the closing of the initial public offering on March 14, 1996 at 80%
of the per share price of such offering.
In December 1995, the Company entered into a Series D Preferred Stock
Purchase Agreement with a strategic investor. The agreement provided for total
consideration to the Company of $3,000,000, of which $1,500,000 was received in
1995 in exchange for 150,000 shares of the Company's Series D Preferred Stock
and the Company's commitment to product development efforts estimated to cost
$825,000. These costs were accrued with the remaining proceeds of $653,000, net,
attributed to the Company's Series D Preferred Stock. Per the terms of the
agreement, the number of shares of Common Stock issued upon automatic conversion
at the initial public offering date of this Series D Preferred Stock was
calculated to provide effective per share pricing to this investor of 80% of the
price per share of Common Stock paid by the public on that date. The investor
was also committed to acquire and did acquire under the terms of the agreement,
additional shares of the Company's Series D Preferred Stock with an aggregate
purchase price of $1,500,000 at the initial public offering date of March 14,
1996. These shares also automatically converted into Common Stock such that the
effective price per share of the Common Stock was the same as the price to
public in the initial public offering on March 14, 1996.
13. STOCK OPTION AND EMPLOYEE BENEFIT PLANS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
other than that required to be recognized by APB 25 for the difference between
the fair value of the Company's Common Stock at the grant date and the exercise
price of the options has been recognized. Had compensation cost for the
Company's two stock option plans been determined based on the fair value at the
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<PAGE> 48
grant date for awards in 1996, 1997, and 1998 consistent with the fair value
provisions of SFAS No. 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below (amounts in thousands
except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) as reported ................................... $ 483 $ (7,904) $(6,165)
Net loss, pro forma ............................................. $ (584) $(11,068) $(8,883)
Net income (loss) per share assuming no dilution, as reported ... $ 0.06 $ (0.83) $ (0.63)
Net loss per share assuming no dilution, pro forma .............. $(0.08) $ (1.17) $ (0.91)
Net income (loss) per share assuming dilution, as reported ...... $ 0.05 $ (0.83) $ (0.63)
Net loss per share assuming dilution, pro forma ................. $(0.08) $ (1.17) $ (0.91)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996, 1997 and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate ................. 6.10% 6.13% 5.10%
Expected lives (years) .................. 4 4 4
Expected volatility ..................... 70% 100% 100%
Expected dividends ...................... 0 0 0
</TABLE>
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Option Plan") permits the
grant of both incentive stock options designed to qualify under IRC Section 422
and non-qualified stock options. A total of 2,950,000 shares of Common Stock has
been reserved for issuance under the 1992 Option Plan. Incentive stock options
may only be granted to employees of the Company whereas non-qualified stock
options may be granted to employees and consultants. Each option, once vested,
allows the optionee the right to purchase one share of the Company's Common
Stock. The Board of Directors determines the exercise price of the options based
on the fair market value of such shares on the date of grant; options granted to
date generally vest ratably over four years and expire ten years from the date
of the grant. Compensation expense equal to the difference between the assumed
fair value of the Company's Common Stock at the grant date and the exercise
price of the options, if any, is recognized ratably over the vesting period.
1996 Directors' Stock Option Plan
In 1996, the Company adopted the 1996 Directors' Stock Option Plan (the
"Directors' Plan"). A total of 150,000 shares of Common Stock has been reserved
for issuance under the Directors' Plan. The Directors' Plan provides for the
grant of nonstatutory stock options to nonemployee directors of the Company
("outside directors"), including an option to purchase 10,000 shares of Common
Stock on the date on which the optionee first becomes a nonemployee director of
the
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<PAGE> 49
Company or January 18, 1996 with respect to the Company's then current
nonemployee directors ("First Option"). Each First Option granted vests in
installments cumulatively as to 25% of the shares subject to the First Option on
each of the first, second, third and fourth anniversaries of the date of grant
of the First Option. Thereafter, each outside director will be automatically
granted an option to purchase 2,500 shares of Common Stock on the first calendar
day of the Company's fiscal year commencing in or after 1997 if, on such date,
the optionee shall have served on the Company's Board of Directors for at least
six months ("subsequent option"). The subsequent options shall vest on the
fourth anniversary of the date of grant, subject to continued service as an
outside director. The exercise price per share of all options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option.
