<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 000-27900
ISOCOR(R)
(Exact name of Registrant as Specified in Its Charter)
California 95-4310259
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3420 Ocean Park Blvd., Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 581-8100
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
10,401,939 Shares of Common Stock of the Registrant were outstanding as
of September 30, 1999
<PAGE> 2
ISOCOR
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998
and September 30, 1999.................................................... 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1999......................................... 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999.................................. 5
Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 1998 and 1999.................................. 6
Notes to Consolidated Financial Statements................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................... 19
Signature........................................................................ 20
</TABLE>
<PAGE> 3
ISOCOR
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,656 $ 10,258
Marketable securities 9,456 9,009
Trade accounts receivable, net 8,900 7,431
Other current assets 1,805 2,682
-------- --------
Total current assets 29,817 29,380
Property and equipment, net 2,380 2,262
Other assets 928 2,302
-------- --------
Total assets $ 33,125 $ 33,944
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,009 $ 1,033
Accrued expenses 4,634 6,882
Deferred revenues 5,708 6,109
Other current liabilities 1,863 1,519
-------- --------
Total current liabilities 13,214 15,543
Other long-term liabilities 146 151
-------- --------
Total liabilities 13,360 15,694
Commitments and contingencies
Shareholders' equity:
Preferred stock, authorized 2,000,000 shares, none issued -- --
or outstanding
Common stock, authorized 50,000,000 shares,
issued and outstanding 9,888,038 and 10,401,939 shares at
December 31, 1998 and September 30, 1999, respectively 39,773 40,518
Notes receivable from shareholders (15) --
Accumulated deficit (19,749) (22,642)
Deferred compensation (56) --
Accumulated comprehensive income (loss) (188) 374
-------- --------
Total shareholders' equity 19,765 18,250
-------- --------
Total liabilities and shareholders' equity $ 33,125 $ 33,944
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE> 4
ISOCOR
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
---------------------------- --------------------------
1998 1999 1998 1999
------- -------------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Products $ 2,524 $ 5,776 $10,019 $14,456
Services 2,736 3,600 6,339 9,816
------- -------------- ------- -------
Total revenues 5,260 9,376 16,358 24,272
------- -------------- ------- -------
Cost of revenues:
Products 509 990 1,746 2,340
Services 1,518 2,215 3,372 6,549
------- -------------- ------- -------
Total cost of revenues 2,027 3,205 5,118 8,889
------- -------------- ------- -------
Gross profit 3,233 6,171 11,240 15,383
------- -------------- ------- -------
Operating expenses:
Engineering 1,309 1,421 4,238 4,227
Sales and marketing 3,388 3,638 9,960 10,466
Administration 859 1,119 2,472 3,456
------- -------------- ------- -------
Total operating expenses 5,556 6,178 16,670 18,149
------- -------------- ------- -------
Loss from operations (2,323) (7) (5,430) (2,766)
Gain / (loss) from currency fluctuations 378 (50) 301 (631)
Interest income 212 205 783 623
------- -------------- ------- -------
Income / (loss) before income taxes and minority interest (1,733) 148 (4,346) (2,774)
Provision for income taxes 77 36 114 114
------- -------------- ------- -------
Income / (loss) before minority interest (1,810) 112 (4,460) (2,888)
Minority interest 19 24 19 5
------- -------------- ------- -------
Net income / (loss) $(1,829) $ 88 $(4,479) $(2,893)
======= ============== ======= =======
Net income/(loss) per share, basic $ (0.19) $ 0.01 $ (0.46) $ (0.28)
======= ============== ======= =======
Weighted average shares outstanding, basic 9,819 10,379 9,767 10,251
======= ============== ======= =======
Net income/(loss) per share, diluted $ (0.19) $ 0.01 $ (0.46) $ (0.28)
======= ============== ======= =======
Weighted average shares outstanding, diluted 9,819 10,576 9,767 10,251
======= ============== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE> 5
ISOCOR
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1998 1999
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,478) $ (2,893)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Provision for doubtful accounts, returns and price protection 569 (69)
Depreciation and amortization 840 827
Amortization of deferred compensation 56 56
Minority interest -- (19)
(Increase) / decrease in:
Trade accounts receivable (998) 961
Other current assets (702) (1,074)
Other assets (116) (372)
Increase / (decrease) in:
Accounts payable 233 97
Accrued expenses 417 1,278
Deferred revenues 2,164 717
Other current liabilities 120 --
Other long-term liabilities 183 24
-------- --------
Net cash used by operating activities (1,712) (467)
-------- --------
Cash flows from investing activities:
Cash paid for acquisition, net of cash acquired (917) --
Purchase of property and equipment (413) (821)
Purchase of marketable securities (30,209) (15,678)
Sale of marketable securities 27,491 15,124
Marketable securities at maturity 3,999 1,000
-------- --------
Net cash used by investing activities (49) (375)
-------- --------
Cash flows from financing activities:
Proceeds from the sale of stock 321 706
-------- --------
Net cash provided by financing activities 321 706
-------- --------
Effect of exchange rate changes on cash (510) 738
-------- --------
Net increase / (decrease) in cash (1,950) 602
Cash and cash equivalents, beginning of period 10,784 9,656
-------- --------
Cash and cash equivalents, end of period $ 8,834 $ 10,258
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE> 6
ISOCOR
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------------
1998 1999 1998 1999
------- ---- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Net income/(loss) $(1,829) $ 88 $(4,478) $(2,893)
Loss from unrealized holdings -- (54) -- (54)
Income/(loss) from foreign currency translation (391) 110 (326) 616
------- ---- ------- -------
Comprehensive income/(loss) $(2,220) $144 $(4,804) $(2,331)
======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE> 7
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by ISOCOR
(the "Company"), pursuant to the regulations of the U.S. Securities and Exchange
Commission, but are not audited. In the opinion of management, the financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to fairly present the consolidated financial position at
September 30, 1999, the consolidated statements of operations and of
comprehensive income for the three and nine month periods ended September 30,
1998 and 1999, and the consolidated statements of cash flows for the nine month
periods ended September 30, 1998 and 1999. These interim statements do not
include all of the disclosures required by generally accepted accounting
principles for annual statements.
