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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27886
WORLDTALK COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0303581
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5155 OLD IRONSIDES DRIVE
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
---------------------------
(408) 567-1500
(Registrant's telephone number, including area code)
---------------------------
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Sections 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.
(1) Yes x No
--------- ---------
(2) Yes No x
--------- ---------
As of April 30, 1996, there were 7,645,443 shares of the Registrant's Common
Stock outstanding.
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Page 1 of 22 See page 19 for Exhibit Index
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FORM 10-Q
WORLDTALK COMMUNICATIONS CORPORATION
INDEX
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<TABLE>
<CAPTION>
PAGE
PART I FINANCIAL INFORMATION NUMBER
<S> <C> <C>
ITEM 1: Financial Statements
Condensed Balance Sheets as of December 31, 1995 and March
31, 1996.................................................. 3
Condensed Statements of Operations for the three months
ended March 31, 1995 and 1996............................. 4
Condensed Statements of Cash Flows for the three months
ended March 31, 1995 and 1996............................. 5
Notes to Condensed Financial Statements....................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
PART II OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K.............................. 19
Signature....................................................................... 20
Exhibits........................................................................ 21
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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WORLDTALK COMMUNICATIONS CORPORATION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1996 DECEMBER 31,
(UNAUDITED) 1995
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 2,280 $ 984
Restricted cash ............................................... -- 2,000
Accounts receivable, net of allowance for doubtful accounts
of $150 and $150, respectively ............................. 2,469 1,567
Inventory ..................................................... 92 --
Prepaid expenses .............................................. 423 115
-------- --------
Total current assets .......................................... 5,264 4,666
Property and equipment, net ....................................... 940 707
Other assets ...................................................... 318 354
-------- --------
$ 6,522 $ 5,727
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable .............................................. $ 869 $ 679
Current portion of capital lease obligations .................. 217 254
Accrued expenses .............................................. 2,307 1,927
Deferred revenue .............................................. 1,729 1,005
-------- --------
Total current liabilities ................................ 5,122 3,865
Capital lease obligations, less current portion ................... 231 266
Other liabilities ................................................. 100 185
Notes payable ..................................................... 250 --
-------- --------
5,703 4,316
-------- --------
Redeemable convertible preferred stock, $.01 par value; 6,500
shares authorized in December 31, 1995 and March 31, 1996;
6,025 shares issued and outstanding in December 31, 1995 and
March 31, 1996 ................................................ 12,816 12,816
Stockholders' equity (deficit):
Common stock; $.01 par value; 25,000 shares authorized in
December 31, 1995 and March 31, 1996; 1,505 and 1,616
shares issued and outstanding in December 31, 1995 and
March 31, 1996, respectively ............................... 15 15
Additional paid-in capital ........................................ 714 670
Stockholder note receivable ....................................... (262) (194)
Deferred compensation ............................................. (164) (175)
Accumulated deficit ............................................... (12,300) (11,721)
-------- --------
Total stockholders' deficit .............................. (11,997) (11,405)
-------- --------
$ 6,522 $ 5,727
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
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WORLDTALK COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
Revenue:
Software licenses ................................... $ 1,942 $ 984
Maintenance, installation, and training ............. 767 351
Software development contracts ...................... -- 150
------- -------
Total revenues ................................ 2,709 1,485
Cost of revenue:
Software licenses ................................... 145 47
Maintenance, installation, and training ............. 474 209
Software development contracts ...................... -- 289
------- -------
Total cost of revenue ......................... 619 545
Operating expense:
Product development ................................. 824 525
Sales and marketing ................................. 1,406 1,039
General and administrative .......................... 446 267
------- -------
Total operating expense ....................... 2,676 1,831
------- -------
Operating loss ......................................... (586) (891)
Other income (expense), net ............................ 7 (10)
------- -------
Net loss ............................................... $ (579) $ (901)
------- -------
Pro forma net loss per share ........................... $ (0.08) $ (0.12)
------- -------
Shares used in computing pro forma net loss per share .. 7,594 7,571
------- -------
</TABLE>
See accompanying notes to condensed financial statements.