The following tables summarize certain information relative to the 1992
Option Plan and the Directors' Plan.
<TABLE>
<CAPTION>
Weighted Average Weighted Fair Value at
Shares Exercise Price Range Exercise Price Grant Date
----------- -------------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995............. 1,051,387 $.3750 to $7.50 $0.83
Granted
Option price = Grant date market price..... 1,219,700 $ 6.44 to $12.50 $7.06 $4.96
Exercised.................................... (139,554) $ .3750 to $5.00 $0.49
Canceled or expired.......................... (123,945) $.3750 to $12.50 $5.13
---------
Outstanding at December 31, 1996............. 2,007,588 $.3750 to $12.50 $1.96
=========
Granted
Option price = Grant date market price..... 683,000 $2.313 to $5.50 $2.86 $2.27
Option price < Grant date market price..... 119,500 $2.625 $2.63
Exercised.................................... (143,497) $.3750 to $2.625 $0.90
Canceled or expired.......................... (616,326) $.3750 to $8.00 $5.75
---------
Outstanding at December 31, 1997............. 2,050,265 $.3750 to $8.00 $2.23
=========
Granted
Option price = Grant date market price..... 787,200 $1.625 to $3.00 $2.84 $1.97
Exercised.................................... (194,912) $.375 to $2.75 $0.78
Canceled or expired.......................... (303,262) $.375 to $8.00 $2.77
---------
Outstanding at December 31, 1998............. 2,339,291 $.375 to $8.00 $1.71
=========
</TABLE>
The following table summarizes information about the stock options at
December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Options exercisable 504,769 817,517 978,853
Options available for future grant 570,328 384,154 250,216
</TABLE>
-49-
<PAGE> 50
The following table summarizes information about the stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Average
Options Outstanding Number Outstanding as of Remaining Weighted Average
Range of Exercise Price December 31, 1998 Contractual Life Exercise Price
- ------------------------ ------------------------ ---------------- ----------------
<S> <C> <C> <C>
$0.00 to $1.99 2,271,250 8.0 $1.62
$2.00 to $3.99 43,041 4.3 $2.80
$4.00 to $5.99 5,000 8.0 $5.50
$6.00 to $8.00 20,000 7.0 $8.00
------------ -------- ------
2,339,291 7.9 $1.71
============
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable Number Exercisable as of Weighted Average
Range of Exercise Prices December 31, 1998 Exercise Price
-------------------------- --------------------------
<S> <C> <C>
$0.00 to $1.99 952,379 $1.38
$2.00 to $3.99 9,498 $2.68
$4.00 to $5.99 2,394 $5.50
$6.00 to $8.00 14,582 $8.00
-------
978,853 $1.50
=======
</TABLE>
Effective April 1, 1997 (the "1997 Grant Date") all optionees under the
1992 Option Plan holding stock options with exercise prices in excess of the
fair market value of the Company's Common Stock received one-for-one repricing
of their then-existing unexercised stock options with a new exercise price set
at $2.625 per share, the closing sales price and fair market value of the
Company's Common Stock on the 1997 Grant Date. The number of stock options
affected was 1,235,065. Other than the change in the exercise price, the
affected options remained the same.
Effective December 11, 1998 (the "1998 Grant Date") all then-current
employees and consultants holding options under the 1992 Option Plan with
exercise prices in excess of the fair market value of the Company's Common Stock
received one-for-one repricing of their then-existing unexercised stock options
with a new exercise price set at $1.8125 per share, the closing sales price and
fair market value of the Company's Common Stock on the 1998 Grant Date. The
number of stock options effected was 1,857,900. Other than the change in the
exercise price, the affected options remained the same.
