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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 MARCH 31, 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
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(2) Yes X No
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As of April 30, 1997 there were 10,312,285 shares of the Registrant's common
stock outstanding.
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Page 1 of 32
Exhibits Table on Page 16
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FORM 10-Q
WORLDTALK COMMUNICATIONS CORPORATION
INDEX
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<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996.................................................... 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1997 and 1996.................................................. 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 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
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................................ 14
ITEM 6: Exhibits and Reports on Form 8-K............................................. 14
Signature.................................................................... 15
Exhibits..................................................................... 16
</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>
March 31, December 31,
1997 1996
Assets (UNAUDITED)
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,272 $ 7,012
Short-term investments 5,365 6,027
Accounts receivable, net of allowance for doubtful accounts
of $148 and $149, respectively 3,079 5,524
Prepaid expenses 444 622
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Total current assets 16,160 19,185
Property and equipment, net 1,873 1,731
Other assets 1,000 803
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$ 19,033 $ 21,719
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Liabilities and stockholders' equity (deficit)
Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 1,064 $ 1,601
Current portion of capital lease obligations 332 343
Accrued expenses 2,734 3,094
Deferred revenue 1,611 1,566
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Total current liabilities 5,741 6,604
Capital lease obligations, less current portion 291 369
Other liabilities 250 350
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Total liabilities 6,282 7,323
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Commitments and contingencies
Stockholders' equity (deficit):
Common stock 103 103
Additional paid-in-capital 31,660 31,650
Stockholder notes receivable (32) (265)
Deferred compensation (120) (131)
Accumulated deficit (18,860) (16,961)
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Total stockholders' equity 12,751 14,396
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$ 19,033 $ 21,719
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</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 March 31,
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1997 1996
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<S> <C> <C>
Revenues:
Software licenses $ 1,364 $ 1,942
Maintenance, installation, and training 1,297 767
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Total revenues 2,661 2,709
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Cost of revenues:
Software licenses 281 145
Maintenance, installation, and training 852 474
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Total cost of revenues 1,133 619
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Gross profit 1,528 2,090
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Operating expenses:
Product development 1,087 824
Sales and marketing 1,796 1,406
General and administrative 600 446
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Total operating expenses 3,483 2,676
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Operating loss (1,955) (586)
Other income (expense), net 121 7
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Income before taxes (1,834) (579)
Income taxes 65 --
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Net loss $ (1,899) $ (579)
======== =======
Net loss per share $ (0.18) $ (0.08)
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Shares used in computing net loss per share 10,298 7,594
======== =======
</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>
Three months ended March 31,
----------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,899) $ (579)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 161 92
Amortization of goodwill 52 --
Amortization of deferred compensation 11 11
Changes in operating assets and liabilities:
Accounts receivable 2,445 (902)
Prepaid expenses 178 (400)
Accounts payable (537) 190
Accrued expenses (360) 380
Deferred revenue 45 724
Other liabilities (100) (85)
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Net cash used in operating activities (4) (569)
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Cash flows from investing activities:
Purchase of property and equipment (303) (320)
Purchase of short-term investments (496) --
Sales/maturities of short-term investments 1,158 --
Other assets (249) 31
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Net cash provided (used in) in investing activities 110 (289)
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Cash flows from financing activities:
Net proceeds from issuance of common stock 10 44
Principal payments under capital lease obligations (89) (72)
Proceeds from bank borrowings -- 250
Stockholder receivable note repayments (borrowings) 233 (68)
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Net cash provided by financing activities 154 154
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Net increase (decrease) in cash and cash equivalents 260 (704)
Cash and cash equivalents at beginning of period 7,012 2,984
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Cash and cash equivalents at end of period $ 7,272 $ 2,280
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Supplemental disclosures:
Cash paid during the period:
Interest $ 36 $ 18
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Noncash investing and financing activities:
Exercise of common stock options in exchange for stockholder
notes receivable $ -- $ 68
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</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 Corporation (the "Company") is a provider of directory-based software
and services solutions that support organizations in transforming intranets into
secure, robust and cost-effective platforms for business-critical applications
and electronic commerce. An "intranet" may be defined as the emerging
application of Internet technology to interconnect application networks within
enterprises. Worldtalk's products and services enable managed deployment of
corporate intranets, designed to provide security, directory services,
electronic mail ("e-mail") connectivity and groupware applications while
leveraging existing infrastructure investment.