4
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WORLDTALK COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
Cash flows from operating activities: 1996 1995
------- -------
<S> <C> <C>
Net loss ....................................................................... $ (579) $ (901)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................... 92 63
Amortization of deferred compensation ....................................... 11 --
Changes in operating assets and liabilities:
Accounts receivable ....................................................... (902) (199)
Inventory ................................................................. (92) --
Prepaid expenses .......................................................... (308) (46)
Accounts payable .......................................................... 190 (90)
Accrued expenses .......................................................... 380 336
Deferred revenue .......................................................... 724 154
Other liabilities ......................................................... (85) 136
------- -------
Net cash used in operating activities .................................. (569) (547)
------- -------
Cash flows from investing activities:
Purchase of property and equipment (net) ....................................... (320) (28)
Other assets ................................................................... 31 (139)
------- -------
Net cash used in investing activities .................................... (289) (167)
------- -------
Cash flows from financing activities:
Proceeds from (payments on) bank borrowings .................................... 250 --
Proceeds from issuance of convertible secured promissory notes ................. -- 1,000
Net proceeds from issuance of redeemable preferred stock ....................... -- 2,750
Net proceeds from issuance of shareholder receivable ........................... (68) --
Net proceeds from issuance of common stock ..................................... 44 --
Principal payments under capital lease obligations ............................. (72) (55)
------- -------
Net cash provided by financing activities ................................ 154 3,695
------- -------
Net increase (decrease) in cash and cash equivalents .............................. (704) 2,981
Cash and cash equivalents at beginning of period .................................. 2,984 198
------- -------
Cash and cash equivalents at end of period ........................................ $ 2,280 $ 3,179
======= =======
Supplemental disclosures:
Cash paid during the period:
Interest ..................................................................... $ 18 $ 11
------- -------
Noncash investing and financing activities:
Equipment acquired under capital lease agreements ............................ $ -- $ 21
------- -------
Conversion of Series AA redeemable preferred stock and common stock
into Series A redeemable preferred stock .................................. $ -- $ 7,113
------- -------
Conversion of convertible secured promissory notes in connection with
sale of Series B redeemable preferred stock ............................... $ -- $ 1,000
------- -------
</TABLE>
See accompanying notes to condensed financial statements.
5
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WORLDTALK COMMUNICATIONS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996
(ALL AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) THE COMPANY AND BASIS OF PRESENTATION
The Company
Worldtalk Communications Corporation, a Delaware corporation doing
business as Worldtalk Corporation (the "Company"), develops software products
that enable information technology managers to extend business communications
and collaboration applications from the work group level to the enterprise and
across wide area networks such as the Internet. These Network Application Router
products: (a) solve the problem of cross-communication in large and/or
heterogeneous e-mail and groupware systems environments, (b) enable centralized
management and control of these environments and (c) provide control of Internet
access.
The financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring accruals) that, in the opinion of
management, are necessary for a fair presentation of the results for the interim
periods. The results of operations for current interim periods are not
necessarily indicative of results to be expected for the current year or any
other period. These financial statements should be read in conjunction with the
Company's Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on April 11, 1996 (File No. 333-1482).
Pro Forma Net Loss Per Share
Pro forma net loss per share is computed using net loss and is based on
the weighted average number of shares of common stock outstanding, convertible
preferred stock, on an "as if converted" basis, using the exchange rate in
effect at the initial public offering date and common equivalent shares from
stock options and warrants outstanding using the treasury stock method.
Reclassifications
Certain reclassifications were made in the 1995 financial statements to
conform with 1996 presentation.
(2) SUBSEQUENT EVENT
On April 17, 1996, the Company completed the initial public offering of
2,100 shares of its Common Stock, of which 2,000 shares were issued and sold by
the Company and 100 shares were sold by a selling stockholder. On May 8, 1996,
an additional 315 shares were sold by selling stockholders upon exercise of the
underwriters' over-allotment option. Net proceeds to the Company aggregated
approximately $14.0 million. The proceeds have been invested in accordance with
the Company's Board of Directors approved investment policy. As of the closing
date of the offering all of the mandatorily redeemable convertible preferred
stock outstanding prior to such offering was automatically converted into an
aggregate of 6,025 shares of common stock.
6
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PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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RESULTS OF OPERATIONS
The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors That May Affect Future Results" as well as those discussed in this
section and elsewhere in this Report, and the risks discussed in the "Risk
Factors" section included in the Company's Registration Statement on Form S-1 as
declared effective by the Securities and Exchange Commission on April 11, 1996
(File No. 333-1482).
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995
----- -----
<S> <C> <C>
Revenue:
Software licenses ................................. 71.7% 66.3%
Maintenance, installation, and training ........... 28.3 23.6
Software development contracts .................... 0.0 10.1
----- -----
Total revenues .............................. 100.0 100.0
Cost of revenue:
Software licenses ................................. 5.4 3.2
Maintenance, installation, and training ........... 17.5 14.1
Software development contracts .................... 0.0 19.4
----- -----
Total cost of revenue ....................... 22.8 36.7
Operating expense:
Product development ............................... 30.4 35.3
Sales and marketing ............................... 51.9 70.0
General and administrative ........................ 16.5 18.0
----- -----
Total operating expense ..................... 98.8 123.3
----- -----
Operating loss ....................................... (21.6) (60.0)
Other income (expense), net .......................... .2 (.7)
----- -----
Net loss ............................................. (21.4)% (60.7)%
----- -----
</TABLE>
Revenue
The Company's revenue is derived primarily from license fees for its
software and charges for services, including maintenance, consulting and
training. License revenue consist of revenue received by the Company from both
the initial license of its software products as well as subsequent purchases to
expand capacity or add additional functionality. Maintenance, installation and
training revenue is received by the Company for support contracts and consulting
and training services. Software development contracts consist principally of
custom product development and non-recoverable engineering charges for product
integration and customization. Revenue from software licenses is generally
recognized upon shipment of software. Revenue from maintenance contracts is
recognized over the contract term, which generally is one year, while
installation and training revenue is recognized when the services are performed.