The statements of operations and cash flows for the 1999 interim periods are not
necessarily indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K as of
December 31, 1998, as filed with the Securities and Exchange Commission.
Concentration of credit risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash, cash equivalents, marketable securities
and accounts receivable. The Company's accounts receivable are derived from
sales directly to customers and indirectly through resellers, systems
integrators and OEMs. The Company performs ongoing credit evaluations of its
customers before granting uncollateralized credit and to date has not
experienced any unusual credit-related losses. At December 31, 1998 and
September 30, 1999, customers in the United States, Ireland and rest of Europe
represented 25%, 34% and 41%, and 21%, 36% and 43%, respectively, of the
Company's net accounts receivable. At December 31, 1998 and September 30, 1999,
the Company held balances in U.S. banks of approximately $1,805,000 and
$1,573,000, respectively, which exceeded federally insured limits. Cash
equivalents and marketable securities are managed by major investment firms in
accordance with the Company's investment policy.
Revenue recognition
In January 1998, the Company adopted the AICPA Accounting Standards Executive
Committee Statement of Position (SOP) 97-2, "Software Revenue Recognition," as
amended by SOP 98-9. 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. When the Company enters into a
license agreement with a customer requiring significant customization of the
software products, the Company recognizes revenue related to the license using
contract accounting. Deferred revenues represent the difference between amounts
invoiced and amounts recognized as revenues under software development and
maintenance agreements. The Company recognizes service revenues from customer
support and maintenance fees ratably over the term of the service period, which
is typically 12 months. Payments for maintenance fees are generally made in
advance. The Company recognizes service revenues from training activities as the
services are provided.
Segment reporting
The Company operates in a single reportable segment, the development, marketing
and support of electronic messaging and directory infrastructure software. The
Company's operations consist of engineering, sales and marketing, administration
and support in both the United States and Europe.
7
<PAGE> 8
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
2. 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. $165,000 is
included in other current liabilities and $48,000 is included in other long-term
liabilities in the accompanying consolidated balance sheets as of December 31,
1998 and September 30, 1999 for these remaining installments. The Company
accounted for this transaction as a purchase and accordingly, the purchase price
was allocated to assets acquired and liabilities assumed based upon their fair
value. The $843,000 paid in excess of the net assets acquired has been allocated
to goodwill, which is being amortized using the straight line method over an
estimated life of five years and is included in other assets in the accompanying
consolidated balance sheets as of December 31, 1998 and September 30, 1999, net
of accumulated amortization of $79,000 and $205,000, respectively. The Company
is committed to purchase the remaining 40% of System Wizards within the period
of January 1, 2000 and December 31, 2001 for a contingent amount based on
revenues and net profits of System Wizards for the four quarters preceding
exercise of the Company's option to purchase the remaining 40%, subject to
various adjustments and maximums. The results of operations for this investment
have been included in the consolidated statements of operations for the period
subsequent to the acquisition and were insignificant prior to the acquisition.
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, 1998 and September
30, 1999, net of accumulated amortization of $188,000 and $212,000,
respectively. The Company is committed to purchase the remaining 40 percent of
this sales and distribution company prior to 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. The Company has estimated the cost to acquire the
remaining 40% to be $1,000,000. This estimate is included in other assets and
accrued expenses in the accompanying consolidated balance sheet as of September
30, 1999. A final purchase price allocation to the net assets acquired will be
made in the first quarter of 2000. The pro forma effect of acquiring the
remaining minority interest to the results of operations is immaterial.
