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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 (IRS Employer
incorporation or organization) Identification Number)
5155 Old Ironsides Drive
Santa Clara, California 95054
(Address of principal executive offices)
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(408) 567-1500
(Registrant's telephone number, including area code)
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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 X No
--- ---
As of July 31, 1997 there were 10,478,298 shares of the Registrant's common
stock outstanding.
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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 Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996.................................................... 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1996............................................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 1997 and 1996........................................................ 5
Notes to Condensed 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 1: Legal Proceedings............................................................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders.......................... 14
ITEM 6: Exhibits and Reports on Form 8-K............................................. 15
Signature.................................................................... 16
Exhibits..................................................................... 17
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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WORLDTALK COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
Assets (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,058 $ 7,012
Short-term investments 5,004 6,027
Accounts receivable, net of allowance for doubtful accounts
of $121 and $149, respectively 2,986 5,199
Prepaid expenses 808 622
------- -------
Total current assets 13,856 19,185
Property and equipment, net 1,857 1,731
Other assets 944 1,128
-------- --------
$ 16,657 $ 21,719
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,177 $ 1,601
Current portion of capital lease obligations 324 343
Accrued expenses 2,605 3,094
Deferred revenue 1,666 1,566
-------- --------
Total current liabilities 5,772 6,604
Capital lease obligations, less current portion 211 369
Other liabilities 250 350
-------- --------
Total liabilities 6,233 7,323
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock 104 103
Additional paid-in-capital 31,957 31,650
Stockholder notes receivable (32) (265)
Deferred compensation (110) (131)
Accumulated deficit (21,495) (16,961)
-------- --------
Total stockholders' equity 10,424 14,396
-------- --------
$ 16,657 $ 21,719
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WORLDTALK COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1996 1997 1996
--------- ---------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 1,056 $2,222 $ 2,420 $ 4,164
Maintenance, installation, and
training 1,204 1,050 2,501 1,817
------- ------ ------- -------
Total revenues 2,260 3,272 4,921 5,981
------- ------ ------- -------
Cost of revenues:
Software licenses 217 296 499 441
Maintenance, installation, and
training 800 556 1,651 1,030
------- ------ ------- -------
Total cost of revenues 1,017 852 2,150 1,471
------- ------ ------- -------
Gross profit 1,243 2,420 2,771 4,510
------- ------ ------- -------
Operating expenses:
Product development 1,167 852 2,254 1,676
Sales and marketing 2,190 1,644 3,986 3,050
General and administrative 657 385 1,256 831
------- ------ ------- -------
Total operating expenses 4,014 2,881 7,496 5,557
------- ------ ------- -------
Operating loss (2,771) (461) (4,725) (1,047)
Other income (expense), net 135 135 255 142
------- ------ ------- -------
Loss before taxes (2,636) (326) (4,470) (905)
Income taxes -- -- 64 --
------- ------ ------- -------
Net loss $(2,636) $ (326) $(4,534) $ (905)
======= ====== ======= =======
Net loss per share $ (0.25) $(0.03) $ (0.44) $ (0.11)
======== ====== ======= =======
Shares used in computing net loss per share 10,375 9,429 10,359 8,511
======== ====== ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WORLDTALK COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,534) $ (905)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 421 206
Amortization of deferred compensation 21 22
Changes in operating assets and liabilities:
Accounts receivable 2,213 (1,232)
Prepaid expenses (186) (187)
Accounts payable (424) 220
Accrued expenses (489) 758
Deferred revenue 100 802
Other liabilities (100) (85)
------- -------
Net cash used in operating activities (2,978) (401)
------- -------
Cash flows from investing activities:
Restricted cash -- 2,000
Purchase of property and equipment (464) (756)
Purchase of short-term investments (1,495) (5,465)
Sales/maturities of short-term investments 2,518 --
Other assets 101 29
------- -------
Net cash provided by (used in) investing activities 660 (4,192)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 308 14,067
Principal payments under capital lease obligations (177) (143)
Proceeds from bank borrowings -- 250
Stockholder receivable note repayments (borrowings) 233 (68)
------- -------
Net cash provided by financing activities 364 14,106
------- --------
Net increase (decrease) in cash and cash equivalents (1,954) 9,513
Cash and cash equivalents at beginning of period 7,012 984
------- --------
Cash and cash equivalents at end of period $ 5,058 $ 10,497
======= ========
Supplemental disclosures:
Cash paid during the period:
Interest $ 59 $ 40
------- --------
Noncash investing and financing activities:
Conversion of convertible preferred stock to common stock $ -- $ 12,816
------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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WORLDTALK COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY
Worldtalk Communications Corporation (the "Company") is a leading provider of
directory-based messaging and internet security software solutions that support
organizations in transforming local area networks ("LAN's") into secure, robust
and cost-effective platforms for business-critical applications and electronic
commerce. The Company's solutions are designed to enable organizations to build,
expand and secure full-service intranets, while leveraging existing
infrastructure investment.