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Software development contract revenue is recognized using the percentage of
completion method. Revenue from international sales has ranged from 15% to 25%
of revenue in prior periods.
The Company's total revenue increased from $1.5 million in the first
quarter of 1995 to $2.7 million in the first quarter of 1996. Software license
revenue increased from $984,000 in the first quarter of 1995 to $1.9 million in
the first quarter of 1996. This increase in software license revenue was due to
increased market acceptance of the Company's existing products, the introduction
of enhanced products and the expansion of the Company's direct sales force.
Maintenance, installation and training revenue increased from $351,000 in the
first quarter of 1995 to $767,000 in the first quarter of 1996. This increase
was primarily attributable to maintenance contracts associated with new software
licenses and the renewal of maintenance contracts by existing customers. The
Company expects that maintenance, installation and training revenue will
continue to increase in absolute amounts as its customer base grows. Software
development contracts decreased from $150,000 in the first quarter of 1995 to
zero in the first quarter of 1996. The decrease in the first quarter of 1996 was
due to the Company's shift in focus to software licensing. The Company does not
anticipate receiving a significant amount of revenue from software development
contracts in the future; however, it may enter into such contracts in special
situations where the related technology provides access to new products, markets
or strategic partnerships. In 1995, the Company formed its Professional Services
organization to assume the responsibility for providing installation, training,
and consulting services to its customer base. Revenue for consulting services is
included in maintenance, installation and training revenue.
Future growth in revenue will be dependent on several factors including
the following: the Company's ability to add enhanced features and functionality
to its NetJunction on HP products, growth of both direct and indirect sales
resources, market acceptance of the NetConnex product, and the Company's ability
to successfully port its NetJunction products to the Windows NT operation system
on a timely basis. The latter two factors are directly related to the increasing
popularity of the Windows NT operating system.
Cost of Revenue
The Company's total cost of revenue increased from $545,000 in the first
quarter of 1995 to $619,000 in the first quarter of 1996. Software license
costs, which primarily consist of media and documentation, increased from
$47,000 in the first quarter of 1995 to $145,000 in the first quarter of 1996.
The increase in the first quarter of 1996 was due to higher sales volume while,
in the first quarter of 1995, costs were lower due to the granting of customer
site licenses where media and documentation costs are minimal as the customer
purchases one product master of the software and documentation. Maintenance,
installation and training costs, which consist primarily of labor and overhead,
increased from $209,000 in the first quarter of 1995 to $474,000 in 1996. The
increase in the first quarter of 1996 was due primarily to the increase in the
number of customer support and training personnel and related overhead costs
necessary to support a larger installed customer base and product upgrades.
Software development contract costs, which consist of labor and overhead,
decreased from $289,000 in 1995 to zero in the first quarter of 1996. The
Company recognizes software development costs as incurred, while related revenue
is recognized as contract milestones are achieved. In 1995, the Company incurred
losses with respect to software development contracts at the gross profit level
of $139,000. The loss in the first quarter of 1995 was a result of the Company's
renegotiation of a relatively large contract and the winding-down of the
Company's software development contract business. Total gross margin was 63% and
77% in the first quarters of 1995 and 1996, respectively. The quarterly
increases in gross margin were a result of the change in revenue mix towards
software licensing, which has higher gross margins.
8
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Product Development
Product development expense includes expenses associated with the
development of new products, enhancements of existing products and quality
assurance activities and consist principally of personnel costs, overhead costs
relating to occupancy, equipment depreciation and supplies. Costs related to
research, design and development of products are charged to product development
expense as incurred. Product development expense increased from $525,000 in the
first quarter of 1995 to $824,000 in the first quarter of 1996. Product
development expense represented 35% and 30% of total revenues in the first
quarters of 1995 and 1996, respectively. The increase in absolute dollars in
product development expense resulted from additional personnel and related costs
in the product development organization. The decrease in product development
expense as a percentage of total revenue is attributable to the increase in
revenue and the fact that product development expense does not fluctuate in
direct proportion to total revenue. The Company believes that a significant
level of investment for product development is required to remain competitive
and, accordingly, the Company anticipates that, for the foreseeable future,
these expenses will continue to increase in absolute dollars but should decline
as a percentage of total revenue.
Sales and Marketing
Sales and marketing expense consists primarily, of salaries, sales
commissions and promotional expenses. Sales and marketing expense increased from
$1.0 million in the first quarter of 1995 to $1.4 million in the first fiscal
quarter of 1996. Sales and marketing expense represented 70% and 52% of total
revenue in the first quarters of 1995 and 1996, respectively. The increase in
absolute dollars reflected the hiring of additional sales and marketing
personnel in connection with additions to the Company's direct sales force,
higher sales commissions associated with increased sales volume and increased
promotional expenses. The decrease in sales and marketing expense as a
percentage of total revenue is attributable to the increase in revenue and the
fact that sales and marketing expense does not fluctuate in direct proportion to
total revenue. In the near future, the Company expects to continue hiring
additional sales and marketing personnel, increase promotion and advertising
efforts and to expand internationally through a combination of distributors,
VARs and direct sales personnel.