3. MARKETABLE SECURITIES
The Company held the following positions as of December 31, 1998 and September
30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
Corporate notes........................... $9,456 $5,030
U.S. Government obligations............... 0 3,979
------ ------
$9,456 $9,009
====== ======
</TABLE>
8
<PAGE> 9
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
4. ACCOUNTS RECEIVABLE
Trade accounts receivable, net of allowances as of December 31, 1998 and
September 30, 1999 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
Accounts receivable....................... $11,035 $ 9,384
Less: Allowance for doubtful accounts,
returns and price protection.............. (2,135) (1,953)
------- -------
$ 8,900 $ 7,431
======= =======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and September 30, 1999 were (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ------------------
(Unaudited)
<S> <C> <C>
Salaries and related expenses............. $1,262 $1,859
Payable to shareholder (See Footnote 2)... -- 1,000
Royalties................................. 401 503
Commissions............................... 461 738
Other..................................... 2,510 2,782
------ ------
$4,634 $6,882
====== ======
</TABLE>
6. INCOME TAXES
The sources of income/(loss) before income taxes for the three and nine months
ended September 30, 1998 and 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
United States $(1,807) $ (982) $(3,461) $(2,617)
Foreign 74 1,130 (884) (157)
------- ------- ------- -------
Income/(loss)
before income taxes
and minority
interest $(1,733) $ 148 $(4,345) $(2,774)
======= ======= ======= =======
</TABLE>
On an interim basis, the Company provides for income taxes using its estimated
effective tax rate for the year for foreign and domestic source income. As of
September 30, 1999, there are net operating loss carryforwards, which remain in
certain foreign jurisdictions. The taxes provided relate primarily to certain
foreign source income.
7. PER SHARE INFORMATION
Basic net 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 (loss) 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
9
<PAGE> 10
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
if all dilutive potential common shares had been issued. Potential common shares
related to stock options are excluded from the computation when their effect is
antidilutive. Common shares related to stock options that are antidilutive
amounted to approximately 2,369,331 at September 30, 1998. For the nine months
ended September 30, 1999, there were approximately 1,999,687 common shares
related to stock options that are antidilutive.
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share (EPS) computations for the three and nine months
ended September 30, 1998 and 1999 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1999 1998 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income/(loss) numerator
for basic and diluted EPS: $(1,829) $ 88 $(4,478) $(2,893)
------- ------ ------- -------
Denominator:
Denominator for basic EPS-
weighted average shares 9,819 10,379 9,767 10,251
Effect of dilutive securities:
Stock options -- 197 -- --
------- ------ ------- -------
Denominator for diluted EPS-
adjusted weighted average
shares and assumed conversions: 9,819 10,576 9,767 10,251
======= ====== ======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS
Included in revenues for the three months ended September 30, 1998 and 1999 was
approximately $39,000 and $328,000, respectively, relating to product sales to,
and software maintenance agreements with, an affiliate of a shareholder.
Revenues from this same affiliate for the nine months ended September 30, 1998
and 1999 were approximately $231,000 and $584,000, respectively. Included in
accounts receivable as of December 31, 1998 and September 30, 1999 was $82,000
and $309,000, respectively, relating to this affiliate.
Revenues from a distributor who is a shareholder for the nine months ended
September 30, 1998 and 1999 were approximately $45,000 and $0, respectively. In
the three months ended September 30, 1998 and 1999, there were no such revenues
from this same distributor.
Included in other assets as of September 30, 1999 was $500,000 for a loan to
Paul Gigg, Chief Executive Officer and $14,000 in accrued interest. The loan was
made pursuant to his relocation to the Los Angeles area and is collateralized by
real property currently owned by Mr. Gigg. Included in interest income for the
three months ended September 30, 1999 was approximately $6,000.
9. SUBSEQUENT EVENT
On October 20, 1999, Critical Path, Inc. signed a definitive acquisition
agreement to acquire the Company in an all stock transaction. Shareholders of
the Company will receive 0.4707 shares of Critical Path, Inc. common stock for
each share of the Company. This transaction is expected to close in the spring
of 2000, subject to various conditions including approval by the Company's
shareholders.
10
<PAGE> 11
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained in this Report on Form 10-Q, the
matters discussed herein are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. Factors that could affect results include
uncertainty related to the proposed acquisition of the Company by Critical Path,
Inc.; the mix of business between products and services; the type and size of
customers doing business with the Company and the structure of those
transactions, their product and services requirements and the impact of the
timing of revenues relative to expenses; timely development, introduction and
acceptance of new products and enhancements to existing products in evolving
markets; continued broad deployment and use of the Internet for electronic
messaging; expansion of the Company's ability to consummate relationships with
alliance partners; the impact of competitive announcements and products; the
rate of growth of the markets in which the Company competes; acquisition
activities and the ability to integrate acquired businesses successfully; the
impact of changes in accounting standards; the effect and rate of change in
standards and platforms for messaging products; the risks associated with the
Year 2000 issue on the Company's software products, internal IT systems, vendors
and customers, as well as the risk factors listed from time to time in the
Company's US Securities and Exchange Commission (SEC) reports, including but not
limited to the report on Form 10-K for the year ended December 31, 1998, and/or
Form 10-Q for the quarters ended in 1999, copies of which are available from
ISOCOR's Investor Relations Department or through the Electronic Data Gathering,
Analysis and Retrieval system (EDGAR) at www.sec.gov. The Company assumes no
obligation to update the forward-looking statements contained herein.
On October 20, 1999, the Company, Critical Path, Inc., a California corporation
("Parent"), and Initialize Acquisition Corp., a California corporation and
wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and
Plan of Reorganization (the "Reorganization Agreement") providing for the
acquisition of the Company by Parent. See "Pending Acquisition of the Company"
below.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues were $9,376,00 and $5,260,000 for the three
months ended September 30, 1999 and 1998, respectively, representing an increase
in 1999 of 78% over the same period one year ago.