1996 Employee Stock Purchase Plan
In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 250,000 shares of Common Stock have been reserved
for issuance under the Purchase Plan. The Purchase Plan enables eligible
employees to purchase Common Stock at 85% of the lower of the fair market value
of the Company's Common Stock on the first day or the last day of each six-month
purchase period. As of December 31, 1997 and 1998, there were 96,901 and 144,946
shares, respectively, issued under the Purchase Plan.
-50-
<PAGE> 51
401(k) Salary Reduction Plan and Trust
In 1992, the Company adopted the ISOCOR 401(k) Salary Reduction Plan and
Trust (the "Plan") for all qualified employees electing participation in the
Plan. Employees can contribute 2%-15% of eligible earnings to the Plan subject
to Internal Revenue Service limitations. No Company contributions were made to
the Plan for the years ended December 31, 1996, 1997 and 1998.
14. GEOGRAPHICAL AREA INFORMATION
The Company operates in a single reportable segment; the development,
marketing and support of off-the-shelf 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.
Revenues for the years ended December 31 and identifiable assets as of
December 31, classified by the major geographical areas in which the Company
operates, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
United States ........................... $ 10,927 $ 11,077 $ 7,917
Ireland ................................. 15,932 13,382 13,751
Other Europe ............................ 7,226 8,245 12,773
Intercompany elimination ................ (7,691) (10,686) (11,162)
-------- -------- --------
$ 26,394 $ 22,018 $ 23,279
======== ======== ========
Identifiable assets:
United States ........................... $ 29,304 $ 26,123 $ 21,207
Ireland ................................. 9,146 5,393 5,650
Other Europe ............................ 2,848 2,707 6,268
-------- -------- --------
Total .......................... $ 41,298 $ 34,223 $ 33,125
======== ======== ========
</TABLE>
The Company's intercompany eliminations represent transfers of goods and
services between its subsidiaries. Export sales from the United States and
Ireland for the years ended December 31, 1996, 1997 and 1998 were $2,131,000,
$2,086,000 and $2,485,000, respectively. The majority of these sales were made
to Asia and South America.
-51-
<PAGE> 52
The Company currently relies significantly on resellers in Europe for
certain elements of marketing and distribution of its software products. In the
event the Company is unable to retain its resellers, there is no assurance that
the Company will succeed in replacing them. Any changes in the Company's
distribution channel could have a significant impact on sales and adversely
affect operating results.
15. RELATED PARTY TRANSACTIONS
Included in related party revenues for the years ended December 31, 1996,
1997 and 1998 was approximately $272,000, $95,000 and $45,000, respectively,
relating to software license agreements with a shareholder.
Included in revenue for the year ended December 31, 1996, 1997 and 1998
was approximately $292,000, $58,000 and $345,000 respectively relating to a
software license and maintenance agreement with an affiliate of a shareholder.
Included in accounts receivable as of December 31, 1997 and 1998 was $46,000 and
$82,000, respectively, relating to this distributor. Included in accounts
payable as of December 31, 1997 and 1998 was $96,000 and $0, respectively,
relating to the consulting services.
During 1997 and 1998, the Company reflected as a reduction of operating
expenses $380,000 and $0, respectively, relating to product development efforts
committed to and performed by the Company under the Series D Preferred Stock
Purchase Agreement discussed in Note 12 above.
16. AGENCY GRANTS
During 1992, 1994 and 1996, the IDA approved grant agreements with one of
the Company's international subsidiaries for approximately $750,000, $850,000
and $793,000, respectively, over six years. The Company reflected as reduction
of operating expenses $413,000, $69,000 and $0 relating to these grants for the
years ended December 31, 1996, 1997 and 1998, respectively. These grants are
based upon the Company's creation and fulfillment of new jobs in Ireland and
include remedy provisions employed by the IDA to pursue partial revocation of
amounts granted in the event the recipient of the grant substantially vacates
its presence in Ireland during a period of five to seven years from date of
grant. While the Company's level of employment within Ireland in 1997 and 1998
has declined, the Company's plans include a commitment to a significant
continuing presence in Ireland. There can be no assurance that the IDA will not
seek partial revocation of prior grants, that the Company will continue to
qualify for this grant aid or be eligible for future grants or that the
Company's results of operations will not be materially adversely affected by the
loss of grant aid.