General and Administrative
General and administrative expense consists primarily of salaries and
occupancy costs for administrative, executive and finance personnel. General and
administrative expense increased from $267,000 in the first quarter of 1995 to
$446,000 in the first quarter of 1996. General and administrative expense
represented 18% and 17% of total revenues in the first fiscal quarters of 1995
and 1996, respectively. The increase in absolute dollars in general and
administrative expense resulted from additional personnel and related costs in
the organization and public company costs. The decrease in general and
administrative expense as a percentage of total revenue is attributable to the
increase in revenue and the fact that general and administrative expense does
not fluctuate in direct proportion to total revenue. The Company believes that
general and administrative expense will increase in absolute dollar amounts for
the near term as the Company expands its administrative staff, adds
infrastructure and incurs additional costs related to being a public company.
As of March 31, 1996, the Company had deferred compensation of $164,000
for the difference between the grant price and the deemed fair value of the
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Company's Common Stock for shares subject to options granted during the last two
months of 1995. The deferred compensation is being amortized over the four-year
vesting period of the options.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and met its
capital expenditure requirements primarily from proceeds of private sales of
Preferred Stock and Common Stock. Through March 31, 1996, the Company had raised
$13.1 million from the sale of Preferred Stock and Common Stock. At March 31,
1996, the Company had $2.3 million in cash and cash equivalents. In April and
May 1996, the Company closed its initial public offering with net proceeds to
the Company of approximately $14.0 million.
The Company has a $750,000 bank credit facility that expires on October
15, 1998 and is comprised of a $500,000 line of credit and a $250,000 term loan
facility. As of March 31, 1996, the Company had borrowed $250,000 of the term
loan facility.
Net cash used for operating activities was $547,000 and $569,000 in 1995
and 1996, respectively. The net cash used during these periods was primarily due
to net losses and increases in accounts receivable, which were partially offset
by increases in accrued liabilities and accounts payable. Investing activities
used net cash of $167,000 and $289,000 in the first quarters of 1995 and 1996,
respectively, primarily to purchase property and equipment. Financing activities
generated cash of $3.7 million and $154,000 in 1995 and 1996, respectively, from
the issuance of Preferred Stock, Common Stock and promissory notes that were
later converted into capital stock and from capital leases and bank borrowings.
As of March 31, 1996, the Company's principal commitments consisted of
obligations under operating and capital leases, comprised of $4.6 million and
$602,000, respectively.
Capital expenditures have been, and near-term future expenditures are
anticipated to be, primarily for facilities and equipment to support expansion
of the Company's operations and management information systems. While the
Company currently has no material capital commitments, the Company anticipates
that its planned purchases of capital equipment in 1996 will require additional
expenditures of approximately $750,000.
The Company believes that the net proceeds from its initial public
offering, together with its cash balance, credit facilities and cash flow
generated from future operations, will be sufficient to meet its anticipated
cash needs for working capital, capital expenditures and business expansion for
at least the next twelve months. Thereafter, if cash generated from operations
is insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or convertible debt securities or obtain
additional credit facilities. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders and
may not be available on terms favorable to the Company if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1 as declared effective by the Securities and
Exchange Commission on April 11, 1996 (File No. 333-1482).
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Limited Operating History; Cumulative Losses
The Company was founded in February 1992, and its first product shipped
in May 1992. The Company has incurred operating losses in each of its fiscal
years since inception and had an accumulated deficit of $12.3 million as of
March 31, 1996. The Company expects to continue to incur such losses through
1996, and there can be no assurance that the Company will reach and sustain
profitability on an annual or quarterly basis. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. To address these risks, the
Company must, among other things, continue to upgrade its technologies,
commercialize products and services incorporating such technologies, continue to
attract, retain and motivate qualified personnel and respond to competitive
developments. There can be no assurance that the Company will be successful.
Quarterly Fluctuations
The Company's quarterly and annual operating results have, in the past,
and may, in the future, vary significantly, depending on many factors. The
Company generally ships products as orders are received and, therefore, has
little or no backlog. Historically, a substantial portion of the Company's
revenues has been recognized in the last month of the quarter as a result of
many customers purchasing practices and the Company's compensation practices for
its sales personnel. During the second half of 1995, the Company changed its
sales force compensation practices to encourage a more even distribution of
revenues throughout the quarter. However, the inability of the Company to
recognize expected revenues during the last month of the quarter, particularly
due to delay in the timing of large orders, could result in substantial
fluctuations from period to period. Additional factors that may affect operating
results include the timing of customers' decision-making processes, the timing
of expenses incurred by the Company in anticipation of product releases or
increased revenue, the timing of product enhancements and product introductions
by the Company and its competitors, market acceptance of new and enhanced
versions of the Company's products, changes in pricing policies of the Company
and its competitors, variations in the mix of products the Company licenses, the
mix of direct and indirect sales, personnel changes and general economic
factors. Any unfavorable changes in these or other factors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Future Operating Results Uncertain
Although the Company has recently begun to experience a significant
increase in its revenue growth rate, such growth should not be considered
indicative of future revenue growth, if any, or of future operating results.