On a geographic basis, revenues from North America sources accounted for
37% and 12% of total revenues, while revenues in the Company's European
marketplace accounted for 58% and 78% of total revenues in the three months
ended September 30, 1999 and 1998, respectively. The remaining 5% and 10% of
revenues in the three months ended September 30, 1999 and 1998, respectively,
were generated from sources outside North America and Europe, primarily from
Asia and South America.
The Company's volume of orders for the three months ended September 30,
1999 was approximately $9 million. The backlog is expected to flow into revenues
throughout the remainder of 1999 and into early 2000 subject to satisfying the
requirements of the contracts. This compares to a backlog of orders at September
30, 1998 of $4 million. The Company's worldwide business is evolving to include
more customers who are implementing larger-scale software systems. These systems
take more time to design, configure and implement. This evolution has a delaying
impact on the speed at which the Company recognizes its revenues, such that
larger projects will be recognized as revenue over several quarters.
Product revenues were $5,776,000 and $2,524,000 for the three months
ended September 30, 1999 and 1998, respectively. ISOCOR's Internet Messaging
product line consists primarily of the N-PLEX products, which accounted for
$3,162,000 or 55% of total product revenues in the three months ended September
30, 1999, more than doubling from the $1,204,000 level for the three months
ended September 30, 1998. Directory revenues accounted for $1,825,000 or 32% of
total product revenues in the three months ended September 30, 1999, increased
by 382% from the three months ended September 30, 1998
11
<PAGE> 12
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
level of $379,000 or 15% of total product revenues. The remainder of total
product revenues in the three months ended September 30, 1999 and 1998 relate
primarily to ISOCOR's older non-Internet related product lines.
Service revenues were $3,600,000 and $2,736,000 for the three months
ended September 30, 1999 and 1998, respectively. The 32% increase from 1998 to
1999 resulted primarily from increased customer demand for solutions
incorporating both products and professional services.
Cost of Revenues. Cost of product revenues consists primarily of media
duplication, manuals and packaging materials and personnel and facility costs
associated with the assembly operation, costs of hardware purchased from third
party vendors and third party royalties relating to licensed technology. The
increase in cost of product revenues to $990,000 in the three months ended
September 30, 1999 from $509,000 in the three months ended September 30, 1998,
respectively, resulted primarily from higher third party royalties related to
increased volumes sold of certain of its Internet-related royalty-bearing
products.
Cost of service revenues consists primarily of personnel-related costs
of providing custom services and software support and update services. The
increase in cost of service revenues to $2,215,000 for the three months ended
September 30, 1999 from $1,518,000 for the three months ended September 30, 1998
resulted primarily from increased personnel-related costs associated with
supporting a higher level of service revenues.
Gross Profit. Gross profit was $6,171,000 and $3,233,000 for the three
months ended September 30, 1999 and 1998, respectively, representing 66% and 61%
of revenues for those same periods, respectively. The principal reason for the
increase in gross margin percentage between 1998 and 1999 is an increasing
percentage of total revenues with its associated higher gross margins partially
offset by decreased services gross margins.
Gross profit from product sales was $4,786,000 and $2,015,000 for the
three months ended September 30, 1999 and 1998, respectively. This represents
83% and 80% of product sales for the three months ended September 30, 1999 and
1998, respectively. The increase in gross profit percentage between the periods
was due to the fixed cost components of cost of sales spread over a higher
product revenue base in the three months ended September 30, 1999 versus
September 30, 1998.
Gross profit from services was $1,385,000 and $1,218,000 for the three
months ended September 30, 1999 and 1998, respectively, representing 38% and 45%
of services revenues for those same periods, respectively. The decrease in gross
profit percentage between the periods was primarily driven by increased levels
of personnel, and thus associated costs, required to provide these services.
Engineering. Engineering expenses were $1,421,000 and $1,309,000 for the
three months ended September 30, 1999 and 1998, respectively, representing 15%
and 25% of revenues for those same periods, respectively. The percentage
decrease is principally driven by the higher revenue base in the three months
ended September 30, 1999 versus September 30, 1998.
Sales and Marketing. Sales and marketing expenses were $3,638,000 and
$3,388,000 for the three months ended September 30, 1999 and 1998, respectively,
representing 39% and 64% of revenues for those same periods, respectively. The
absolute increase is primarily attributable to increased operating expenses
associated with recruiting and commissions based on higher revenues. The
percentage decrease is principally driven by the higher revenue base in the
three months ended September 30, 1999 versus September 30, 1998.
Administration. Administration expenses were $1,119,000 and $859,000 for
the three months ended September 30, 1999 and 1998, respectively, representing
12% and 16% of revenues for those same periods, respectively. The absolute
increase is primarily attributable to the increased operating expenses
associated with increased consulting and outside service fees. The percentage
decrease is principally driven by the higher revenue base in the three months
ended September 30, 1999 versus September 30, 1998.
12
<PAGE> 13
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $50,000 and $(378,000) for the three months ended September 30,
1999 and 1998, respectively. The fluctuation during these periods resulted
principally from changes in foreign currency exchange rates.
Interest income. Interest income was $205,000 for the three months
September 30, 1999 as compared with $212,000 in the same period in 1998.