PER SHARE DATA
Net loss per share for the three and six months ended June 30, 1997, is based on
the weighted average common shares outstanding during each period.
Pro forma net loss per share for the three and six months ended June 30, 1996,
was computed using net loss and was 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 dilutive common equivalent shares from stock options and
warrants outstanding using the treasury stock method. In accordance with certain
Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within 12
months of the offering date as if they were outstanding for all prior periods
presented using the treasury stock method and the anticipated initial public
offering price.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." SFAS No. 128 requires the
presentation of basic earnings per share ("EPS") and, for companies with complex
capital structures, diluted EPS. SFAS No. 128 is effective for annual and
interim periods ending after December 15, 1997. The Company expects that basic
and diluted net loss per share will not differ materially from net loss per
share as presented in the accompanying consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications were made to the 1996 condensed consolidated financial
statements to conform to the 1997 presentation.
(2) SIGNIFICANT EVENTS
On April 17, 1996, the Company completed the initial public offering of 2.1
million shares of its Common Stock, of which 2.0 million shares were issued and
sold by the Company, and 100,000 shares were sold by a selling stockholder. On
May 8, 1996, an additional 315,000 shares were sold by selling stockholders upon
exercise of the underwriters' over-allotment option. Net proceeds to the Company
aggregated $13.8 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 6,025,000 shares of Common Stock.
In November 1996, the Company acquired all of the outstanding stock of Deming
Software, Inc. (Deming), a privately held company, specializing in the
development of electronic mail security software for the Internet, for a total
purchase price of $4.8 million including 569,000 shares of the Company's common
stock, $225,000 in cash, and $418,000 of direct acquisition costs. The
acquisition was accounted for using the purchase
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method and accordingly, the operating results of Deming have been included in
the consolidated financial statements of the Company from the date of the
acquisition.
(3) LITIGATION
In May 1996, an action was commenced against the Company by a subcontractor,
Salinas Group Limited, relating to a project by which the Company provided
software products and services to one of its customers. The complaint in the
U.S. District Court for the Southern District of New York (the "New York
Action"), sought payment for certain cost overruns and damages for an
unspecified breach of contract and set forth various claims, including breach of
alleged contracts and interference with certain contracts the subcontractor had
with the Company's customers. In June 1997, the contractor withdrew some of its
claims. The complaint sought over $12 million in damages, but did not specify
the basis, or the nature, of the alleged damages. The complaint also sought
unspecified punitive damages.
The Company filed a counterclaim against the subcontractor for amounts paid to
the subcontractor in excess of that called for by the subcontractor agreement.
In addition, the Company filed a separate action in California state courts
against both the subcontractor and its principal, setting forth claims for
breach of contract, conversion, fraud, breach of fiduciary duty, and their
failure to report and pay to the Company fees they received for licensing the
Company's products. The subcontractor filed cross-claims that appear to be
substantially similar to those asserted in the New York Action. After a
non-binding arbitrator award in favor of the Company, the parties reached an
agreement in principle to settle both actions.
