-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BTT0zzXHrqApHSvM5pHOu5H6Q4TiXCmEIUlIwr2oyj5kPR3tF4OZb4n+GR3itVPv 4J14eZinf97gg/NWJ9VDJg== 0000950148-97-002882.txt : 19971117 0000950148-97-002882.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950148-97-002882 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISOCOR CENTRAL INDEX KEY: 0000879283 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 954310259 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27900 FILM NUMBER: 97719635 BUSINESS ADDRESS: STREET 1: 3420 OCEAN PARK BLVD CITY: SANTA MONICA STATE: CA ZIP: 90405 MAIL ADDRESS: STREET 2: 3420 OCEAN PARK BLVD SUITE 2010 CITY: SANTA MONICA STATE: CA ZIP: 904053306 10-Q 1 FORM 10-Q 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, 1997 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 incorporation or (I.R.S. Employer Identification No.) organization) 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 [ ] 9,463,090 shares of Common Stock of the Registrant were outstanding as of September 30, 1997
2 ISOCOR INDEX TO FORM 10-Q
Page ---- Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets at September 30, 1997 and December 31, 1996..................................................... 3 Consolidated Statements of Operations for the three and nine months ended September 30, 1997 and 1996......................................... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996.................................. 5 Notes to Consolidated Financial Statements................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 13 Part II Other Information Item 2. Change in Securities and Use of Proceeds..............................14 Item 6. Exhibits and Reports on Form 8-K..................................... 14 Signature........................................................................ 15
2 3 ISOCOR CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31, 1997 1996 ------------- ------------- (unaudited) (audited) ASSETS Current assets: Cash and cash equivalents $ 10,322 $ 13,374 Marketable securities 10,693 11,739 Trade accounts receivable Customer, net 8,711 11,160 Related party 72 74 Other current assets 1,862 1,618 ------------- ------------- Total current assets 31,660 37,965 Property and equipment, net 2,658 2,990 Other assets 287 343 ------------- ------------- Total assets $ 34,605 $ 41,298 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 933 $ 819 Other accrued expenses 2,937 3,677 Deferred revenues 3,352 2,730 Product development obligation 76 380 Other current liabilities 230 301 ------------- ------------- Total current liabilities 7,528 7,907 Other long-term liabilities 144 187 ------------- ------------- Total liabilities 7,672 8,094 Commitments and contingencies Shareholders' equity: Common stock, authorized 50,000,000 shares, issued and outstanding 9,463,090 and 9,315,241 shares at September 30, 1997 and December 31, 1996, respectively 39,258 39,047 Notes receivable from shareholders (26) (26) Accumulated deficit (12,121) (5,680) Deferred compensation (149) (205) Cumulative foreign currency translation adjustment (29) 68 ------------- ------------- Total shareholders' equity 26,933 33,204 ------------- ------------- Total liabilities and shareholders' equity $ 34,605 $ 41,298 ============= ============= The accompanying notes are an integral part of these consolidated financial statements
4 ISOCOR CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Products: Customer $ 4,464 $ 5,185 $ 10,851 $ 15,310 Related parties 91 28 95 459 Services: Customer 1,618 1,175 4,404 3,545 Related parties 14 25 26 74 -------- -------- -------- -------- Total revenues 6,187 6,413 15,376 19,388 Cost of revenues: Products 808 517 1,743 2,066 Services 753 601 2,026 1,757 -------- -------- -------- -------- Total cost of revenues 1,561 1,118 3,769 3,823 -------- -------- -------- -------- Gross profit 4,626 5,295 11,607 15,565 -------- -------- -------- -------- Operating expenses: Engineering 2,017 2,318 6,244 6,689 Sales and marketing 3,168 2,261 10,556 7,167 Administration 714 634 2,282 1,889 Agency grants 0 (117) (69) (373) -------- -------- -------- -------- Total operating expenses 5,899 5,096 19,013 15,372 -------- -------- -------- -------- Income (loss) from operations (1,273) 199 (7,406) 193 Acquisition costs 0 182 0 182 (Income) loss from currency fluctuations 23 (15) (93) 49 Interest income (285) (326) (893) (687) -------- -------- -------- -------- Income (loss) before income taxes (1,011) 358 (6,420) 649 Provision for income taxes 3 95 22 375 -------- -------- -------- -------- Income (loss) before minority interest (1,014) 263 (6,442) 274 Minority interest 0 (26) 0 0 -------- -------- -------- -------- Net Income (loss) ($ 1,014) $ 289 ($ 6,442) $ 274 ======== ======== ======== ======== Net income (loss) per share $ (0.11) $ 0.03 $ (0.69) $ 0.03 ======== ======== ======== ======== Shares used in per share calculation 9,429 10,452 9,405 7,947 ======== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements
5 ISOCOR CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Nine Months Ended September 30 ------------------------------- 1997 1996 ------------ ------------ Cash flows from operating activities: Net (loss) income ($6,442) $ 274 Adjustments to reconcile net loss to net Cash provided (used) by operating activities: Provision for doubtful accounts, returns and price protection 457 586 Depreciation and amortization 1,018 975 Amortization of deferred compensation 56 56 Deferred rent (26) (16) (Increase) / decrease in: Accounts receivable 1,045 (1,894) Other current assets (388) (157) Other assets (10) (15) Increase / (decrease) in: Accounts payable 11 (286) Other accrued expenses (92) 635 Deferred revenues 843 806 Other current liabilities (221) 94 Product development obligation (304) (216) Long-term liabilities (7) (78) ------------ ------------ Net cash (used) provided by operating activities (4,060) 764 ------------ ------------ Cash flows from investing activities: Purchase of property and equipment (859) (1,458) Purchase of marketable securities 1,046 (12,474) Sale of minority interest in non-consolidated subsidiary 0 547 ------------ ------------ Net cash provided (used) by investing activities 187 (13,385) ------------ ------------ Cash flows from financing activities: Proceeds from the sale of stock, net 211 20,153 ------------ ------------ Net cash provided by financing activities 211 20,153 ------------ ------------ Effect of exchange rate changes on cash 610 (95) ------------ ------------ Net (decrease) increase in cash (3,052) 7,437 Cash and cash equivalents, beginning of period 13,374 5,880 ------------ ------------ Cash and cash equivalents, end of period $ 10,322 $ 13,317 ============ ============ The accompanying notes are an integral part of these consolidated financial statements
6 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 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. 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, 1997, the consolidated results of operations for the three and nine month periods ended September 30, 1997 and 1996, and the consolidated cash flows for the nine month periods ended September 30, 1997 and 1996. 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 1997 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, 1996, as filed with the Securities and Exchange Commission. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company's accounts receivable are derived from sales directly to customers and indirectly through resellers, systems integrators and OEMs. The Company performs ongoing credit evaluations of its customers before granting uncollateralized credit and to date has not experienced any unusual credit-related losses. Cash equivalents are managed by major investment firms in accordance with the Company's investment policy. At September 30, 1997, the Company held balances in U.S. banks of approximately $135,000 which exceeded federally insured limits. Statement of Financial Accounting Standards Not Yet Adopted In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share." This statement requires dual presentation of newly defined basic and diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. The accounting standard is effective for both interim and annual periods ending after December 15, 1997 and requires restatement of all prior period EPS data presented. Earlier application is not permitted. The Company is currently evaluating the requirements of SFAS No. 128. On June 30, 1997, the Financial Accounting Standards Board issued SFAS No. 130, "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. This accounting standards is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. The Company is currently evaluating the requirements of SFAS No. 130. On June 30, 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management is currently evaluating the requirements of SFAS No. 131. 6 7 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 2. MARKETABLE SECURITIES At September 30, 1997, the Company held the following positions (dollars in thousands): September 30, 1997 ------------------ Corporate notes........................... $10,198 U.S. Government obligations............... 495 ------- $10,693 ======= 3. ACCOUNTS RECEIVABLE Customer trade accounts receivable, net of allowances as of September 30, 1997 and December 31, 1996, were (dollars in thousands):
September 30, 1997 December 31, 1996 ------------------ ----------------- Accounts receivable............................... $ 10,683 $12,807 Less: Allowance for doubtful accounts, returns and price protection.................................. (1,972) (1,647) -------- ------- $ 8,711 $11,160 ======== =======
4. OTHER ACCRUED EXPENSES Other accrued expenses include (dollars in thousands):
September 30, 1997 December 31, 1996 ------------------ ----------------- Salaries and related expenses............. $1,187 $1,196 Commissions............................... 385 440 Royalties................................. 179 556 Other..................................... 1,186 1,485 ------ ------ $2,937 $3,677 ====== ======
7 8 ISOCOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 5. INCOME TAXES The source of income (loss) before income taxes for the three and nine months ended September 30, 1997 and 1996 is as follows (dollars in thousands):
Three months ended Nine months ended September 30, September 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ------------- ------------- ------------- ------------- United States....... $ (48) $(420) $(1,891) $(1,389) Foreign............. (963) 778 (4,529) 2,038 ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest............ $(1,011) $358 $(6,420) $649 ------------- ------------- ------------- -------------