There can be no assurance that the Company's revenue will grow or be sustained
in future periods or that the Company will be profitable in any future period.
Revenues depend primarily on the volume and timing of orders received during the
period, which are difficult to forecast. Licenses of the Company's NetJunction
products, which have accounted for a substantial portion of the Company's
revenue to date, generally involve a significant commitment of capital by
prospective customers, with the attendant delays frequently associated with
customers' internal procedures to approve large capital expenditures and lengthy
decision-making processes. For these and other reasons, the sales cycle
associated with the license of the Company's NetJunction products is lengthy
(typically three to six months) and subject to a number of significant risks,
including customers' budgetary constraints and internal acceptance reviews, over
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which the Company has little or no control. The timing and outcome of such
decision-making processes have affected the Company's historical financial
performance and are expected to impact future results. Although the Company
anticipates that revenues relating to new products, such as the recently
introduced NetConnex product, will increase in the future, there can be no
assurance that the Company's expectations of increased revenues from its new
products will be realized.
The Company's expense levels are based, in part, on its expectation of
future revenue, which is difficult to predict. If revenue levels are below
expectations due to delays associated with customers' decision-making processes
or for any other reason, operating results are likely to be materially adversely
affected. Net income may be disproportionately affected by a reduction in
revenue because a large portion of the Company's expenses is related to
headcount that cannot be easily reduced without adversely affecting the
Company's business. In addition, the Company currently intends to increase its
funding of research and product development, increase its sales and marketing
and customer support operations and expand distribution channels. To the extent
such expenses precede or are not subsequently followed by increased revenue, the
Company's business, operating results and financial condition could be
materially and adversely affected.
Due to the foregoing factors, it is likely that in some future period the
Company's revenue or operating results will be below the expectations of public
market analysts and investors, In such event, the price of the Company's Common
Stock would likely be materially adversely affected.
Risks Associated with Technological Change and New Product Development
The Company's industry is characterized by extremely rapid technological
change, frequent new product introductions and enhancements, evolving industry
standards and rapidly changing customer requirements. The Company's future
operating results will depend in part upon its ability to enhance its current
products and develop and introduce new products that keep pace with
technological advancements and address the increasingly sophisticated needs of
its customers. Development of new and enhanced products depends, in part, on the
timely availability of published interfaces with the application software the
Company's products support. If developers of such software discontinue making
such interfaces available to the Company, it may be more difficult for the
Company to keep pace with changes in these target environments. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
evolving industry standards and changing customer requirements, that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or product
enhancements, or that its new products and product enhancements will adequately
meet the requirements of the marketplace and achieve any significant degree of
market acceptance. Failure of the Company, for technological or other reasons,
to develop and introduce new products and product enhancements in a timely and
cost-effective manner or to anticipate and respond adequately to changing market
conditions, as well as any significant delay in product development or
introduction, could cause customers to delay or decide against purchases of the
Company's products.
In addition, the introduction or even announcement by the Company, or by
one or more of its competitors, of products embodying new technologies or
features could render the Company's existing products obsolete or unmarketable.
The introduction or announcement of new product offerings by the Company or one
or more of its competitors could also cause customers to defer or cancel
purchases of existing Company products.
Software products as complex as those offered by the Company may contain
defects or failures when introduced or when new versions are released. The
Company has, in the past, discovered and corrected software defects in certain
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of its products and may experience delays or lost revenue to correct new defects
in the future. Although the Company has corrected known material defects in its
current products and has not experienced material adverse effects resulting from
any such defects to date, there can be no assurance that, despite testing by the
Company, errors will not be found in new products or releases after commencement
of commercial shipments, resulting in, among other consequences, loss of market
share or failure to achieve market acceptance.
Dependence on Key Personnel
The Company's future depends in large part on the continued service of
its key technical personnel and its ability to continue to attract and retain
highly skilled technical personnel. Certain key technical personnel have an
in-depth knowledge of the Company's software and the actions necessary to
maintain and enhance the Company's products. The Company is particularly
dependent upon such personnel to continually respond to changes in the
application software that the Company's products interconnect. Moreover, there
are only a limited number of qualified software engineers with relevant industry
experience. The competition for such personnel in the software industry in
general, and the data communications market in particular, is intense, and there
can be no assurance that the Company will retain its key technical personnel or
locate and attract such personnel in the future. The Company has at times
experienced and continues to experience difficulty in recruiting qualified
technical personnel, and the Company anticipates experiencing such difficulties
in the future. Generally, the Company's employees are not bound by employment or
noncompetition agreements or covered by key man life insurance policies. In
addition, competitors may attempt to recruit the Company's key employees. The
loss of any key technical personnel or the failure to successfully recruit such
personnel in the future could have a material adverse effect on the Company's
business, financial condition and results of operations.