The Economic and Technological Finance Authority - Berlin ("Authority")
makes grants to promote research and development in small and medium-sized
German-owned companies located in Berlin. The grants are paid quarterly based
upon actual development costs, including salaries,
-52-
<PAGE> 53
and depend upon the work being carried out in Berlin. The Company reflected as a
reduction of operating expenses $87,000, $0 and $0 relating to these grants for
the years ended December 31, 1996, 1997 and 1998, respectively. Although remedy
provisions exist for the recoverability of such grants if certain conditions are
not met, the Company has been assured by the Authority that no recovery of the
grants made to NetCS is contemplated, and accordingly, no liability has been
recognized in the financial statements for this contingency. The Company is no
longer eligible to receive these grants in Germany.
-53-
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity, of cash flows
and of comprehensive income present fairly, in all material respects, the
financial position of ISOCOR (the "Company") and its subsidiaries at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in the index on page 59 of this Form 10-K
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
February 10, 1999
-54-
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file its 1999 Proxy Statement within 120 days after
the end of its fiscal year pursuant to Regulation 14A as promulgated by the U.S.
Securities and Exchange Commission for its Annual Meeting of Shareholders to be
held May 13, 1999.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current directors and executive officers of the Company, and their ages as
of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ----- --------
<S> <C> <C>
Andrew De Mari.................... 59 Chairman of the Board of Directors
Paul Gigg......................... 45 President, Chief Executive Officer and Director
C. Raomal Perera.................. 41 Senior Vice President, Engineering
Janine M. Bushman................. 44 Vice President, Finance and Administration, Chief
Financial Officer and Director
Karl Klessig...................... 57 Vice President, Marketing and Strategic Alliances
Alex Lazar........................ 41 Vice President, North American Sales
Abraham Levine.................... 50 Vice President, Professional Services
Barry Wyse........................ 37 Vice President, Engineering
Dennis Cagan...................... 54 Director
Alexandra Giurgiu (1)(2).......... 39 Director
G. Bradford Jones (1)(2).......... 42 Director
Bill Yundt ....................... 58 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Andrew De Mari is a founder of the Company, was elected Chairman of the Board of
Directors in November 1997 and has been a member of the Board of Directors since
the Company's inception in 1991. Prior to becoming Chairman, Dr. De Mari served
as the Company's President
-55-
<PAGE> 56
and Chief Executive Officer since its founding in 1991. Prior to founding
ISOCOR, Dr. De Mari was a founder of Retix, a networking equipment company, and
a Vice President of Compucorp, a office automation product manufacturer. Dr. De
Mari holds M.S.E.E. and Ph.D. degrees in Electrical Engineering from the
California Institute of Technology and Dott. Ing. Electrical Engineering from
the Politecnico di Torino, Italy.
Paul R. Gigg joined ISOCOR in January 1993. He became General Manager, Europe in
October 1995, was elected Vice President, European Marketing and Sales in
October 1996, was elected Chief Operating Officer in April 1997 and was elected
to the Board of Directors and as President and Chief Executive Officer in
November 1997. Prior to joining ISOCOR, Mr. Gigg was Director of Marketing and
Engineering at Dowty Communications (formerly Case Communications), a developer
and supplier of networking products. Mr. Gigg holds a B.S.E.E. degree from the
University of Wales, United Kingdom.
C. Raomal Perera is a founder of the Company and has had overall responsibility
for the Irish operations of ISOCOR since June 1991. He was elected as an officer
of ISOCOR in November 1992 and currently holds the position of Senior Vice
President Engineering and General Manager, ISOCOR Ireland. Prior to that, he was
the Software Research and Development Manager for Artist Graphics, a
manufacturer of computer peripherals, from September 1990 to June 1991. For two
years prior to that, Mr. Perera was employed by Retix as Associate Vice
President, OSI Technology Unit and prior to that, Director of Engineering and
Software Development Manager of Retix Research and Development Centre in
Ireland. Mr. Perera holds a B.S.E.E. degree from the University of Wales, United
Kingdom.