PER SHARE DATA
Earnings per share for the three months ended March 31, 1997, is based on the
weighted average common and, when dilutive, common equivalent shares outstanding
during each period, using the treasury stock method. Common equivalent shares
consist of dilutive shares issuable upon the exercise of stock options and
warrants.
Pro Forma net loss per share for the period ended March 31, 1996, 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
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
EPS will be higher than primary earnings per share as presented in the
accompanying consolidated financial statements and that diluted EPS will not
differ materially from diluted earnings 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.
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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 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"), seeks payment for certain cost overruns and damages for an unspecified
breach of contract and sets forth various claims, including breach of alleged
contracts and interference with certain contracts the subcontractor had with the
Company's customers. The complaint seeks over $12 million in damages, but does
not specify the basis, or the nature, of the alleged damages. The complaint also
seeks unspecified punitive damages.
The Company intends to defend vigorously against the action. The Company
believes that: the subcontractor's claims are without merit and not supported by
the facts or the law; the subcontractor agreement expressly disclaims the types
of damages now being sought; and the law prohibits punitive damages for breach
of contract.
The Company has 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 has 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 has filed cross-claims that appear to
be substantially similar to those asserted in the New York Action.
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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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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 in "Additional Factors That May Affect Future Results".
Although the Company has experienced significant growth in revenues from the
HP-UX product family ("NetJunction products"), and associated services, the
Company does not believe prior growth rates are indicative of the Company's
future operating results. Further, future growth is expected to depend not only
from sales of the NetJunction product family but also from sales of the
Company's new Windows NT products. Accordingly, the Company expects increased
competition and 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; 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. For example,
revenue for the first quarter of 1997 have been affected by several of these
factors.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of earnings data
for the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
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<S> <C> <C>
Revenue
Software licenses 51.3% 71.7%
Maintenance, installation, and training 48.7 28.3
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Total revenue 100.0 100.0
Cost of revenue
Software licenses 10.6 5.3
Maintenance, installation, and training 32.0 17.5
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Total cost of revenue 42.6 22.8
Gross Margin 57.4 77.2
Operating expense
Product development 40.9 30.4
Sales and marketing 67.5 51.9
General and administrative 22.5 16.5
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Total operating expense 130.9 98.8
Operating loss (73.4) (21.6)
</TABLE>
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<TABLE>
<S> <C> <C>
Interest and other income 4.5 0.3
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Income before taxes (68.9) (21.3)
Income taxes 2.4 --
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Net loss (71.4)% (21.3)%
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</TABLE>
REVENUES
The Company's total revenues are derived primarily from license fees for its
software and charges for services, including maintenance, 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 months ended March 31, 1997 were $2.7
million representing no change from the comparable period last year and a
decrease of $1.7 million or 38.9% from the immediately preceding quarter ended
December 31, 1996. The Company believes that first 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 revenue was $1.4 million for the three months ended March 31,
1997 as compared to $1.9 million for the same quarter in 1996 and $3.0 million
for the quarter ended December 31, 1996, representing decreases of 29.8% and
54.3%, respectively. 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 months ended March
31, 1997 were $1.3 million as compared to $767,000 for the comparable period
last year and $1.4 million for the immediately preceding quarter, representing
an increase of 69.1% and a decrease of 5.2%, respectively. The increase in
maintenance, installation and training revenues from the comparable quarter last
year was attributable to maintenance contracts associated with new 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 months ended March 31, 1997
were $1.1 million as compared to $619,000 for the same quarter in 1996 and $1.1
million for the immediately preceding quarter ended December 31, 1996,
representing increases of 83.0% and 7.1%, respectively.