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, 1997, no net operating loss carryforwards remain in foreign jurisdictions. The taxes provided relate primarily to foreign source income. 6. PER SHARE INFORMATION Net income (loss) per common share is computed using the weighted average number of shares of Common Stock and common equivalent shares outstanding. Common equivalent shares related to stock options are excluded from the computation when their effect is antidilutive. All of the 475,000 common shares of the Company issued to effect the business combination with NetCS have been treated as outstanding for all periods presented for the computation of the weighted average number of shares outstanding as required for "pooling of interests" accounting treatment. 7. RELATED PARTY TRANSACTIONS Included in revenues for the three months ended September 30, 1997 and 1996 was approximately $14,000 and $26,000, 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, 1997 and 1996 were approximately $26,000 and $292,000, respectively. Included in accounts receivable as of September 30, 1997 was approximately $27,000 relating to this affiliate. Included in operating expenses for the three months ended September 30, 1997 and 1996 were approximately $22,000 and $35,000, respectively, relating to consulting services provided by this affiliate. Operating expenses relating to this same affiliate for the nine months ended September 30, 1997 and 1996 were approximately $135,000 and $109,000, respectively. Included in accounts payable as of September 30, 1997 was approximately $56,000 related to these consulting services. Included in revenues for the three months ended September 30, 1997 and 1996 were approximately $95,000 and $27,000, respectively, relating to software license and maintenance agreements with a shareholder. Revenues from this same shareholder for the nine months ended September 30, 1997 and 1996 were approximately $94,000 and $241,000, respectively. Included in accounts receivable as of September 30, 1997 was approximately $45,000 relating to this affiliate. 8 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The consolidated financial statements of the Company contained in this report have been retroactively restated for all periods presented to include the financial position, results of operations and cash flows of NetCS Informationstechnik GmbH in accordance with the pooling of interests method of accounting. 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 the actual results to differ materially from those projected. Factors that could cause actual results to differ materially include, but are not limited to, the introduction and market acceptance of new products offered by the Company and its competitors, the volume and timing of large transactions with customers, the level of product and price competition, the Company's success in expanding its direct sales force and indirect distribution channels, the risks related to international operations, the effect of shifting standards and platforms for messaging products, and other risks detailed below and discussed 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. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Revenues. Total revenues were $6,187,000 and $6,413,000 for the three months ended September 30, 1997 and 1996, respectively, representing a 4% decrease in 1997 over the same period one year ago. Revenues from domestic sources accounted for approximately 29% and 27% of total revenues in the three months ended September 30, 1997 and 1996, respectively, while the Company's international revenues accounted for 71% and 73%, respectively, of the Company's total revenues in the same periods. Within international revenues, revenues outside of Europe accounted for approximately 21% and 4% of total revenues in the three months ended September 30, 1997 and 1996, respectively. The increase in the three months ended September 30, 1997 is largely due to increased revenues in South America, which the Company does not view as an upward trend. Product revenues were $4,555,000 and $5,213,000 for the three months ended September 30, 1997 and 1996, respectively. The 13% decrease from 1996 to 1997 was mainly due to decreased volumes of, and declining prices for, the Company's X.400 products, partially offset by increased volumes of the Company's newer Internet/Intranet products. The decreased volumes of X.400 products sold relate primarily to a continuing shift in market demand away from the Company's X.400 product lines which the Company expects to continue. Service revenues were $1,632,000 and $1,200,000 for the three months ended September 30, 1997 and 1996, respectively. The 36% increase from 1996 to 1997 resulted primarily from increased software support and update service fees, and to a lesser extent from increased custom engineering services. Cost of Revenues. Cost of product revenues were $808,000 and $517,000 for the three months ended September 30, 1997 and 1996, respectively. The 56% increase in cost of product revenues from the three months ended September 30, 1996 to the three months ended September 30, 1997 resulted primarily from a $310,000 writedown of third-party prepaid royalties relating to a specific product technology which the Company believes is non-strategic. Cost of service revenues were $753,000 and $601,000 for the three months ended September 30, 1997 and 1996, respectively. The 25% increase from 1996 to 1997 resulted primarily from higher personnel-related costs due to supporting increased revenue levels of software support and update, and custom engineering services. 