Janine M. Bushman joined the Company in April 1993. She became the Vice
President of Operations of the Company in October 1994, was elected to the Board
of Directors in July 1995 and was elected Chief Financial Officer and Vice
President, Finance and Administration in November 1995. For almost six years
prior to joining the Company, Ms. Bushman was Controller and Corporate Secretary
for Interactive Systems Corporation, a developer and supplier of UNIX operating
systems software. Ms. Bushman holds an M.B.A. from Loyola Marymount University
and a B.S. in Accounting from the California State University at Northridge.
Karl Klessig joined the Company in May 1998, and was elected Vice President,
Marketing and Strategic Alliances in October 1998. Prior to joining ISOCOR, Mr.
Klessig was the founder of Enterprise Solutions Limited (ESL), where he served
as a Director from its inception in 1991, and as President and CEO until 1997.
ESL develops, manufactures and distributes electronic messaging and directory
solutions. Prior to that he was the founder, President and CEO of Quadratron
Systems Limited, an Office Automation Software company, from 1983 until 1991.
Prior to 1983 Mr. Klessig founded four other companies, and was responsible for
the management and restructuring of five other companies. Mr. Klessig holds a
B.S. degree in Physics from Illinois Institute of Technology, where he serves on
the Board of Overseers, and a Masters of International Business Administration
from West Coast University.
Alex Lazar joined the Company in November 1993 and was elected to the position
of Vice President, North American Sales in July 1997. Prior to joining the
Company, Mr. Lazar was Vice President, Sales and Support and a founder of
Isicad, a network management software company, which position he held from 1987
to 1993. Mr. Lazar holds a B.S. from DePaul University.
-56-
<PAGE> 57
Abraham Levine joined the Company in January 1999 as Vice President,
Professional Services. Prior to joining the Company, Mr. Levine was Vice
President of Professional Services at Software.com, an Internet Messaging
company, from May 1997 to December 1998. Prior to this, Mr. Levine was Vice
President and General Manager of Business Intranet Solutions at Sprint (a
telecommunications company) from February 1996 to February 1997. Previously, Mr.
Levine held several positions, including Sprint Global Executive, at Control
Data Systems a messaging product and integration company from February 1989 to
February 1996 and March 1997 to May 1997. Mr. Levine holds a Bachelor of Science
degree in Business Administration from California State University at
Northridge.
Barry Wyse joined ISOCOR B.V. in May 1995 and became Vice President, Engineering
of the Company in December 1997. Prior to joining the Company, Mr. Wyse served
as Software Manager for Microsoft B.V., a subsidiary of Microsoft Corporation, a
commercial software provider, from April 1994 to May 1995 and as Principal
Engineer for Lotus B.V., a subsidiary of Lotus Development Corporation, which
was subsequently acquired by IBM, from December 1992 to February 1994. Mr. Wyse
holds an M. S. degree in Computer Science from University College, Dublin,
Ireland.
Dennis Cagan was elected to the Board of Directors of the Company in August 1997
and has also served as a consultant to the Company since that time. Commencing
in January 1999 he became CEO of MessageMedia, Inc. a services company providing
customer relationship management and direct marketing via Internet e-mail. Mr.
Cagan has been President of Cagan Co., Inc., a management consulting firm, since
1981 and also serves as Chairman of the Board of Acorn Technologies, Inc. He
also currently serves on the Board of Directors of Sanctuary Woods Multimedia
Corp. and MessageMedia, Inc.
Alexandra Giurgiu became a member of the Company's Board of Directors in May
1993. She is Managing Director and Executive Officer of 4c Ventures, L.P., a
venture capital partnership, since 1994. From 1984 to 1985, she was Director of
International Operations for Lifeboat Associates, a software distribution and
publishing company. Additionally, she currently serves on the Board of Directors
of Object Design, Wireless Access, Hands-On Technology and Alacrity Systems.
G. Bradford Jones became a member of the Company's Board of Directors in July
1991. He is a general partner in the venture capital firm of Brentwood
Associates, which he joined in 1981. Mr. Jones also serves on the Board of
Directors of Onyx Acceptance Corp., Interpore International and Aastrom
Biosciences.