Cost of product revenues, consist of the costs of royalties paid to third-party
vendors, product media and duplication, packaging materials, and shipping
expenses, was $281,000 for the three months ended March 31, 1997, as compared to
$145,000 for the same period last year and $333,000 for the quarter ended
December 31, 1996, representing an increase of 93.4% and a decrease of 15.8%,
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
$852,000 for the three months ended March 31, 1997, as compared to $474,000 for
the quarter ended March 31, 1996 and $724,000 for the immediately preceding
quarter ended December 31, 1996, representing increases of 79.7% and 17.7%,
respectively. These increases were due to the significant expansion of the
Company's customer service resources across all categories, including
consulting, support, and account management staff. The Company anticipates these
expenditures may increase in dollar amount and may increase as a percentage of
total revenue in the future.
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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 months ended March 31, 1997 were $1.1 million
as compared to $824,000 for the same quarter last year and $962,000 for the
immediately preceding quarter, representing increases of 31.9% and 13.0%,
respectively. Product development expenses represented 40.9% of total revenues
for the three months ended March 31, 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 to expand and
enhance the Company's 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. The Company believes that continued
commitment to product development will be required for the Company's products to
obtain a competitive advantage. The Company intends to continue to allocate
increasing resources to product research and development. Consequently, such
expenses may increase in both dollar amount and as a percentage of total
revenues in the future.
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 months ended
March 31, 1997 were $1.8 million, as compared to $1.4 million for the same
period in 1996 and $2.0 million for the quarter ended December 31, 1996,
representing an increase of 27.7% and a decrease of 11.6%, respectively. Sales
and marketing expenses represented 67.5% of total revenues for the three months
ended March 31, 1997. The increase in absolute dollars from the comparable
quarter last year was primarily the result of the expansion of the Company's
direct sales force and marketing efforts. The decrease from the immediately
preceding quarter was due primarily to lower sales commission expenses which
fluctuated in direct proportion to the lower total revenues for the three months
ended March 31, 1997. The increase in sales and marketing expenses as a
percentage of total revenues was attributable to the decrease in revenues, and
the fact that certain sales and marketing expenses do not fluctuate in direct
proportion to total revenues. In the 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. Consequently, such expenses may
increase in both dollar amount and as a percentage of total revenues in the
future.
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 months ended March 31, 1997
were $600,000 as compared to $446,000 for the same quarter in 1996 and $485,000
for the immediately preceding quarter ended December 31, 1996, representing
increases of 34.5% and 23.7%, respectively. General and administrative expenses
represented 22.5% of total revenues for the three months ended March 31, 1997.
The increase in absolute dollars was attributable to increased staffing and
associated expenses necessary to manage and support the Company's growth and 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. The Company believes that general and
administrative expenses will continue to increase in absolute dollar amounts in
the future, as the Company expands its staffing to handle increased
infrastructure requirements.
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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 months
ended March 31, 1997 was $121,000, as compared to $7,000 for the same quarter
last year and $190,000 for the immediately preceding quarter, respectively. The
increase in net interest income from the same quarter last year 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 decrease from the immediately preceding quarter was primarily
attributable to a decrease in the Company's average cash and cash equivalent and
short-term investment balances, due to the timing of collection of accounts
receivable balances from the Company's customers during the quarter ended March
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
In April 1996, the Company completed its initial public offering of 2 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 March 31, 1997 the Company had cash and cash equivalents of $7.3
million, short-term investments of $5.4 million and working capital of $10.4
million.
The Company has a $2.0 million bank line of credit, which expires on January 7,
1998. As of March 31, 1997, the Company had utilized $243,000 of its available
line of credit.
Net cash used in operating activities amounted to $4,000 for the three months
ended March 31, 1997 and was comprised principally of the Company's net loss of
$1.9 million and decreases in accounts payable and accrued expenses of $897,000,
offset by decreases in accounts receivable and prepaid expenses of $2.6 million
and $178,000, respectively.
Net cash provided by investing activities amounted to $110,000 for the three
months ended March 31, 1997, which included $303,000 for purchases of property
and equipment, a decrease in other assets of $249,000 and the purchase of
short-term investments of $496,000 offset by maturities of short-term
investments of $1,158,000 The Company currently has no significant capital
commitments for fiscal 1997.
Net cash provided by financing activities amounted to $154,000 for the three
months ended March 31, 1997 which comprised of principal payments under capital
lease obligations of $89,000, offset by repayments of stockholder receivables of
$233,000 and net proceeds from issuance of common stock of $10,000.