9 10 Gross Profit. Gross profit was $4,626,000 and $5,295,000 for the three months ended September 30, 1997 and 1996, respectively, representing 75% and 83% of revenues for those same periods, respectively. Gross profit from product sales was $3,747,000 and $4,696,000 for the three months ended September 30, 1997 and 1996, respectively, representing 82% and 90% of product sales for those same periods, respectively. This percentage decrease is primarily due to the impact of the writedown of third- party prepaid royalties discussed above. Gross profit from services was $879,000 and $599,000 for the three months ended September 30, 1997 and 1996, respectively, representing 54% and 50% of services revenues for those same periods, respectively. Engineering. Engineering expenses were $2,017,000 and $2,318,000 for the three months ended September 30, 1997 and 1996, respectively, representing 32.6% and 36.1% of revenues for those same periods, respectively. The absolute decrease in engineering expenses resulted principally from decreased expenses in labor and consulting. Sales and Marketing. Sales and marketing expenses were $3,168,000 and $2,261,000 for the three months ended September 30, 1997 and 1996, respectively, representing 51.2% and 35.3% of revenues for those same periods, respectively. The increase in sales and marketing expenses resulted principally from labor-related costs arising from increased levels of personnel and to a lesser extent from marketing program expenses. Both increases resulted from an intensified focus by the Company on sales and marketing efforts which the Company expects to continue. Administration. Administration expenses were $714,000 and $634,000 for the three months ended September 30, 1997 and 1996, respectively, representing 11.5% and 9.9% of revenues for those same periods, respectively. The absolute increase primarily resulted from increased labor expenses relating to the additional personnel devoted to these activities. Agency Grants. Agency grants have been received from two sources. Under an incentive program designed to induce organizations to locate and conduct business in Ireland, the Industrial Development Authority of Ireland makes grants that are based predominately upon the number of new jobs created by the Company there. The amount of grants in any given period will therefore vary based upon the number of jobs created and the timing of receipt of grant aid payments and will continue to fluctuate on a quarterly basis. The Company currently expects the level of these grants to be insignificant in the short-term. The Economic and Technological Finance Authority - Berlin makes grants to promote research and development in small and medium-sized German-owned companies located in Berlin. The grants are paid quarterly based upon actual development costs, including salaries, and depend upon the work being carried out in Berlin. As of August 31, 1996, the Company was no longer eligible to receive these grants in Germany. (Income) loss from currency fluctuations. (Income) loss from currency fluctuations was $23,000 and $(15,000) for the three months ended September 30, 1997 and 1996, respectively. The fluctuation during these periods resulted from changes in foreign currency exchange rates. Interest income. Interest income was $285,000 for the three months ended September 30, 1997 as compared with $326,000 in the same period in 1996. This decline is largely due to the Company's lower cash and cash equivalent balances during the three months ended September 30, 1997 versus September 30, 1996. See Liquidity and Capital Resources. 10 11 Provision for Income Taxes. The income tax provision was $3,000 on a pre-tax loss of $1,011,000 for the three months ended September 30, 1997. For the three months ended September 30, 1996, the income tax provision was $95,000 on pre-tax income of $358,000. The tax provisions resulted from taxes on the Company's international operations. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Revenues. Total revenues were $15,376,000 and $19,388,000 for the nine months ended September 30, 1997 and 1996, respectively, representing a decrease in 1997 of 21% over the same period one year ago. Revenues from domestic sources accounted for approximately 28% and 23% of total revenues in the nine months ended September 30, 1997 and 1996, respectively, while the Company's international revenues accounted for 72% and 77%, respectively, of the Company's total revenues in the same periods. Product revenues were $10,946,000 and $15,769,000 for the nine months ended September 30, 1997 and 1996, respectively. The 31% decrease from 1996 to 1997 was mainly due to decreased volumes of, and declining prices for, the Company's X.400 products, partially offset by increased volumes in the Company's newer Internet/Intranet products. The decreased volumes of X.400 products sold relate primarily to a continuing shift in market demand away from the Company's X.400 product lines which the Company expects