(4) REPRICING
In April 1997, the Company offered option holders under its stock option plans
the opportunity to have outstanding options repriced to the then current fair
market value of the Company's common stock of $3.75 per share. Normal vesting
schedules for repriced options resume after a three month "freeze". The other
terms of the options remained unchanged. On April 28, 1997, the Company amended
in order to reprice 851,584 options pursuant to this offer.
(5) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and displaying comprehensive
income and its components in the consolidated financial statements. It does not,
however, require a specific format for the statement, but requires the Company
to display an amount representing total comprehensive income for the period in
that financial statement. The Company is in the process of determining its
preferred format. This Statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Statement establishes standards for the
way the public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial statements for
periods beginning after December 31, 1997. The Company does not believe it has
any separately reportable business segments.
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The Securities and Exchange Commission has approved rule amendments to clarify
and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the financial statements. In addition,
the amendments expand existing disclosure requirements to include quantitative
and qualitative information about market risk inherent in market sensitive
instruments. The required quantitative and qualitative information should be
disclosed outside the financial statements and related notes thereto. The
enhanced accounting policy disclosure requirements are effective for the
quarterly period ended June 30, 1997. As the Company does not engage in
derivative instruments, no further interim period disclosure has been provided.
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PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This Discussion and Analysis of Financial Condition and Results of Operations
contains descriptions of the Company's expectations regarding future trends
affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Securities Litigation Reform Act of 1995.
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and in "Additional Factors That May Affect Future Results".
The Company has experienced a reduction in revenues from the HP-UX product
family ("NetJunction products") and associated services over the past several
quarters which has resulted in operating losses. The Company believes the
primary reason for reduced revenues is that small to mid-sized organizations are
increasingly reluctant to make new investments in UNIX-based products. Those
products appeal to larger organizations which have both the resources to manage
UNIX applications and the need for the scalability and robustness of a UNIX
solution. Smaller organizations and departments within larger organizations
appear to be migrating to the Windows NT platform at a rapid pace. While the
Company anticipated this trend and began developing a family of Windows NT-based
messaging, directory and security products approximately 18 months ago, the
shift from UNIX to Windows NT occurred more rapidly than anticipated, causing
the Company to realize lower than anticipated revenues. The Company believes
that future NetJunction/UNIX projects will be limited to projects involving
large organizations and will require significant consulting and integration. In
response, the Company has recently realigned resources to place the NetJunction
business in a dedicated business unit to better serve large organizations. The
Company believes that a return to historic growth patterns will depend on market
acceptance of its new Windows NT-based products as well as a continuing
contribution from the NetJunction product line. With respect to the Windows
NT-based products, Net Talk(TM), a directory/certificate server and multi-vendor
e-mail coexistence solution, and the WorldSecure(TM) Client, a secure e-mail
desktop plug-in, began shipping during the second quarter of 1997 and the
Company anticipates that its e-mail firewall product, WorldSecure(TM) Server
will ship before the end of the third quarter of 1997. The Company's future
revenue will depend increasingly on these new Windows NT messaging and internet
security products. Further, revenue from these new Windows NT-based products
will depend increasingly on the development of third-party distribution channels
and OEM relationships. These products will also place the Company into
competition with a new set of vendors, many of whom have significantly greater
resources than the Company. Accordingly, the Company intends to invest
significantly in its business. As a result, there can be no assurance that the