Management of Growth
If the Company continues to grow, it will be required to recruit
additional key sales and marketing and technical personnel. An increase in
engineering staff will be required to rapidly develop the full line of Windows
NT-based products currently being planned and to design new features for the
Company's NetJunction products. The Company's product marketing strategy in the
future will place greater reliance on distribution by value added resellers
("VARs") and distributors to supplement a direct sales model, which will require
the addition of personnel with channel experience to the Company's sales and
marketing force. Moreover, the number and size of the Company's annual
maintenance contracts are expected to increase as sales and the installed base
of the Company's products increase, resulting in pressure to increase customer
service and support personnel. Additional customer service and support personnel
will also be needed to support the Company's Windows NT-based products. These
products are expected to be purchased by customers with little computer
knowledge and experience who increasingly rely upon the Company's customer
service personnel to provide extensive telephone support, often involving
software and hardware problems unrelated to the Company's products. The
Company's ability to assimilate new personnel will be critical to the Company's
performance, and there can be no assurance that the administrative, financial
and operational systems and controls currently in place will be adequate if the
Company continues to grow or that the Company will be able to implement
additional systems and controls successfully, and in a timely manner.
Moreover, the increase in the number of the Company's employees and the
Company's market diversification and product development activities have
resulted in increased responsibility for management. The Company's senior
13
<PAGE> 14
management personnel have worked together for only a short period of time, its
Chief Financial Officer and Vice President Sales having joined the Company in
April 1995 and December 1995, respectively. Additional management personnel are
expected to be added in the near future. The inability of the Company's
management to work together effectively, to manage its growth, to respond to
changing business conditions, or to adapt its operational, management and
financial systems and controls to accommodate its growth, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Reliance on the NetJunction Products; Market Acceptance of Windows
NT-based Products
Since its inception, the Company has derived a substantial portion of its
revenue from its NetJunction products. Revenue from these products accounted for
more than 70% of the Company's revenue from software licenses in the quarter
ending March 31, 1996. The Company's future operating results are significantly
dependent upon continued market acceptance and continued enhancement of its
NetJunction products. Today's businesses use e-mail and groupware for messaging
and critical file transfers within their own organizations, as well as to
conduct electronic information transfer with other organizations over the
Internet. The market for the Company's NetJunction products is in large part due
to the proliferation of numerous disparate e-mail systems and local area network
("LAN") environments, and the fact that, to date, no single vendor has dominated
this market. Standardization of messaging systems could reduce demand for the
connectivity feature of the Company's products. There can be no assurance that
the NetJunction products will continue to be adequately enhanced to achieve
continued market acceptance or that competitive developments out of the
Company's control may not substantially reduce or eliminate the Company's
principal market.
The Company's future also depends upon the successful completion,
introduction and market acceptance of its Windows NT-based products. NetConnex,
the first product in this proposed line of products, was introduced in September
1995; however, the remainder of this product line is currently under
development. There can be no assurance that the Windows NT platform itself will
continue to claim market acceptance, that Microsoft Corporation ("Microsoft")
will continue to improve and enhance Windows NT so that it remains a viable
product, or that the Company's emphasis on Windows NT for future product
development will prove justified. Significant development work must be completed
on the Company's Windows NT-based products to adequately address the perceived
market for these products. The Company may not be successful in marketing this
line of products or any of their new or enhanced products.
The Company believes that a number of factors must be addressed for its
products to achieve broad market acceptance. These factors include throughput
performance, functionality, interoperability with existing systems, price and
the customer's assessment of the Company's technical, managerial, service and
support expertise and capability. Failure to succeed with respect to any of
these factors could result in the Company failing to achieve broad market
acceptance of its products. The market for the Company's products has only
recently begun to develop and is rapidly evolving. As is typical in the case of
such markets, demand and market acceptance are subject to a high level of
uncertainty. The industry, especially the portions of the market relating to
Windows NT and the Internet, is young and has few proven products. Accordingly,
it is difficult to predict the future growth rate, if any, the size of the
market and the potential acceptance of the Company's products. Failure of the
Company's products to achieve broad market acceptance as a result of
competition, technological change or other factors, and any factor adversely
affecting the e-mail and groupware markets or viability of the Internet, could
have a material adverse effect on the Company's business, financial condition
14
<PAGE> 15
and results of operations.
Dependence on the Internet
License of the Company's products will depend in part upon a robust
industry and infrastructure for providing Internet access and carrying Internet
traffic. The Internet may not prove to be a viable commercial marketplace
because of inadequate development of the necessary infrastructure, such as a
reliable network backbone and adequate bandwidth, or timely development of
complementary products, such as high speed modems. Because global commerce and
on-line exchange of information on the Internet and other similar open wide area
networks ("WANs") are new and evolving, it is difficult to predict with any
assurance whether the Internet will prove to be a viable commercial marketplace.