Provision for Income Taxes. The income tax provision was $36,000 and
$77,000 for the three months ended September 30, 1999 and 1998, respectively, on
a pre-tax gain/(loss) of $148,000 and ($1,733,000) for the three months ended
September 30, 1999 and 1998, respectively, which resulted from taxes on the
Company's foreign operations.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues were $24,272,000 and $16,358,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing an increase
in 1999 of 48% over the same period one year ago. Revenues from domestic sources
accounted for approximately 32% and 27% of total revenues in the nine months
ended September 30, 1999 and 1998, respectively, while the Company's European
marketplace revenues accounted for 59% and 60%, respectively, of the Company's
total revenues in the same periods. The remaining 9% and 13% of revenues in the
three months ended September 30, 1999 and 1998, respectively, were generated
from sources outside North America and Europe, primarily from Asia and South
America.
Product revenues were $14,456,000 and $10,019,000 for the nine months
ended September 30, 1999 and 1998, respectively. ISOCOR's Internet Messaging
product line consists primarily of the N-PLEX products, which accounted for
$7,381,000 or 51% of total product revenues in the nine months ended September
30, 1999, up from the nine months ended September 30, 1998 level of $4,938,000
or 49% of total product revenues. Directory revenues accounted for $3,747,000 or
26% of total product revenues in the nine months ended September 30, 1999, up
from the nine months ended September 30, 1998 level of $1,484,000, or 15% of
product revenues. The Company's worldwide Internet Messaging and Directory
business includes customers who are implementing large-scale/complex software
systems. These systems take time to design, configure and implement. This has a
delaying impact on the speed at which the Company recognizes its revenues, such
that large projects will be recognized as revenue over several quarters.
In the nine months ended September 30, 1999 and 1998 product revenues
driven by the demand for non-Internet related solutions were $3,329,000 and
$3,597,000 of product revenues, respectively. This slight decrease was primarily
due to decreased volumes of the Company's products relating to a continuing
shift in market demand away from the Company's older non-Internet related
product lines, partially offset by increased prices. The Company believes that
this marketplace and the related revenues will continue to decline slowly
through the remainder of 1999 and beyond.
Service revenues were $9,816,000 and $6,339,000 for the nine months
ended September 30, 1999 and 1998, respectively. The 55% increase from 1998 to
1999 resulted primarily from increased volumes of software support and update
services; increased levels of custom services revenues largely driven by the
increased customer demand for ISOCOR's solutions incorporating both products and
services; and to a lesser extent due to 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.
Cost of Revenues. Cost of product revenues consists primarily of costs
of media duplication, manuals and packaging materials, hardware purchased from
third party vendors and third party royalties relating to licensed technology.
The increase in cost of product revenues to $2,340,000 from $1,746,000 in
13
<PAGE> 14
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
the nine months ended September 30, 1999 to September 30, 1998, respectively,
resulted primarily from increased hardware purchased from third party vendors.
Cost of service revenues consists primarily of personnel-related costs
of providing custom services and software support and update services. The
increase in cost of service revenues from $3,372,000 for the nine months ended
September 30, 1998 to $6,549,000 for the nine months ended September 30, 1999
resulted from increased personnel and related costs associated with supporting a
higher level of service revenues and includes the services cost of sales
attributable to the Company's acquisition of a 60% interest in System Wizards,
S.p.A. in the third quarter of 1998.
Gross Profit. Gross profit was $15,383,000 and $11,240,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing 63% and 69%
of revenues for those same periods, respectively. The decrease in gross profit
percentage between the periods was driven primarily by the change in services
gross margin.
Gross profit from product sales was $12,116,000 and $8,273,000 for the
nine months ended September 30, 1999 and 1998, respectively, representing 84%
and 83% of product sales for the nine months ended September 30, 1999 and 1998,
respectively. The slight increase in the gross profit percentage is due to the
fixed cost component of costs of sales spread over a higher product revenue
base for the nine months ended September 30, 1999 versus September 1998.
Gross profit from services was $3,267,000 and $2,967,000 for the nine
months ended September 30, 1999 and 1998, respectively, representing 33% and 47%
of services revenues for those same periods, respectively. The decrease in gross
profit percentage between the periods was primarily driven by increased levels
of personnel required to provide these services, partially attributable to the
Company's acquisition of a 60% interest in System Wizards, S.p.A. in the third
quarter of 1998.
Engineering. Engineering expenses were $4,227,000 and $4,238,000 for the
nine months ended September 30, 1999 and 1998, respectively, representing 17%
and 26% of revenues for those same periods, respectively. The percentage decline
in engineering expenses is affected by the higher revenue in the nine months
ended September 30, 1999.
Sales and Marketing. Sales and marketing expenses were $10,466,000 and
$9,960,000 for the nine months ended September 30, 1999 and 1998, respectively,
representing 43% and 61% of revenues for those same periods, respectively. The
absolute increase in sales and marketing expenses resulted principally from
operating expenses associated with higher commissions on higher revenues for the
nine months ended September 30, 1999 versus 1998 and partially from the
Company's acquisition of a 60% interest in an Italy based services company in
the third quarter of 1998. The decrease in sales and marketing expenses as a
percentage of revenues is affected by the higher revenue in the nine months
ended September 30, 1999.