Company will be profitable on a quarterly or annual basis. The Company's future
operating results may fluctuate due to factors such as the demand for the
Company's products; size and timing of customer orders; the introduction of new
products and product enhancements by the Company or its competitors; the
budgeting cycles of customers; acceptance by the market of the Company's
products; changes in the proportion of revenue attributable to license and
service fees; changes in the level of operating expenses; the ability of the
Company to develop new distribution channels; and competitive conditions in the
industry.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of earnings data
for the periods indicated as a percentage of total revenues:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
------- ------ ----- -----
<S> <C> <C> <C> <C>
Revenue
Software licenses 46.7 % 67.9 % 49.2 % 69.6 %
Maintenance, installation, and training 53.3 32.1 50.8 30.4
------ ----- ----- -----
Total revenue 100.0 100.0 100.0 100.0
Cost of revenue
Software licenses 9.6 9.0 10.1 7.4
Maintenance, installation, and training 35.4 17.0 33.6 17.2
------ ----- ----- -----
Total cost of revenue 45.0 26.0 43.7 24.6
Gross Margin 55.0 74.0 56.3 75.4
Operating expense
Product development 51.6 26.0 45.8 28.0
Sales and marketing 96.9 50.2 81.0 51.0
General and administrative 29.1 11.8 25.5 13.9
------ ----- ----- -----
Total operating expense 177.6 88.0 152.3 92.9
Operating loss (122.6) (14.0) (96.0) (17.5)
Interest and other income 6.0 4.1 5.2 2.4
------ ----- ----- -----
Loss before taxes (116.6) (9.9) (90.8) (15.1)
Income taxes -- -- 1.3 --
------ ----- ----- -----
Net loss (116.6)% (9.9)% (92.1)% (15.1)%
======= ===== ===== =====
</TABLE>
REVENUES
The Company's total revenues are derived primarily from license fees for its
software and charges for services, including maintenance, customization
consulting, installation and training. License fees relate to both the initial
license of its software products, as well as subsequent purchases to expand
capacity or add additional functionality. Maintenance, installation and training
revenues relate to support contracts, installation and training services.
Revenues from software licenses are generally recognized upon shipment of
software. Revenues from maintenance contracts are recognized over the contract
term, which generally is one year, while installation and training revenues are
recognized when the services are performed.
The Company's total revenues for the three and six months ended June 30, 1997
were $2.3 million and $4.9 million, respectively, a decrease of $1.0 million or
30.9% and $1.1 million or 17.7% when compared to the same periods last year and
a decrease of $401,000 or 15.1% when compared with the immediately preceding
quarter ended March 31, 1997. The Company believes that second quarter 1997
revenues were below the Company's expectations primarily due to a more rapid
than anticipated transition of small and medium sized businesses from UNIX
operating systems to the Windows NT platform.
Software license revenues for the three and six months ended June 30, 1997 were
$1.1 million and $2.4 million, respectively, a decrease of $1.2 million or 52.5%
and $1.7 million or 41.9% when compared to the same periods last year and a
decrease of $308,000 or 22.6% when compared to the immediately preceding
quarter. The decrease in software license revenue was attributable to decreased
sales volume of the Company's UNIX-based product line.
Maintenance, installation and training revenues for the three and six months
ended June 30, 1997 were $1.2 million and $2.5 million, respectively, an
increase of $154,000 or 14.7% and $684,000 or 37.6% when compared to the same
periods last year and a decrease of $93,000 or 7.2% when compared to the
immediately preceding quarter. The increases in maintenance, installation and
training revenues from the comparable periods last year were attributable to an
increase in the number of maintenance contracts associated with new
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software licenses, the renewal of maintenance contracts by existing customers,
and increases in demand for customization consulting and training services. The
decrease in maintenance, installation and training revenues from the immediately
preceding quarter was attributable to lower software license revenue, as
maintenance and installation revenues are derived primarily from the Company's
software license installations.
COST OF REVENUES
The Company's total costs of revenues for the three and six months ended June
30, 1997 were $1.0 million and $2.2 million, respectively, as compared to
$852,000 and $1.5 million for the same periods in 1996 and $1.1 million for the
immediately preceding quarter ended March 31, 1997, representing increases of
19.4% and 46.2% from the same periods last year and a decrease of 10.2% from the
quarter ended March 31, 1997.