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 the proceeds from its initial public offering,
together with its cash balances, 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 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 $18.9
million as of March 31, 1997. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in the
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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 is 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 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
continued market acceptance and continued enhancement of its 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. Further,
product transition issues may dilute management and sales force focus on the
NetJunction product line, resulting in lower than anticipated sales. Particular
reference is made to the risks associated with expanding both product offerings
and sales channels relating to the Company's planned introduction of Windows
NT-based products during 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 Window NT products
will in the future depend more significantly on distribution by VARs 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. During 1997 and beyond, the Company's strategy targeted at
industry growth of the Windows NT operating system is being rapidly validated.
While the Company expects that NetJunction/UNIX products will remain the
standard for robust, enterprise-wide electronic communications backbones, the
Company has experienced the impact of the shift from UNIX to Windows NT in
smaller organizations and departments. The Company feels well positioned to
benefit from this market trend, as it introduces its Windows NT product line.
This expansion into the Windows NT market may cause disruption in historic sales
and/or expense patterns causing quarterly results to differ materially from
expectation. Further, there can be no assurance that the Company will be
successful in implementing this planned expansion.
12
<PAGE> 13
Although international sales accounted for 29.0% of the Company's total sales
for the three months ended March 31, 1997, compared to 20.8% for the same
quarter in 1996 and 27.5% for the immediately preceding quarter ended December
31, 1996, it is not certain that revenues from the licensing and support of the
Company's products in international markets will continue to grow. 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.
13
<PAGE> 14
- --------------------------------------------------------------------------------
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"), seeks payment for certain cost overruns and damages for an unspecified
breach of contract and sets forth various claims, including breach of alleged
contracts and interference with certain contracts the subcontractor had with the
Company's customers. The complaint seeks over $12 million in damages, but does
not specify the basis, or the nature, of the alleged damages. The complaint also
seeks unspecified punitive damages.
The Company intends to defend vigorously against the action. The Company
believes that: the subcontractor's claims are without merit and not supported by
the facts or the law; the subcontractor agreement expressly disclaims the types
of damages now being sought; and the law prohibits punitive damages for breach
of contract.
The Company has 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 has 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 has filed cross-claims that appear to
be substantially similar to those asserted in the New York Action.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report:
10.1 Amendment to Loan and Security Agreement, dated January 9,
1997, between Registrant and General Bank
10.2 Form of Employment Agreement, dated January 23, 1997,
between Registrant and Christopher J. Andrews, Simon A.
Khalaf and Sathvik Krishnamurthy
10.3 Form of Employment Agreement, dated January 23, 1997,
between Registrant and Stephen R. Bennion, Steve M. Goldner
and Mark A. Jung
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 March 31,
1997.
14
<PAGE> 15
- --------------------------------------------------------------------------------
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 14, 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)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.1 Amendment to Loan and Security Agreement, dated January 9,
1997, between Registrant and General Bank
10.2 Form of Employment Agreement, dated January 23, 1997,
between Registrant and Christopher J. Andrews, Simon A.
Khalaf and Sathvik Krishnamurthy
10.3 Form of Employment Agreement, dated January 23, 1997,
between Registrant and Stephen R. Bennion, Steve M. Goldner
and Mark A. Jung
11.1 Statement re: Computation of Net Income (Loss) per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 10.1
Amendment to Loan and Security Agreement, dated
January 9, 1997, between Registrant and General Bank
- --------------------------------------------------------------------------------
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is entered into as of
January 9, 1997, by and between General Bank ("Bank") and Worldtalk Corporation
("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of October 25, 1995, as amended from time to time (the
"Agreement"). Borrower and Bank desire to extend the term of the Agreement in
accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The following terms defined in Section 1.1 are amended to read as
follows:
"Committed Line" means Two Million Dollars ($2,000,000).
"Maturity Date" means January 31, 1998.
2. The concentration limit in clause (i) of the term Eligible
Accounts shall be twenty percent (20%) of Eligible Accounts.
3. The first sentence of Section 2.3(a) is amended to read as
follows:
(a) Interest Rate. Except as set forth in Section 2.3(b), any
Advances shall bear interest, on the average Daily Balance,
at a rate equal to one half (0.5) percentage point above the
Prime Rate.