Failure of such a commercial marketplace to develop or, if developed, to be
viable, or failure of the Company's products to adequately address
communications between organizations over the Internet could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition
The market for the Company's products is intensely competitive and
subject to rapid change. In the LAN environment, the Company primarily
encounters competition from large public systems vendors, including Control Data
Systems, Digital Equipment Corporation and International Business Machines
Corporation. Additionally, many smaller companies offer alternative solutions
with point-to-point gateway connectivity products. The Company also anticipates
competition in the future from companies in related markets, such as database
vendors, internetworking vendors and value-added network or Internet service
providers. Because there are relatively low barriers to entry in the software
market, the Company expects additional competition from other established and
emerging companies if the e-mail connectivity, intelligent directory and
application router markets continue to develop and expand. The Company believes
that the competitive factors affecting the market for the Company's products and
services include product functionality and product quality, performance and
price, ease of product integration with disparate e-mail, groupware, LAN and WAN
environments, quality of customer support services, customer training and
documentation, hardware platforms supported and vendor and product reputation.
The relative importance of each of these factors depends upon the specific
customer environment. Although the Company believes that its products and
services currently compete favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors.
Many of the Company's current and potential competitors have longer
operating histories, significantly greater financial, technical, product
development and marketing resources, greater name recognition and larger
customer bases than the Company. The Company's present or future competitors may
be able to develop products comparable or superior to those developed by the
Company, adapt more quickly than the Company to new technologies, evolving
industry trends or customer requirements, or devote greater resources to the
development, promotion and license of their products than the Company.
Accordingly, there can be no assurance that competition will not intensify or
that the Company will be able to compete effectively in its market.
The Company expects that it will face increasing pricing pressures from
its current competitors and new market entrants. The Company's competitors may
engage in pricing practices that reduce the average selling prices of the
Company's products. To offset declining average selling prices, the Company
believes that it must successfully introduce and license new products on a
15
<PAGE> 16
timely basis and develop new products that incorporate features that can be sold
at higher average selling prices. To the extent that new products are not
developed in a timely manner, do not achieve customer acceptance or do not
generate higher average selling prices, the Company's gross margins may decline.
Risks Associated with New Distribution Channels
The Company anticipates that its marketing strategy for its Windows
NT-based products will in the future place greater reliance on distribution by
VARs and distributors to supplement its direct sales model. The Company lacks a
breadth of experience in distributor channel management. There can be no
assurance that expansion of the Company's channel sales efforts will succeed or
that such expansion will result in increased sales. The use of VARs and
distributors can result in less control and visibility by the Company over its
end-users. In addition, dependence on third-party distribution channels results
in lower margins than direct sales. If the channel sales efforts fail, the
Company's revenues could be materially and adversely affected.
Increasing Dependence on Systems Integrators
The Company utilizes systems integrators to assist in the deployment and
project management of its NetJunction products. These systems integrators help
the Company's customers design and implement complex computer communication
networks, which often consist of both hardware and software from a variety of
vendors. The Company anticipates that future sales of its NetJunction products
will continue to be dependent upon the viability and financial stability of
these systems integrators. Since these computer communication projects involve
customers with varying degrees of sophistication, effective systems integrator
representatives must possess sufficient technical, marketing and sales resources
and must devote these resources to a lengthy sales cycle, customer training and
product service and support. Systems integrators may recommend products of
several different companies, including, in some cases, products that are
competitive with the Company's products. There can be no assurance that any of
the Company's systems integrators will be able to market, deploy or support the
Company's products effectively, that economic conditions or industry demand will
not adversely affect these companies, or that any of these systems integrators
will not devote greater resources to marketing and supporting products of other
companies. The loss of certain of the Company's systems integrators could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Strategic Relationships
The Company may be dependent on the technical, manufacturing, marketing,
financial and other resources of third parties with which it has established or
is attempting to establish strategic relationships for certain joint product
development and marketing programs. Third parties with which the Company
establishes strategic relationships are not necessarily contractually obligated
to perform any of the activities on which the Company depends in order to meet
its business objectives. These third parties may choose to discontinue their
strategic relationships with the Company, develop or market products or
technologies that compete directly with the Company's products or establish
relationships with the Company's competitors.
16
<PAGE> 17
Dependence on Proprietary Technology
The Company's future success is dependent upon its proprietary software
technology. The Company does not currently have any patents and relies
principally on trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its technology.