Cost of product revenues, consist of the costs of royalties paid to third-party
vendors, product media and duplication, packaging materials, and shipping
expenses, were $217,000 and $499,000 for the three and six months ended June 30,
1997, as compared to $296,000 and $441,000 for the same periods last year and
$281,000 for the quarter ended March 31, 1997, representing a decrease of 26.7%,
an increase of 13.2% and a decrease of 22.8%, respectively. The fluctuations in
cost of product revenues were due principally to the mix of software products
and license sales volume.
Maintenance, installation and training costs, consisting principally of
personnel-related costs for consulting, training and technical support, were
$800,000 and $1.7 million for the three and six months ended June 30, 1997, as
compared to $556,000 and $1.0 million for the same periods last year and
$852,000 for the immediately preceding quarter ended March 31, 1997,
representing increases of 43.9% and 60.3%, and a decrease of 6.1%, respectively.
The increases from the same periods last year were due to the significant
expansion of the Company's customer service resources across all categories,
including consulting, support, and account management staff, while the decrease
from the immediately preceding quarter was due primarily to lower headcount
during the quarter ended June 30, 1997.
PRODUCT DEVELOPMENT
Product development expenses consisting primarily of personnel-related costs,
including salaries and benefits of personnel, as well as equipment and facility
costs. Product development expenses were incurred for the research, design and
development of new products, enhancements of existing products, and quality
assurance activities. Costs related to research, design and development of
products are charged to product development expenses as incurred. Product
development expenses for the three and six months ended June 30, 1997 were $1.2
million and $2.3 million as compared to $852,000 and $1.7 million for the same
periods last year and $1.1 million for the immediately preceding quarter,
representing increases of 37.0%, 34.5% and 7.4%, respectively. Product
development expenses represented 51.6% of total revenues for the three months
ended June 30, 1997. The increase in absolute dollars in product development
expenses was due to increased staffing and associated support costs of software
engineers and consultants required primarily to expand product lines but
secondarily to enhance the Company's existing product lines. The increase in
product development expenses as a percentage of total revenues is attributable
to the decrease in revenues, and the fact that product development expenses do
not fluctuate in direct proportion to total revenues.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, benefits, and
commissions of sales and marketing personnel, trade show expenses, and
promotional expenses. Sales and marketing expenses for the three and six months
ended June 30, 1997 were $2.2 million and $4.0 million, as compared to $1.6
million and $3.1 million for the same periods in 1996 and $1.8 million for the
quarter ended March 31, 1997, representing increases of 33.2%, 30.7% and 21.9%,
respectively. Sales and marketing expenses represented 96.9% of total revenues
for the three months ended June 30, 1997. The increases in absolute dollars from
the comparable periods last year were primarily the result of the expansion of
the Company's marketing resources and the launch of the Company's new Windows
NT-based messaging and internet security products. The increase in sales and
marketing expenses as a percentage of total revenues was attributable to both
the increase in absolute
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dollars and the decrease in revenues, as well as the fact that certain sales and
marketing expenses do not fluctuate in direct proportion to total revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses primarily consist of personnel costs for
finance and accounting, human resources and executive management of the Company.
General and administrative expenses for the three and six months ended June 30,
1997 were $657,000 and $1.3 million as compared to $385,000 and $831,000 for the
same periods in 1996 and $600,000 for the immediately preceding quarter ended
March 31, 1997, representing increases of 70.6%, 51.1% and 9.5%, respectively.
General and administrative expenses represented 29.1% of total revenues for the
three months ended June 30, 1997. The increases in absolute dollars were
attributable primarily to increased staffing and associated expenses necessary
to manage and support the Company's business. A secondary factor for this
increase in absolute dollars was the amortization of goodwill related to the
acquisition of Deming Software, Inc. during the fourth quarter of 1996. The
increase in general and administrative expenses as a percentage of total
revenues is attributable to the decrease in revenue and the fact that general
and administrative expenses do not fluctuate in direct proportion to total
revenues.
For the remainder of fiscal 1997, the Company expects operating expenses to
remain relatively flat in absolute dollars but will fluctuate as a percentage of
revenue, depending on revenue levels.