Administration. Administration expenses were $3,456,000 and $2,472,000
for the nine months ended September 30, 1999 and 1998, respectively,
representing 14% and 15% of revenues for those same periods, respectively. The
absolute increase in administration expenses resulted principally from the
increased operating expenses associated with increased consulting and
professional service fees and partially attributable to the increased operating
expenses associated with the Company's acquisition of a 60% interest in System
Wizards, S.p.A. in the third quarter of 1998.
(Income) loss from currency fluctuations. (Income) loss from currency
fluctuations was $631,000 and $(301,000) for the nine months ended September 30,
1999 and 1998, respectively. The fluctuation during these periods resulted
principally in Ireland due to the strength of the US dollar against local
currencies.
Interest income. Interest income was $623,000 for the nine months ended
September 30, 1999 as compared with $784,000 in the same period in 1998. The
decrease is primarily related to decreased levels of marketable securities
during the first six months of 1999 as compared to the same period in 1998.
14
<PAGE> 15
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Provision for Income Taxes. The income tax provision was $114,000 for
both the nine months ended September 30, 1999 and 1998, on pre-tax losses of
$2,774,000 and $4,345,000, which resulted from taxes on the Company's foreign
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash usage from operating activities of $467,000 and $1,712,000
for the nine months ended September 30, 1999 and 1998, respectively, decreased
period over period by $1,245,000. Operating cash flows for the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998 were
positively affected by an increased cash flow relative to a decreased operating
loss (net of adjustments due to depreciation and amortization and the provision
for doubtful accounts, returns and price protection) and decreased level of
trade accounts receivable offset by increased level of accrued expenses,
deferred revenues and other current assets. Cash flow from operations can vary
significantly from quarter to quarter depending upon the timing of operating
cash receipts and payments, especially accounts receivable and accounts payable.
As of September 30, 1999, total accounts receivable, net was $7,431,000 versus
$8,900,000 at December 31, 1998. The lower accounts receivable balance at
September 30, 1999 is partially attributable to increased cash collections in
the nine months ended at that same date. Certain portions of the Company's
larger sales have payment terms up to 120 days, thus slowing the cash flow
cycle, and the company expects that future large sales will follow the same
pattern. The Company does not believe these payment terms are likely to have a
material adverse effect on the collectibility of the related receivables.
As of September 30, 1999, the Company had a balance of $10,258,000 in cash and
cash equivalents, and a balance of $9,009,000 in marketable securities. The
Company believes that these existing capital resources will be adequate to
finance the Company's operations and capital expenditures through at least the
end of 2000.
YEAR 2000 COMPLIANCE
The Company is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems and the Company's
software products to process information accurately that may be date-sensitive.
Any of the Company's programs or products that recognize a date using "00" as
the year 1900 rather than the year 2000 could result in errors or system
failures. The Company utilizes a number of computer programs across its entire
operation. The Company is assessing both the readiness of its internal computer
systems and software, and the compliance of its software licensed to customers,
for handling the year 2000.
The Company relies on a variety of internal computer systems, as well as
services provided by third parties, in the operation of its business. The
Company has substantially completed its assessment of the impact of the year
2000 problem upon such systems, and does not believe that any of such systems
are mission-critical to the Company's business operations such that a failure in
such systems would have an immediate adverse effect on the Company's business,
financial condition or results of operations. At this time, the Company believes
that its systems are year 2000 compliant and is in the final stages of
completing the process of taking steps or monitoring the actions of its
suppliers with respect to those systems. The Company's internal systems run on
personal computers and microprocessor-based computer servers set up in a
workstation environment and should not be susceptible to universal failures.
Were system failures to occur as a result of the year 2000 issue, the Company
believes that its on-site engineers and technical personnel would be able to
address and resolve such issues prior to the occurrence of any material adverse
effect on the Company's business operations. The failure of certain of the
systems upon which the Company relies, such as payroll and banking services,
could, however, be disruptive to the Company's business operations if such
systems
15
<PAGE> 16
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
were unavailable for an extended period of time. The Company is in the final
stages of completing its process of making inquiries with the providers of such
types of services to determine their year 2000 readiness. The Company believes
that its business operations would not be materially adversely effected by short
disruptions in such services and that the providers of such services (who also
typically service many other business customers) will take steps to rectify any
failures as soon as possible. More generally, the Company does not believe that
its risks with regard to failures in the power grid or general communications,
building security and similar systems place the Company in a unique position
relative to year 2000 issues as compared to other businesses.
The Company is in the final stages of testing and upgrading, where necessary, of
the current versions of its currently-offered software products to address the
year 2000 issue and year 2000 compliant versions of its current products are
available. The Company believes that a number of its older or obsolete products
and/or versions are not year 2000 compliant, and the Company currently does not
intend to update such products or versions. The Company has taken and plans to
continue to take appropriate steps to notify its customers and distribution
channels about the year 2000 issues associated with the Company's older and
discontinued products. The Company maintains on its website a list of the
Company's current year 2000-compliant products (by product and version number).