The Company also believes that factors such as the technological and creative
skills of its personnel and new product developments and enhancements are
essential to establishing and maintaining a technology leadership position. The
Company generally enters into confidentiality and/or license agreements with its
employees, distributors and customers and limits access to and distribution of
its software, documentation and other proprietary information. Much of the
Company's software is shipped with a software security lock which initially
limits software access to authorized users. In addition, the Company restricts
third-party access to its source code, except in connection with source code
escrow arrangements. There can be no assurance that the steps taken by the
Company will prevent misappropriation of its technology, and such protections do
not preclude competitors from developing products with functionality or features
similar to the Company's products. Furthermore, there can be no assurance that
third parties will not independently develop competing technologies that are
substantially equivalent or superior to the Company's technologies. The Company
and Microsoft co-own part of the source code for NetConnex that was jointly
developed under an agreement. Microsoft is not restricted in the use it may make
of the source code and could develop products competitive with the Company's
products in the future. In addition, effective copyright and trade secret
protection may be unavailable or limited in certain foreign countries. Any
failure by or inability of the Company to protect its proprietary technology
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Although the Company has not received any notice that its products
infringe the proprietary rights of any third party, there can be no assurance
that infringement claims will not be asserted against the Company or its
customers in the future. As the number of software products in the industry
increases and the functionality of these products further overlaps, the Company
believes that software developers may become increasingly subject to
infringement claims as well. Furthermore, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation, either as plaintiff or defendant, would cause the Company to incur
substantial costs and divert management resources from productive tasks, whether
or not such litigation is resolved in the Company's favor and whether or not any
claims against the Company have merit. Parties making claims against the Company
could obtain reimbursement for substantial damages, as well as injunctive or
other equitable relief, which could effectively block the Company's ability to
license its products in the United States or abroad. If it appears necessary or
desirable, the Company may seek licenses to intellectual property that it is
allegedly infringing. However, there can be no assurance that licenses could be
obtained on commercially reasonable terms, if at all, or that the terms of any
offered licensed will be acceptable to the Company. There are currently no
pending claims that the Company's products, trademarks or other proprietary
rights infringe upon the proprietary rights of third parties and the Company has
not brought any similar type of action against any other person or entity.
International Sales
Although international sales accounted for only 20.8% of the Company's
total revenue in the quarter ended March 31, 1996, it is expected that revenues
from the licensing and support of the Company's products in international
markets will increase in the future. International sales involve a number of
risks, including the impact of possible recessionary environments in economies
outside the United States, longer receivables collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
17
<PAGE> 18
requirements, reduced protection for intellectual property rights in some
countries, tariffs and other trade barriers, foreign currency exchange rate
fluctuations, difficulties in staffing and managing foreign operations, the
burdens of complying with a variety of foreign laws, potentially adverse tax
consequences and political and economic instability. Because licenses of the
Company's products are denominated in United States dollars, an increase in the
value of the dollar could increase the price in local currencies of the Company'
products in foreign markets and make the Company's products relatively more
expensive than competitive products denominated in local currencies. There can
be no assurance that the foregoing factors will not have a material adverse
effect on the Company's future international license and service revenue. The
Company believes that its growth will require expansion of its sales in foreign
markets and expects to rely principally on resellers in those markets, rather
than substantially increase its direct sales force to serve those markets. There
can be no assurance that the Company will be able to sustain or increase revenue
derived from international licensing and service.
Product Liability
Although the Company has not experienced any product liability claims to
date, the license and support of products by the Company may entail the risk of
such claims. Notwithstanding the provisions in certain of the Company's license
agreements designed to limit the Company's exposure, a product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Volatility of Stock Price
The market price of the shares of Common Stock is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the software or other industries, general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often resulted. There can be no assurance that such litigation will not
occur in the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect upon the Company's business, financial
condition and results of operations.
18
<PAGE> 19
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ITEM 6 EXHIBITS AND REPORTS ON PAGE
FORM 8-K NUMBER
<S> <C>
(a) Exhibits. The following exhibits are being filed as part of this report:
11.1 Statement re: Computation of Per Share Earnings. 21
27.1 Financial Data Schedule 22
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the three
months ended March 31, 1996.
</TABLE>
19
<PAGE> 20
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WORLDTALK
COMMUNICATIONS CORPORATION
Date: May 16, 1996 By: /s/ STEPHEN R. BENNION
---------------------------------------
Stephen R. Bennion
Vice President, Finance and Operations
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
20
<PAGE> 1
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 11.1
Computation of (Pro Forma) Net Loss Per Share
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
Net loss ....................................................... $ (579) $ (901)
======= =======
Weighted average common shares outstanding ..................... 1,569 2,530
Preferred stock, on an "as if converted basis" using the
exchange rate in effect at the initial public offering
date ....................................................... 6,025 933
Staff Accounting Bulletin No. 83 issuances and grants (1) ..... -- 4,108
------- -------
Weighted average shares outstanding ............................ 7,594 7,571
======= =======
Net loss per share ............................................. $ (0.08) $ (0.12)
======= =======
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock warrants, options and other potentially dilutive securities
issued during the 12 months period preceding the date of initial filing of the
Company's Registration Statement on Form S-1 (File No. 333-1482), have been
included in the calculation of common equivalent shares, using the treasury
stock method, as if they were outstanding for all periods presented, even if
anti-dilutive.
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,280
<SECURITIES> 0
<RECEIVABLES> 2,619
<ALLOWANCES> 150
<INVENTORY> 92
<CURRENT-ASSETS> 5,264
<PP&E> 1,708
<DEPRECIATION> 768
<TOTAL-ASSETS> 6,522
<CURRENT-LIABILITIES> 5,122
<BONDS> 0
12,816
0
<COMMON> 729
<OTHER-SE> (12,726)
<TOTAL-LIABILITY-AND-EQUITY> 6,522
<SALES> 2,709
<TOTAL-REVENUES> 2,709
<CGS> 619
<TOTAL-COSTS> 619
<OTHER-EXPENSES> 2,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> (579)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (579)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0
</TABLE>