NET INTEREST INCOME
Net interest income consists of interest income and expense and other
miscellaneous income and expense items. Net interest income for the three and
six months ended June 30, 1997 was $135,000 and $255,000, as compared to
$135,000 and $142,000 for the same periods last year and $121,000 for the
immediately preceding quarter, respectively. The increase in net interest income
for six months ended June 30, 1997 from the same period in 1996 was primarily
attributable to increases in the Company's cash and cash equivalent and
short-term investment balances, resulting from the Company's initial public
offering. The increase from the immediately preceding quarter was primarily
attributable to higher interest earnings on the Company's average cash and cash
equivalent and short-term investment balances, offset by a decrease in the
Company's average cash and cash equivalent and short-term investment balances.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company completed its initial public offering of 2.1 million
shares of Common Stock. The Company received net proceeds of approximately $13.8
million, after deducting expenses which included underwriting discounts and
commissions. At June 30, 1997 the Company had cash and cash equivalents of $5.1
million, short-term investments of $5.0 million and working capital of $8.1
million.
The Company has a $2.0 million bank line of credit, which expires on January 7,
1998. As of June 30, 1997, the Company had utilized $243,000 of its available
line of credit.
Net cash used in operating activities amounted to $3.0 million for the six
months ended June 30, 1997 and was comprised principally of the Company's net
loss of $4.5 million and decreases in accounts payable, accrued expenses and
other liabilities of $1.0 million and an increase in prepaid expenses of
$186,000, offset by a decrease in accounts receivable of $2.2 million and an
increase in deferred revenue of $100,000.
Net cash provided by investing activities amounted to $660,000 for the six
months ended June 30, 1997, which included $464,000 for purchases of property
and equipment and the purchase of short-term investments of $1.5 million, offset
by maturities of short-term investments of $2.5 million and an increase in other
assets of $101,000. The Company currently has no significant capital commitments
for fiscal 1997.
Net cash provided by financing activities amounted to $364,000 for the six
months ended June 30, 1997 which comprised of principal payments under capital
lease obligations of $177,000, offset by repayments of stockholder receivables
of $233,000 and net proceeds from issuance of common stock of $308,000.
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The Company may, in the future, pursue acquisitions of complementary companies
or technologies, or divest certain products and related services, to further
strategic corporate objectives. Such transactions could result in a significant
use of cash and earnings per share dilution caused by reduced interest income
and/or the issuance of additional stock. Additionally, costs associated with the
acquisition or divestiture of companies, products and related services or
technologies could materially impact future operating results. Further, such
acquisitions could result in the immediate write-off of research and development
in process and expenses relating to integration costs. Such costs could result
in significant losses in one or more fiscal quarters.
The Company believes that its cash balances and credit facilities will be
sufficient to meet its anticipated cash needs to fund operating losses, working
capital requirements, 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 sales 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.
ADDITIONAL FACTORS THAT MAY EFFECT FUTURE RESULTS
The Company was founded in February 1992 and has incurred operating losses in
each of its fiscal years since inception and had an accumulated deficit of $21.5
million as of June 30, 1997. 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. There can be no assurance that the Company will be successful
in addressing such risks.
The Company's quarterly and annual operating results have in the past, and may
in the future, vary significantly depending on many factors. Historically, a
substantial portion of the Company's revenues has been recognized in the last
two-weeks of the third month of the quarter as a result of many customers'
purchasing practices. The inability of the Company to recognize expected
revenues during the last month of the quarter, particularly due to delay in the
timing or loss 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 research,
development and marketing expenses in relation to product releases, the timing
of product introductions by the Company and its competitors, market acceptance
of new versions of the Company's products, variations in the mix of the
Company's license products, 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.