Customers under current support and maintenance agreements with the Company are
entitled to upgrade to a year 2000-compliant replacement product. The Company
has completed a mailing to its customers under support and maintenance
agreements and has conducted a general customer mailing (including the Company's
distribution channels and customers not under maintenance and support
agreements) regarding the Company's year 2000 upgrade plans and the possible
solutions. The Company has given certain of its customers warranties with
respect to year 2000 compliance and may have to offer updates, workarounds or
replacement products to those customers. Through its website, the Company is
encouraging customers not under support and maintenance agreements to contact
the Company regarding possible upgrades or migration paths to address year 2000
issues. In addition to the information contained on the Company's website, the
Company's regular newsletter contains similar information regarding year 2000
issues. In certain cases, however, customers may need to make hardware and/or
operating system changes in order to implement a year 2000 solution. In other
cases, the Company will not be able to offer a solution. In the event that any
of the products that the Company has made year 2000-compliant suffer
unanticipated failures as a result of year 2000 problems, the Company would
deploy its engineering and technical support resources to implement a solution.
The Company believes that its customers are currently undergoing evaluations of
their needs to achieve Year 2000 compliance and in are various states of
readiness. The Company believes that for some customers, this may slow down
their software purchases as they devote more time to preparing and testing their
systems for year 2000 readiness, versus evaluating and implementing new systems.
Therefore, such customers may choose to defer system investments during 1999,
negatively impacting the Company's revenues. Because Year 2000 related impacts
on customer purchasing decisions are unprecedented, the Company has a limited
ability to forecast accurately the impact of the Year 2000 issue on its
revenues.
Some of the Company's products incorporate software code supplied by third
parties. The Company relies upon such vendors to ensure that such code is
updated to address year 2000 issues where appropriate. Because such third
parties license their code to others in addition to the Company, the Company
believes that such third parties will take measures to address any year 2000
issues with respect to such code. However, in the event that such third parties
do not take actions to make the code year 2000-compliant or their actions prove
insufficient, and where the Company has the right to make code modifications,
the Company believes that its technical personnel, who are familiar with the
code used in the Company's products, could make necessary modifications to
correct problems that arise.
The Company has not incurred substantial costs to date to address the year 2000
issue and does not expect the total costs of such project to be material to the
Company's financial position. To date, the Company has spent approximately
$300,000 in connection with actions taken by the Company to address year 2000
16
<PAGE> 17
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
problems and estimates remaining costs to be immaterial. Such costs are being
expensed as they are incurred and are being funded through operating cash flow.
Cost estimates are based on currently available information. Factors that could
affect these estimates include, but are not limited to, the availability and
cost of trained personnel to evaluate and implement necessary changes, the
ability to locate and correct noncompliant systems and the ability of the
Company's customers and service providers to successfully implement year 2000
compliant systems or fixes. Any failure by the Company to make its products year
2000 compliant could result in a decrease in sales of the Company's products
and/or possible claims against the Company by customers as a result of year 2000
problems caused by the Company's products. Despite the Company's efforts to
address the year 2000 impact on its internal systems, products and business
operations, the year 2000 issue may result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations.
EURO IMPACT
In January 1999, eleven European countries, including Ireland, Germany and
Italy, where the Company maintains significant operations, initiated the process
to replace their individual national currencies with a single, shared new
currency (the "Euro") as part of the program of European Economic and Monetary
Union. It is expected that this process will be completed at the latest by end
of June in the year 2002. Although transactions during this transitional period
may still be consummated in the individual currencies of the member countries,
the Company will be required to, and is currently in the process of,
implementing modifications to its accounting systems as well as its contracts
and other obligations in order to accommodate the Euro. The Company does not
currently believe that it will incur a material financial expense in connection
with such modifications. The introduction of the Euro, presents certain risks
for the Company including, risks associated with its reduced ability to adjust
pricing of its products based on local currencies, fluctuations in the Euro
based on economic turmoil in countries other than those in which the Company
does business and other risks normally associated with doing business in
international currencies, any of which could have an adverse effect on the
Company's business, financial condition and results of operations.
PENDING ACQUISITION OF THE COMPANY
The Reorganization Agreement the Company has entered into with Critical Path,
Inc., a California corporation ("Parent") and Initialize Acquisition Cap, a
California corporation and wholly owned subsidiary of Parent ("Merger Sub") sets
forth the terms and conditions of the proposed merger of Merger Sub with and
into the Company (the "Merger"). Upon effectiveness of the Merger, each
outstanding share of common stock, no par value, of the Company (the "Company
Common Stock"), other than shares held by the Company, Parent or any subsidiary
thereof or shares qualifying as dissenting shares pursuant to the California
Corporations Code, will be converted into the right to receive 0.4707 of a share
of common stock, no par value, of Parent (the "Parent Common Stock"). As a
result of the Merger, the Company will become a wholly owned subsidiary of
Parent. The parties intend for the Merger to be treated as a tax-free
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended, and as a "purchase" for accounting purposes.
Consummation of the Merger is subject to the satisfaction or waiver of certain
conditions, including (1) approval by the shareholders of the Company of the
Reorganization Agreement, a related agreement of merger and the Merger; (2)
effectiveness of a registration statement registering with the Securities and
Exchange Commission the shares of Parent Common Stock to be issued in the Merger
to the shareholders of the Company; (3) approval of the listing of such shares
of Parent Common Stock by The Nasdaq Stock Market; (4) expiration or termination
of all applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended; (5) less than 5% of the outstanding shares
of the Company Common Stock having qualified as dissenting shares under the
California Corporations Code; (6) effectiveness of employment offer letters
between Parent and each of certain officers and employees of the Company and the
execution and delivery by such persons of Covenants Not to Compete or Solicit
with Parent; and (7) certain other customary conditions.