to continue. Service revenues were $4,430,000 and $3,619,000 for the nine months ended September 30, 1997 and 1996, respectively. The 22.4% increase from 1996 to 1997 resulted primarily from increased software support and update service fees. Cost of Revenues. Cost of product revenues were $1,743,000 and $2,066,000 for the nine months ended September 30, 1997 and 1996, respectively. The 16% decrease in cost of product revenues from the nine months ended September 30, 1996 to the nine months ended September 30, 1997 resulted from a decreased level of costs relating to hardware purchased from third-party vendors as a result of decreased sales of these components, which the Company expects to continue, offset by an increase in third-party royalties primarily relating to a $310,000 writedown of third-party prepaid royalties relating to a specific product technology which the Company believes is non-strategic. Cost of service revenues were $2,026,000 and $1,757,000 for the nine months ended September 30, 1997 and 1996, respectively. The 15% increase in cost of service revenues from 1996 to 1997 resulted primarily from increased personnel-related costs of providing software support and update, training and installation, and custom engineering services. Gross Profit. Gross profit was $11,607,000 and $15,565,000 for the nine months ended September 30, 1997 and 1996, respectively, representing 75% and 80% of revenues for those same periods. Gross profit from product sales was $9,203,000 and $13,703,000 for the nine months ended September 30, 1997 and 1996, respectively, representing 84.1% and 86.9% of product sales for those same periods, respectively. This percentage decrease is primarily due to the impact of the writedown of third-party prepaid royalties discussed above. 11 12 Gross profit from services was $2,404,000 and $1,862,000 for the nine months ended September 30, 1997 and 1996, respectively, representing 54.3% and 51.5% of services revenues for those same periods, respectively. This percentage increase is primarily due to reductions in the costs of providing software support and upgrade services. Engineering. Engineering expenses were $6,244,000 and $6,689,000 for the nine months ended September 30, 1997 and 1996, respectively, representing 40.6% and 34.5% of revenues for those same periods, respectively. The absolute decrease in engineering expenses resulted principally from decreased expenses in labor and consulting, while the increase in the percentage is driven by the lower revenues in the nine months ended September 30, 1997. Sales and Marketing. Sales and marketing expenses were $10,556,000 and $7,167,000 for the nine months ended September 30, 1997 and 1996, respectively, representing 69% and 37% of revenues for those same periods, respectively. The increase in sales and marketing expenses resulted principally from labor-related costs, increased levels of personnel and, to a lesser extent, from marketing program expenses. Both increases resulted from an intensified focus by the Company on sales and marketing efforts which the Company expects to continue. The increase in sales and marketing expenses as a percentage of revenues is also driven by the lower revenues in the nine months ended September 30, 1997. Administration. Administration expenses were $2,282,000 and $1,889,000 for the nine months ended September 30, 1997 and 1996, respectively, representing 14.8% and 9.7% of revenues for those same periods, respectively. The absolute increase primarily resulted from increased labor expenses and additional personnel devoted to these activities. The increase in administation expenses as a percentage of revenues is also driven by the lower revenues in the nine months ended September 30, 1997. Agency Grants. Agency grants have been received from two sources. Under an incentive program designed to induce organizations to locate and conduct business in Ireland, the Industrial Development Authority of Ireland makes grants that are based predominately upon the number of new jobs created by the Company there. The amount of grants in any given period will therefore vary based upon the number of jobs created and the timing of receipt of grant aid payments and will continue to fluctuate on a quarterly basis. The Company currently expects the level of these grants to be insignificant in the short-term. The Economic and Technological Finance Authority - Berlin makes grants to promote research and development in small and medium-sized German-owned companies located in Berlin. The grants are paid quarterly based upon actual development costs, including salaries, and depend upon the work being carried out in Berlin. As of August 31, 1996, the Company was no longer eligible to receive these grants in Germany. (Income) loss from currency fluctuations. (Income) loss from currency fluctuations was $(93,000) and $49,000 for the nine months ended September 30, 1997 and 1996, respectively. The fluctuation during these periods resulted from changes in foreign currency exchange rates. Interest income. Interest income was $893,000 for the nine months ended September 30, 1997 as compared with $687,000 in the same period in 1996. The increase resulted primarily from interest earned on the investment of cash received from the Company's initial public offering which was completed in mid-March 1996, partially offset by declining cash balances during 1997. Provision for Income Taxes. The income tax provision was $22,000 on a pre-tax loss of $6,420,000 for the nine months ended September 30, 1997, which resulted from taxes on the Company's international operations. For the nine months ended September 30, 1996, the income tax provision of $375,000 on pre-tax income of $649,000 related primarily to the Company's profitable international operations. 