The Company's success also depends on the performance of management and key
personnel. In this regard, there have been several recent executive level
changes. Specifically, Mark Jung, the Company's chairman and chief executive
officer, along with the vice president, sales and the vice president,
engineering have left the Company. Mr. Jung entered into a twelve month
consulting contract with the Company pursuant to which he will continue to work
with the Company as may be reasonably requested by the Company. Mr. Jung was
replaced as chief executive officer by Bernard Harguindeguy, who was promoted
from his previous position as president and chief operating officer. In
addition, John Weald was named Vice President, Engineering - Intranet Products,
Robert Dickinson, Engineering Director of the Company's Deming Internet Security
business unit was promoted to Vice President, Engineering - Security Products,
and Sathvik Krishnamurthy, Vice President and General Manager of the Company's
Deming Internet Security business unit was named Vice President,
Intranet/Security Products. A key element in the Company's future success will
be the ability of the Company's new management team to implement the Company's
business strategy.
The Company's success is also dependent upon market acceptance of its products
in preference to competing products and products that may be developed by
others. 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 or that such new products will achieve a sufficient level of market
acceptance to result in profitable operations. In addition, the introduction or
announcement of new product offerings by the Company or its competitors could
cause customers to defer
13
<PAGE> 14
or cancel purchases of existing Company products. Failure of the Company 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 product, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's future operating results are significantly dependent upon market
acceptance of its new Windows NT-based products, along with a continued
contribution from the Company's NetJunction products and related services. The
market for the Company's NetJunction products has arisen in large part because
of the proliferation of numerous disparate e-mail systems and LAN environments
and the fact that, to date, no single vendor has dominated this market. 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 substantially reduce or eliminate the Company's
principal market. Sales of NetJunction products during the first two quarters of
fiscal 1997 have been below the Company's expectations resulting in operating
losses. The Company believes that the principal reason for this shortfall is a
more rapid than anticipated shift from the UNIX platform to the Windows NT
platform in small and mid-sized organizations, as well as departments of large
organizations. While the Company believes that there continues to be market
demand for the NetJunction product line, this demand is limited to large
organizations. The Company believes that the introduction of its new Windows
NT-based products and the development of new sales channels during the second
and third quarters of fiscal 1997 will begin the process of restoring the
Company to its historic growth patterns. However, there can be no assurance that
the Company will be successful in this regard. Further, sales of NetJunction
products may continue to be below the Company's revised expectations resulting
in greater than anticipated operating losses during the second half of fiscal
1997.
The Company believes that its success is also dependent upon the successful
completion, introduction and market acceptance of its Window NT-based products.
There are a number of factors which must be addressed for the Company's products
to achieve broad market acceptance. These factors include performance,
functionality, interoperability, 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 Company anticipates that its marketing strategy of its Windows NT-based
products will in the future depend more significantly on distribution by VARs
and OEMs, and on managing the distribution channel. 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. If the channel sales efforts fail, the
Company's business, operating results and financial condition could be
materially and adversely affected.
International sales accounted for 8.7% of the Company's total sales for the
three months ended June 30, 1997, compared to 30.6% for the same quarter in 1996
and 29.0% for the immediately preceding quarter ended March 31, 1997.
International sales involve a number of risks, including the impact of possible
recessionary environments in economies outside of the United States, longer
receivables collection periods, unexpected changes in regulatory requirements,
reduced protection for intellectual property rights in some countries, tariffs
and other trade barriers. There can be no assurance that the Company will be
able to sustain or increase revenue derived from international licensing and
service. Any failure to expand sales in foreign markets, and the risks of doing
business in those markets, could have a material adverse effect on the Company's
business, financial condition and result of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
14
<PAGE> 15
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
In May 1996, an action was commenced against the Company by a subcontractor,
Salinas Group Limited, relating to a project by which the Company provided
software products and services to one of its customers. The complaint in the
U.S. District Court for the Southern District of New York (the "New York
Action"), sought payment for certain cost overruns and damages for an
unspecified breach of contract and set forth various claims, including breach of
alleged contracts and interference with certain contracts the subcontractor had
with the Company's customers. In June 1997, the contractor withdrew some of its
claims. The complaint sought over $12 million in damages, but did not specify
the basis, or the nature, of the alleged damages. The complaint also sought
unspecified punitive damages.