4. Section 6.3 is amended to read as follows:
6.3 Financial Statements, Reports, Certificates. Borrower
shall deliver to Bank: (a) as soon as available, but in
any event within thirty (30) days after the end of each
fiscal quarter, a company prepared consolidated balance
sheet and income statement covering Borrower's
consolidated operations during such period, certified by
a Responsible Officer; (b) as soon as available, but in
any event within ninety (90) days after the end of
Borrower's fiscal year, audited consolidated financial
statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified
opinion on such financial statements of an independent
certified public accounting firm reasonably acceptable to
Bank; (c) within five (5) days upon becoming available,
copies of all statements, reports and notices sent or
made available generally by Borrower to its security
holders or to any holders of Subordinated Debt and all
reports on Form 10-K and 10-Q filed with the Securities
and Exchange Commission; (d) promptly upon receipt of
notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary
of One Hundred Thousand Dollars ($100,000) or more; and
(e) such budgets, sales projections,
16
<PAGE> 2
operating plans or other financial information as Bank
may reasonably request from time to time.
Within thirty (30) days after the last day of each month,
Borrower shall deliver to Bank a Borrowing Base Certificate
signed by a Responsible Officer in substantially the form of
Exhibit C hereto, together with aged listings of accounts
receivable and accounts payable.
Borrower shall deliver to Bank with the quarterly financial
statements a Compliance Certificate signed by a Responsible
Officer in substantially the form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such
audits will be conducted no more often than once every twelve
(12) months unless an Event of Default has occurred and is
continuing.
5. Sections 6.8, 6.9 and 6.10 are amended to read as follows,
and Section 6.11 is deleted:
6.8 Quick Ratio. Borrower shall maintain, as of the last day
of each fiscal quarter, a ratio of Quick Assets to Current
Liabilities (excluding 80% of net deferred revenue) of at
least 1.0 to 1.0.
6.9 Debt-Net Worth Ratio. Borrower shall maintain, as of the
last day of each fiscal quarter, a ratio of Total Liabilities
(excluding 80% of net deferred revenue) less Subordinated
Debt to Tangible Net Worth plus Subordinated Debt of not more
than 2.0 to 1.0.
6.10 Tangible Net Worth. Borrower shall maintain, as of the
last day of each fiscal quarter, a Tangible Net Worth plus
Subordinated Debt of not less than Ten Million Dollars
($10,000,000).
6. Exhibit D is amended to read as Exhibit D attached hereto.
7. Unless otherwise defined, all capitalized terms in this
Amendment shall be as defined in the Agreement. Except as
amended, the Agreement remains in full force and effect.
8. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as
of the date of this Amendment, and that no Event of Default
has occurred and is continuing.
9. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which
together shall constitute one instrument.
10. As a condition to the effectiveness of this Amendment, Bank
shall receive a non-refundable loan fee of Seven Thousand
Five Hundred Dollars ($7,500) plus an amount equal to the
Bank Expenses incurred in connection with this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
WORLDTALK CORPORATION
By
-------------------
Title
----------------
GENERAL BANK
By
-------------------
Title
----------------
17
<PAGE> 3
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: GENERAL BANK
FROM: WORLDTALK CORPORATION
The undersigned authorized officer of Worldtalk Corporation hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending _____________ with all required
covenants except as noted below and (ii) all representations and warranties
of Borrower stated in the Agreement are true and correct in all material
respects as of the date hereof. Attached herewith are the required documents
supporting the above certification. The Officer further certifies that these are
prepared in accordance with Generally Accepted Accounting Principles (GAAP) and
are consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C> <C>
Quarterly financial statements Quarterly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 30 days Yes No
A/R Audit Initial and Semi-Annual Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.0:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth + Sub Debt $10,000,000 $________ Yes No
Maximum Debt/Tangible Net Worth 2.0:1.0 _____:1.0 Yes No
</TABLE>
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
SIGNATURE
TITLE
DATE
18
<PAGE> 4
CORPORATE RESOLUTIONS TO BORROW
BORROWER: WORLDTALK CORPORATION
I, the undersigned Secretary or Assistant Secretary of Worldtalk
Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State
of _______________.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
--------------------------------------------------------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from General Bank ("Bank"),
on such terms as may be agreed upon between the officers, employees, or agents
and Bank, such sum or sums of money as in their judgment should be borrowed,
without limitation, including such sums as are specified in that certain
Amendment to Loan and Security Agreement dated as of January 9, 1997 (the "Loan
Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT; FOREIGN EXCHANGE. To execute letters of credit
applications, foreign exchange agreements and other related documents pertaining
to Bank's issuance of letters of credit and foreign exchange contracts.