Bill Yundt joined the Company's Board of Directors in May 1998. He is Vice
President, Networking at WebTV Networks, Inc. ("WebTV"), a subsidiary of
Microsoft Corporation where he has been employed since June 1996. Prior to
joining WebTV Mr. Yundt served as Vice President of BBN Planet Corporation, a
computer hardware hosting service provider, from September 1994 to May 1996.
Mr. Yundt was founder and CEO of BARRNet (Bay Area Regional Network), an
internet service provider, in 1993 where he was active through
-57-
<PAGE> 58
1996 and was employed as Director of Networking and Distributed Computing for
Stanford University from November 1969 through August 1994.
Further information regarding Registrant's directors will be set forth under the
caption "Election of Directors - Nominees" in the Registrant's 1999 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
into this Form 10-K from the information set forth under the caption
"Compensation of Executive Officers" in the Company's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
into this Form 10-K from the information set forth under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management" in the Company's
1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
into this Form 10-K from the information set forth under the caption "Certain
Relationships and Related Transactions" in the Company's 1999 Proxy Statement.
-58-
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
(a) (1) Consolidated Financial Statements:.....................31
(2) Financial Statement Schedule:..........................S-1
</TABLE>
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item
601 of Regulation S-K):
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1* Stock Purchase Agreement by and among Registrant, NetCS and the
stockholders of NetCS dated August 29, 1996.
2.2* Escrow Agreement dated August 29, 1996.
3.1+ Amended and Restated Articles of Incorporation of Registrant.
3.2+ Amended and Restated Bylaws of Registrant.
3.3++ Certificate of Amendment to Bylaws of Registrant dated November 5,
1997.
3.4 Certificate of Amendment to Bylaws of Registrant dated May 13, 1998.
10.1+ 1992 Stock Option Plan and forms of option agreements thereunder.
10.2+ 1996 Directors' Stock Option Plan and form of option agreement
thereunder.
10.3+ 1996 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4+ Form of Indemnification Agreement.
10.5+ Lease dated November 11, 1994 between ISOCOR and Telos Corporation.
10.6+ Lease dated June 15, 1995 between ISOCOR B.V. and Forfas.
10.7+ Rights Agreement dated December 29, 1995 among the Registrant, its
Preferred shareholders and certain of its Common shareholders, as
amended.
10.8+++ International Reseller Agreement dated May 11, 1993 between the
Registrant and Syseca S.A.
10.9+ Source Code Access License Agreement dated September 15, 1993 and
Amendment to the Source Code Access License Agreement dated May 1,
1995, between the Registrant and Syseca S.A.
10.10+++ Report of Discussions between the Registrant and Syseca S.A. dated
September 27, 1994 (translated) and Affidavit of Translations by
Abbey Translations dated January 25, 1996.
10.11+++ Master Binary License Agreement dated September 30, 1994 between the
Registrant and Lir S.A.
10.12+++ Master Binary License Agreement dated December 28, 1994, Amendment to
the Master Binary Agreement dated March 2, 1995 and
</TABLE>
-59-
<PAGE> 60
<TABLE>
<S> <C>
Amendment to the Master Binary License Agreement dated December 28,
1995, between the Registrant and Syseca S.A.
10.13+ Product Loan Agreement between the Registrant and Syseca S.A. dated
November 1, 1995.
10.14+ Employment Agreement between the Registrant and C. Raomal Perera
dated September 9, 1992.
10.15+++ Series D Preferred Stock Purchase Agreement dated December 29, 1995
between the Registrant and Intel Corporation and related Statement of
Work and Product Requirements.
10.16++ Lease dated March 3, 1998 between the Registrant and Spieker
Properties.
10.17++ Letter Agreement dated December 3, 1997 between ISOCOR B.V. and
Forfas.
10.18++ Agreement between Andrew De Mari and the Registrant dated November 5,
1997.
10.19++ Letter Agreement between the Registrant and Paul Gigg dated December
9, 1997.