The Company filed a counterclaim against the subcontractor for amounts paid to
the subcontractor in excess of that called for by the subcontractor agreement.
In addition, the Company filed a separate action in California state courts
against both the subcontractor and its principal, setting forth claims for
breach of contract, conversion, fraud, breach of fiduciary duty, and their
failure to report and pay to the Company fees they received for licensing the
Company's products. The subcontractor filed cross-claims that appear to be
substantially similar to those asserted in the New York Action. After a
non-binding arbitrator award in favor of the Company, the parties reached an
agreement in principle to settle both actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 1997, the Company held an Annual Meeting of Stockholders (the
"Meeting") at which the following matters were submitted for approval by the
stockholders: (i) election of all five directors of the Company, with each to
serve until his term expires and his successor has been elected and qualified or
until such director's earlier resignation, death or removal; (ii) ratification
of the selection of KPMG Peat Marwick LLP as the Company's independent
accountants for the fiscal year ending December 31, 1997; and (iii) amendment of
the Company's 1996 Equity Incentive Plan to increase the number of shares
reserved for issuance thereunder by 750,000 shares. A total of 7,884,757 shares
were represented at the Meeting, in person or by proxy, equal to approximately
76.5% of the outstanding shares of the Company's Common Stock.
Each nominee to the Board of Directors was elected by the vote set forth below:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
David J. Cowan 7,874,667 10,090
Wade Woodson 7,874,667 10,090
Max Hopper 7,874,667 10,090
Anthony Sun 7,874,667 10,090
Mark A. Jung 7,874,667 10,090
</TABLE>
15
<PAGE> 16
The selection of KPMG Peat Marwick LLP as the Company's independent accountants
was approved by the following vote: 7,882,057 shares voted in favor, 1,200
shares voted against, 1,500 shares abstained. The amendment to the Company's
1996 Equity Incentive Plan was approved by the following vote: 6,403,052 shares
voted in favor, 200,005 shares voted against, 4,047 shares abstained and
1,277,653 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report:
11.1 Statement re: Computation of Net Income (Loss) per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed during the three months ended June 30, 1997.
16
<PAGE> 17
- --------------------------------------------------------------------------------
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: August 13, 1997 By: /s/ STEPHEN R. BENNION
-----------------------------------------------
Stephen R. Bennion
Executive Vice President,
Finance and Administration
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
17
<PAGE> 18
EXHIBIT INDEX
11.1 Statement re: Computation of Net Income (Loss) per Share
27.1 Financial Data Schedule
<PAGE> 1
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 11.1
Computation of Net Income (Loss)Per Share
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $(2,636) $ (326) $(4,534) $ (905)
Weighted average common shares outstanding 10,375 3,404 10,359 2,486
Preferred stock, on an "as if converted basis" using the
exchange rate in effect at the initial public offering date
-- 6,025 -- 6,025
------- ------ ------- ------
Number of common shares and common share equivalents used
in computation 10,375 9,429 10,359 8,511
======= ====== ======= ======
Net loss per share $ (0.25) $(0.03) $(0.44) $(0.11)
======= ====== ====== ======
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,058
<SECURITIES> 5,004
<RECEIVABLES> 2,986
<ALLOWANCES> 121
<INVENTORY> 0
<CURRENT-ASSETS> 13,856
<PP&E> 1,857
<DEPRECIATION> 175
<TOTAL-ASSETS> 16,657
<CURRENT-LIABILITIES> 5,772
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 10,320
<TOTAL-LIABILITY-AND-EQUITY> 16,657
<SALES> 2,260
<TOTAL-REVENUES> 2,260
<CGS> 1,017
<TOTAL-COSTS> 1,017
<OTHER-EXPENSES> 4,014
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135
<INCOME-PRETAX> (2,636)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,636)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