17
<PAGE> 18
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Pursuant to an employment offer letter executed by Parent and Paul Gigg,
President and Chief Executive Officer of the Company, after the Merger Paul Gigg
will become Executive Vice President and Chief Operating Officer of Parent. Upon
effectiveness of the Merger, outstanding director and employee options to
purchase Company Common Stock will be assumed by Parent and become options to
purchase shares of Parent Common Stock. The exercise price and number of shares
of Company Common Stock subject to each such option will be appropriately
adjusted to reflect the Exchange Ratio. Also a result of the Merger, each
outstanding purchase right under the Company's Employee Stock Purchase Plan will
become a right to purchase a number of shares of Parent Common Stock equal to
the Exchange Ratio.
Pursuant to a Stock Option Agreement, dated as of October 20, 1999 (the "Option
Agreement"), between the Company and Parent, the Company has granted Parent an
option (the "Option") to purchase up to 19.9% of the outstanding Company Common
Stock. The Option is exercisable under certain circumstances following the
termination of the Reorganization Agreement.
The Reorganization Agreement contains an $11,484,800 termination fee payable by
the Company to Parent under certain circumstances in connection with the
termination of the Reorganization Agreement. Such termination fee plus any
amounts payable to Parent by the Company in cancellation of the Option pursuant
to the Option Agreement may not exceed $14,355,800. In the event that a
termination fee is payable, the Company must reimburse up to $2 million of
Parent's expenses incurred in connection with the Reorganization Agreement.
Subject to satisfaction (or waiver) of the various conditions to completion of
the Merger, the Company currently anticipates that the Merger will become
effective during the first quarter of 2000.
18
<PAGE> 19
ISOCOR
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(a) Quantitative Information About Market Risk
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio. The Company maintains
an investment policy designed to ensure the safety and preservation of its
invested funds by limiting default risk, market risk, and reinvestment risk. As
of September 30, 1999, the Company had $10,258,000 of cash and cash equivalents
and $9,009,000 in short-term investments with a weighted average variable rate
of 3.43% and 5.14%, respectively.
The Company attempts to mitigate default risk by attempting to invest in
high credit quality securities, by constantly positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor and by placing its portfolio under the management
of professional money managers who invest within specified parameters
established by the Board of Directors. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio liquidity
and maintains a prudent amount of diversification.
(b) Qualitative Information About Market Risk
While the Company's consolidated financial statements are prepared in
United States dollars, a substantial portion of the Company's worldwide
operations have a functional currency other than the United States dollar. In
particular, the Company maintains substantial development operations in Ireland,
where the functional currency is the Irish Pound, Germany where the functional
currency is the German Mark and Italy, where the functional currency is the
Lira. In addition, a significant portion of the Company's revenues are also
denominated in currencies other than the United States dollar. Fluctuations in
exchange rates may have a material adverse effect on the Company's results of
operations and could also result in exchange losses. The impact of future
exchange rate fluctuations cannot be predicted adequately. To date, the Company
has not sought to hedge the risks associated with fluctuations in exchange
rates, but may undertake such transactions in the future. The Company does not
have a policy relating to hedging. There can be no assurance that any hedging
techniques implemented by the Company would be successful or that the Company's
results of operations will not be materially adversely affected by exchange rate
fluctuations.
PART II Other Information
Item 6. - Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
27.1-Financial Data Schedule.
(b) No reports on Form 8-K have been filed during the quarter for which
this report has been filed.
19
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by Janine M. Bushman, thereunto duly authorized to sign on behalf of the
registrant and as the principal financial officer thereof.
ISOCOR
Date: November 12, 1999 By: /s/ JANINE M. BUSHMAN
---------------------------------
Janine M. Bushman, Vice President,
Finance and Administration, and
Chief Financial Officer (Principal
Financial and Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibits Page
- ------- -------- ----
<S> <C> <C>
27.1 Financial Data Schedule................22
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,258
<SECURITIES> 9,009
<RECEIVABLES> 9,384
<ALLOWANCES> 1,953
<INVENTORY> 0
<CURRENT-ASSETS> 29,380
<PP&E> 9,070
<DEPRECIATION> 6,808
<TOTAL-ASSETS> 33,944
<CURRENT-LIABILITIES> 15,543
<BONDS> 0
0
0
<COMMON> 40,518
<OTHER-SE> (22,268)
<TOTAL-LIABILITY-AND-EQUITY> 33,944
<SALES> 24,272
<TOTAL-REVENUES> 24,272
<CGS> 2,340
<TOTAL-COSTS> 8,889
<OTHER-EXPENSES> 18,149
<LOSS-PROVISION> 534
<INTEREST-EXPENSE> (623)
<INCOME-PRETAX> (2,774)
<INCOME-TAX> 114
<INCOME-CONTINUING> (2,888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,893)
<EPS-BASIC> (.28)
<EPS-DILUTED> (.28)
</TABLE>