10.20++ Consultancy Agreement between the Registrant and Cagan Co. Inc.,
dated September 1, 1997 and related work orders dated September 1,
1997 and February 11, 1998.
10.21o++++ Software License Agreement between the Registrant and Netscape
Communications Corporation dated September 30, 1998.
21.1+ Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 62).
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
* Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Registrant's Current Report on Form 8-K dated
August 29, 1996.
+ Incorporated by reference to exhibits filed in response to Item
16(a), "Exhibits," of the Registrant's Registration Statement on Form
S-1 and amendments thereto (File No. 333-606) which became effective
on March 13, 1996.
+ Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Registrant's Registration Statement on Form S-8,
dated July 10, 1997.
++ Incorporated by reference to exhibits filed in response to Item
14(a), "Exhibits," of the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
-60-
<PAGE> 61
- - Incorporated by reference to exhibits filed in response to Item 6(a),
"Exhibits," of the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
++ Confidential treatment granted by order effective March 13, 1996.
++++ Confidential treatment granted by order effective March 1, 1999.
-61-
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ISOCOR
Date: March 30, 1999 By: /s/ PAUL GIGG
-------------------------------------
Paul Gigg, President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Paul Gigg and Janine M. Bushman, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------------------- ----------------------------------------------------- --------------
<S> <C> <C>
/s/ ANDREW DE MARI Chairman of the Board of Directors March 30, 1999
- ---------------------------------
(Andrew De Mari)
/s/ PAUL GIGG President, Chief Executive Officer and March 30, 1999
- ---------------------------------
(Paul Gigg) Director (Principal Executive Officer)
/s/ JANINE M. BUSHMAN Vice President, Finance and March 30, 1999
- ---------------------------------
(Janine M. Bushman) Administration, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
/s/ DENNIS CAGAN Director March 30, 1999
- ---------------------------------
(Dennis Cagan)
/s/ ALEXANDRA GIURGIU Director March 30, 1999
- ---------------------------------
(Alexandra Giurgiu)
/s/ G. BRADFORD JONES Director March 30, 1999
- ---------------------------------
(G. Bradford Jones)
/s/ BILL YUNDT Director March 30, 1999
- ---------------------------------
(Bill Yundt)
</TABLE>
-62-
<PAGE> 63
ISOCOR
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and end
Account Description of period expenses Deductions of period
- ----------------------------------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts,
returns, and price protection . $ (586) $(2,771) $ 1,710 $(1,647)
Year ended December 31, 1997
Allowance for doubtful accounts,
returns, and price protection . $(1,647) $(2,916) $ 3,054 $(1,509)
Year ended December 31, 1998
Allowance for doubtful accounts,
returns, and price protection . $(1,509) $(2,012) $ 1,386 $(2,135)
</TABLE>
S-1
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT OF BYLAWS
The undersigned, Elias J. Blawie, hereby certifies that:
1. He is the duly elected and incumbent Secretary of ISOCOR
(the "Company").
2. By action taken at a meeting of the Board of Directors on May
13, 1998, the second sentence of Article III, Section 3.2 of the Bylaws of the
Company was amended to read in its entirety as follows:
"The number of directors of the corporation shall be not
less than five (5) nor more than nine (9). The exact number of
directors shall be six (6) until changed, within the limits specified
above, by a bylaw amending this Section 3.2, duly adopted by the board
of directors or by the shareholders."
3. The matters set forth in this certificate are true and correct of
my own knowledge.