ISSUE WARRANTS. To issue warrants to purchase the Corporation's capital
stock, for such series and number, and on such terms, as an officer of the
Corporation shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements
as they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
19
<PAGE> 5
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on January 9, 1997 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X
20
<PAGE> 1
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 10.2
Form of Employment Agreement, dated January 23, 1997
between Registrant and Christopher J. Andrews,
Simon A. Khalaf and Sathvik Krishnamurthy
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION
EMPLOYMENT AGREEMENT
This Agreement is entered into as of January 23, 1997 by and between
Worldtalk Communications Corporation, a Delaware corporation (the "Company"),
and ___________ ("Employee"). In consideration of the terms and conditions set
forth in this Agreement, the parties agree as follows:
1. DEFINITIONS.
1.1 For purposes hereof "Cause" for termination of any
Employee's employment will exist at any time after the happening of one or more
of the following events: (a) the Employee's conviction of a felony involving
moral turpitude; (b) any willful act or acts of dishonesty undertaken by the
Employee and intended to result in substantial gain or personal enrichment of
the Employee, directly or indirectly, at the expense of the Company or a
Successor, Parent, Subsidiary or Affiliate of the Company (as such terms are
defined in the Company's 1996 Equity Incentive Plan); (c) any willful act or
misconduct which is materially and demonstrably injurious to the Company or a
Successor, Parent, Subsidiary or Affiliate of the Company; (d) substantial and
repeated neglect of the Employee's responsibility, or malfeasance thereof, that
remains uncured after 30 days written notice of such neglect or malfeasance; or
(e) the Employee's death or disability (within the meaning of Section 22(e)(3)
of the Internal Revenue Code of 1986, as amended.
1.2 A "Merger" shall mean (a) a merger or consolidation in
which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings), or (b) a merger in which the Company is the surviving corporation but
after which the stockholders of the Company (other than any stockholder which
merges (or which owns or controls another corporation which merges) with the
Company in such merger) cease to own at least 90% of the issued and outstanding
capital stock or other equity interests in the Company.
1.3 A "Sale" means a Merger, the sale of all or substantially
all of the assets of the Company as a going concern in a single transaction or
series of related transactions or the sale or transfer of a majority of the
outstanding shares of the Company by the stockholders of the Company in a single
transaction or a series of related transactions other than market transactions
to unrelated purchasers.
1.4 A "Transaction "means:
(a) a dissolution or liquidation of the Company;
(b) a merger or consolidation in which the Company is
not the surviving corporation (other than a merger or consolidation
with a wholly owned subsidiary, a reincorporation of the Company in a
different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company);
(c) a merger in which the Company is the surviving
corporation but after which the stockholders of the Company (other than
any stockholder which merges (or which owns or controls another
corporation which merges) with the Company in such merger) cease to own
at least 90% of the issued and outstanding capital stock or other
equity interests in the Company;
(d) the sale of all or substantially all of the assets
of the Company; or
21
<PAGE> 2
(e) any other transaction which qualifies as a
"corporate transaction" under Section 424(a) of the Internal Revenue
Code of 1986, as amended, wherein the stockholders of the Company give
up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the
outstanding shares of the Company from or by the stockholders of the
Company).
2. EMPLOYMENT. The Company hereby continues to employ Employee and
Employee hereby continues to accept employment with the Company upon the terms
and conditions set forth in this Agreement. Employee hereby represents and
warrants to the Company that he is free to enter into and fully perform this
Agreement and the Proprietary Rights and Confidentiality Agreement he has signed
for the benefit of the Company (the "Confidentiality Agreement").