12 13 LIQUIDITY AND CAPITAL RESOURCES During March 1996, the Company completed a public offering and sale of 2,300,000 shares (including the over-allotment option) of its Common Stock at $9 per share, resulting in net proceeds to the Company, after offering costs, of approximately $18,300,000. Concurrently with such offering, the Company received an additional $1,500,000 from Intel Corporation and an additional $288,000 from Thomson-CSF Ventures as a result of the sale and issuance of 166,667 and 39,942 shares of Common Stock, respectively. The Company (used)/generated cash from operating activities of $(4,060,000) and $764,000 for the nine months ended September 30, 1997 and 1996, respectively. The primary factors contributing to this decrease in cash flow in 1997 are the higher operating loss for the nine months ended September 30, 1997 of $7.4 million versus operating income of $193,000 for the nine months ended September 30, 1996, and a decrease in other accrued expenses, both of which are offset by an increased cash flow relating to a decrease in accounts receivable. As of September 30, 1997, total accounts receivable, net was $8,783,000 versus $11,234,000 at December 31, 1996. This lower accounts receivable balance at September 30, 1997 is partially attributable to lower revenue levels in the nine months ended at that same date. The Company typically generates a large percentage of its quarterly revenue during the last few weeks of the quarter, and has payment terms in excess of 90 days on some of its larger sales. Certain of the Company's larger sales have longer payment terms, thus slowing the cash flow cycle, and the Company expects that future large sales will follow the same pattern. The Company does not believe these longer payment terms are likely to have a material adverse effect on the collectibility of the related receivables. As of September 30, 1997, the Company had a balance of $10,322,000 in cash and cash equivalents, and a balance of $10,693,000 in marketable securities. The Company believes that its existing capital resources will be adequate to finance the Company's operations and capital expenditures through the end of 1998. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable 13 14 PART II Other Information Item 2. Changes in Securities and Use of Proceeds 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 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: Underwriting discounts and commissions $1,449,000 Other expenses $ 951,000 Total $2,400,000 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 September 30, 1997, the Company used such net offering proceeds, in direct or indirect payments to others, as follows: Purchase and installment of machinery and equipment $ 2,172,000 Working capital $ 6,193,000 Investment in short term interest-bearing obligations and cash equivalents $ 7,959,000 Repayment of short term liabilities $ 1,292,000 Application to short term assets $ 684,000 Total $18,300,000 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. 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: 11.1 - Statement of Computation of Shares Used in Per Share Computation. 27.1 - Financial Data Schedule. (b) No reports on Form 8-K were filed during the quarter covered by this report. 14 15 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 14, 1997 By: /s/ JANINE M. BUSHMAN ----------------------------------- Janine M. Bushman, Vice President, Finance and Administration and Chief Financial Officer 15 16 INDEX TO EXHIBITS Exhibit Number Exhibits Page - ------------------------------------------------------------------------------ 11.1 Statement of Computation of Shares Used in Per Share Computation.....1 27.1 Financial Data Schedule..............................................2 EX-11.1 2 EXHIBIT 11.1 1 Exhibit 11.1 ISOCOR STATEMENT OF COMPUTATION OF SHARES USED IN PER SHARE COMPUTATION (IN THOUSANDS)
Three months ended Nine months ended ------------------------- ------------------------- September September September September 30, 1997 30, 1996 30, 1997 30, 1996 --------- --------- --------- --------- Computation of shares used in net income (loss) per share: Weighted average common shares outstanding ................................ 9,429 9,271 9,405 6,789 Common equivalent shares attributable to stock options (treasury stock method) ...... 1,181 1,158 Common equivalent shares attributable to redeemable preferred stock.................. ----- ------ ----- ----- Shares used in per share calculation ........ 9,429 10,452 9,405 7,947 ===== ====== ===== =====
1 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS IN THE PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 10,322 10,693 10,755 1,972 0 31,660 7,040 4,382 34,605 7,528 0 0 0 39,258 (12,325) 34,605 15,376 15,376 1,743 3,769 19,013 251 (893) (6,420) 22 (6,442) 0 0 0 (6,442) (.69) (.69)
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