Date: May 13, 1998
/s/ ELIAS J. BLAWIE
-------------------------------
Elias J. Blawie, Secretary
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of ISOCOR on Form S-8 (File No. 333-61133) of our report dated
March 29, 1999, on our audits of the financial statements of ISOCOR as of
December 31, 1998 and 1997, and for the years ended December 31, 1996, 1997 and
1998, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
February 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998, SEPTEMBER 30, 1998, JUNE
30, 1998 AND MARCH 31, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1998, NINE
MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1998, SIX MONTHS IN THE PERIOD ENDED
JUNE 30, 1998 AND THREE MONTHS IN THE PERIOD ENDED MARCH 30, 1998 AND ARE
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 SEP-30-1998 JUN-30-1998 MAR-30-1998
<CASH> 9,656 8,834 7,326 8,048
<SECURITIES> 9,456 8,396 11,925 10,806
<RECEIVABLES> 11,035 13,640 9,877 10,612
<ALLOWANCES> 2,135 2,125 1,700 1,686
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 29,817 32,220 30,564 30,526
<PP&E> 8,762 8,477 7,165 6,933
<DEPRECIATION> 6,382 6,126 5,071 4,725
<TOTAL-ASSETS> 33,125 35,738 32,967 32,973
<CURRENT-LIABILITIES> 13,214 14,261 9,395 8,990
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 39,758 39,638 39,637 39,415
<OTHER-SE> (19,993) (18,383) (16,181) (15,552)
<TOTAL-LIABILITY-AND-EQUITY> 33,125 35,738 32,967 32,973
<SALES> 23,279 16,358 11,098 5,047
<TOTAL-REVENUES> 23,279 16,358 11,098 5,047
<CGS> 2,787 1,746 1,237 545
<TOTAL-COSTS> 7,858 5,118 3,091 1,466
<OTHER-EXPENSES> 22,579 16,670 11,114 5,826
<LOSS-PROVISION> 341 243 177 146
<INTEREST-EXPENSE> (1,008) (784) (571) (311)
<INCOME-PRETAX> (5,909) (4,345) (2,613) (2,097)
<INCOME-TAX> 237 114 37 17
<INCOME-CONTINUING> (6,146) (4,459) (2,650) (2,114)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (6,165) (4,478) (2,650) (2,114)
<EPS-PRIMARY> (.63) (.46) (.27) (.22)
<EPS-DILUTED> (.63) (.46) (.27) (.22)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997, SEPTEMBER 30, 1997, JUNE
30, 1997 AND MARCH 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE TWELVE MONTHS IN THE PERIOD ENDED DECEMBER 31, 1997, NINE
MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1997, SIX MONTHS IN THE PERIOD ENDED
JUNE 30, 1997 AND THREE MONTHS IN THE PERIOD ENDED MARCH 30, 1997 AND ARE
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. SECTION
XI.B.4.b REQUIRES RETROACTIVE RESTATEMENT OF PREVIOUSLY FILED FINANCIAL DATA
SCHEDULES AS A RESULT OF SFAS No. 128, EARNINGS PER SHARE.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-30-1997
<CASH> 10,784 10,322 12,393 8,397
<SECURITIES> 9,677 10,693 10,802 15,505
<RECEIVABLES> 10,609 10,755 10,943 10,719
<ALLOWANCES> 1,509 1,972 2,035 2,112
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 31,554 31,660 34,244 34,500
<PP&E> 7,056 7,040 7,053 6,972
<DEPRECIATION> 4,651 4,382 4,137 3,941
<TOTAL-ASSETS> 34,223 34,605 37,459 37,857
<CURRENT-LIABILITIES> 8,406 7,528 9,576 7,756
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 39,359 39,258 39,096 39,082
<OTHER-SE> (13,675) (12,325) (11,369) (9,150)
<TOTAL-LIABILITY-AND-EQUITY> 34,223 34,605 37,459 37,857
<SALES> 22,018 15,376 9,189 3,834
<TOTAL-REVENUES> 22,018 15,376 9,189 3,834
<CGS> 2,863 1,743 935 430
<TOTAL-COSTS> 5,667 3,769 2,208 988
<OTHER-EXPENSES> 25,419 19,013 13,114 6,361
<LOSS-PROVISION> 382 251 218 107
<INTEREST-EXPENSE> (1,170) (893) (616) (308)
<INCOME-PRETAX> (7,859) (6,420) (5,408) (3,169)
<INCOME-TAX> 45 22 19 8
<INCOME-CONTINUING> (7,904) (6,442) (5,427) (3,177)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (7,904) (6,442) (5,427) (3,177)
<EPS-PRIMARY> (0.83) (0.69) (0.58) (0.34)
<EPS-DILUTED> (0.83) (0.69) (0.58) (0.34)
</TABLE>