3. SALARY AND BENEFITS. For the performance of all of Employee's
obligations under this Agreement, the Company shall set the Employee's salary
and bonuses from time to time, which salary and bonuses will be payable as
earned in accordance with the payroll policies of the Company as constituted
from time to time. During the term of this Agreement, Employee shall be entitled
to receive fringe benefits of employment generally available to the Company's
other similarly situated employees as he becomes eligible for them.
4. TERM. Employee's employment with the Company is not for a specified
term, is at will and may be terminated by either party with or without cause as
described in this Section 4. Employee, in his sole discretion, may, at any time,
terminate his employment, with or without cause (which will also terminate this
Agreement) after giving the Company two weeks prior written notice. The Company,
in its sole discretion, may terminate the employment of Employee, with or
without cause, immediately upon giving Employee written notice, but may not
terminate this Agreement. This Agreement shall also terminate upon the first to
occur of the fifth anniversary of this Agreement (except as provided in Section
5.2 below as to any effective employment or consulting obligations subsequent to
a Sale), the death of Employee or upon written notice given by the Employee to
the Company.
5. TERMINATION IN CONNECTION WITH TRANSACTION.
5.1 CONTINUATION OF EMPLOYMENT. In the event of a
Transaction, then the Employee's employment may be continued with the successor
company, if any, under such terms as the Employee and the successor company may
mutually agree and:
(a) any or all shares of the Company's capital stock,
with respect to the vesting thereof, and any options for the purchase
of the same (collectively, as to all such shares and options, "Awards")
shall be assumed, converted, substituted or replaced by the successor
company, if any, by options or shares that are substantially equivalent
to the Awards, which assumption, conversion or replacement will be
binding on Employee; or
(b) subject to Section 5.4 below, the successor
corporation may provide substantially similar consideration to Employee
as was provided to stockholders with respect to any options to purchase
the Company's capital stock (after taking into account the existing
provisions of the Awards) and provide, with respect to shares of the
Company's capital stock, the same consideration as provided to
stockholders of the Company subject to repurchase restrictions no less
favorable to the Employee.
With respect to a Sale of the Company, if the successor company or any of its
affiliates, if any, does not offer Employee a position with the successor or any
of its affiliates that is within Employee's expertise and is reasonably similar
in duties and responsibilities to Employee's position with the Company, and as a
result, Employee declines employment with the successor company or any of its
affiliates, then (a) such failure shall be deemed a termination in connection
with the Sale with notice as provided in Section 5.2.1 below, (b) Employee shall
be deemed an employee for 12 months subsequent to the closing of the Sale
entitled to the benefits of Section 5.2.1 below, it being understood that
Employee may, at Employee's option during such 12-month
22
<PAGE> 3
period, seek and obtain full-time employment elsewhere to the exclusion of
the Company and its successor, without affecting his rights under Section 5.2.1
below and (c) Employee shall perform consulting services and be entitled to the
benefits provided in Section 5.2.3 below.
5.2 TERMINATION ON A SALE.
5.2.1 Notice and Continuation of Employment Upon
a Sale. The Employee's employment may not be terminated by the Company or any
potential acquirer in connection with the Sale without the acquirer giving the
Employee 12 months prior written notice of termination at the closing of the
Sale (the "Effective Date"). During the period of such notice, if any, the
Employee will be paid an amount for the 12-month period that is equal to his
then current salary and bonuses, whether or not the Employee's services are
actually required by the Company, its successor or this Agreement during the
notice period, which annual amount will be payable in 12 equal monthly
installments, as earned, in accordance with the Company's normal payroll policy
in effect from time to time, and the Employee will be obligated to render
consulting services to the Company as specified in Section 5.2.3 below. Employee
benefits will continue, and the Employee's options and shares of Common Stock
will continue to vest, during the 12-month period after the Effective Date of
the Sale so long as the Employee's employment is not terminated for Cause.
5.2.2 Notice and Continuation of Employment During
the Year after Sale. During the 12-month period after the Sale, assuming the
notice of termination described in Section 5.2.1 above was not given, the
Employee's employment may be terminated by the Company (which, for purposes of
this Section 5.2.2 and Section 5.2.3 below, shall mean the Company or its
successor) for Cause at any time and may be terminated without Cause by the
Company only if such termination is effective on the date 12 months after the
Effective Date of the Sale. Such termination, whether with or without Cause,
must be effected by giving the Employee at least 14 days prior written notice.
Employee benefits will continue, and the Employee's options and shares of Common
Stock will continue to vest, during the 12-month period after the Effective Date
of the Sale so long as the Employee's employment is not terminated for Cause.
5.2.3 Consulting Obligations. If the Employee's
employment is terminated upon the Sale as described in Section 5.2.1 above or is
terminated by the Company without Cause during the 12-month period after the
Effective Date of the Sale as described in Section 5.2.2 above, the Employee
will be obligated to hold himself available to consult, at the request of the
Company and on such projects within the Employee's professional expertise as the
Company shall designate, during the 12-month period following the first
anniversary of the Effective Date. Such services will be rendered for up to 10
hours per month and will be paid an hourly rate equal to $300 for each hour
actually worked, payable monthly, as earned, in accordance with the Company's
normal payroll policy in effect from time to time. For so long as the Employee's
consulting obligation is not terminated for Cause, each of his options and
shares will continue to vest while the consulting arrangement is in effect, the
Board having determined that the Employee will be performing substantial
services for the Company during that time. The Employee's services as a
consultant may be terminated by the Company for Cause upon 14 days advance
written notice.
5.2.4 Supersede Other Rights, Unless Greater. Subject
to any greater rights granted to Employee under any Award, this provision will
supersede and replace any other provision for accelerated vesting that applies
to such Award held by the Employee, whether such Award is now granted or is
granted in the future and whether such Award is now owned or will be owned in
the future.
5.3 TERMINATION OF AWARDS ON A TRANSACTION. Except as provided
in this Section 5 and provided that the successor corporation (if any) does not
assume, replace, convert or substitute or pay for all outstanding Awards as
provided in Section 5.1 above, in the event of a Transaction, such Awards will
expire on such event at such time and on such conditions as the Board shall
determine upon 20 days advance written notice to Employee.
5.4 OTHER TREATMENT OF AWARDS. Subject to any greater rights
granted to Employee under the foregoing provisions of this Section 5, in the
event of the occurrence of any Transaction, any outstanding Awards will be
treated as provided in the applicable agreement or plan of merger,
consolidation, dissolution, liquidation, sale of assets or other "corporate
transaction."
23
<PAGE> 4
6. COLLATERAL AGREEMENTS. Employee and the Company acknowledge
that the Confidentiality Agreement previously entered into between Employee and
the Company will continue in full force and effect in accordance with its terms
irrespective of any termination of this Agreement.
7. GENERAL PROVISIONS.
7.1 WITHHOLDING. All sums payable to Employee under this
Agreement shall be reduced by all federal, state, local and other withholding
and similar taxes and payments required by applicable law.
7.2 NOTICES. All notices required under this Agreement shall
be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, to the address of the relevant party as set forth below such party's
signature hereto, or as may be changed by notice given hereafter in accordance
with the provisions of this Section 7.2.
7.3 ARBITRATION. Employee and the Company shall submit to
binding arbitration in any controversy or claim arising out of, or relating to,
this Agreement or any breach hereof, provided, however, that the Company retains
its right to, and shall not be prohibited, limited or in any other way
restricted from, seeking or obtaining equitable relief from a court having
jurisdiction over the parties. Such arbitration shall be conducted in accordance
with the Rules of the American Arbitration Association in effect at that time,
and judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
7.4 ENFORCEABILITY. If any provision of this Agreement shall
be found by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, the parties hereby waive such provision to the extent that it is
found to be invalid or unenforceable and to the extent that to do so would not
deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect. Remedies provided for in this
Agreement are cumulative and are in addition to any other right or remedy
granted to any party by contract, at law, in equity or otherwise.
7.5 NO WAIVER. The failure by either party at any time to
require performance or compliance by the other of any of its obligations or
agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of any
provision hereof shall not be taken or held to be a waiver of any preceding or
succeeding breach of such provision or any other provision of this Agreement. No
waiver of any kind shall be effective or binding, unless it is in writing and is
signed by the party against whom such waiver is sought to be enforced.
7.6 ASSIGNMENT. This Agreement and all rights hereunder are
personal to Employee and may not be transferred or assigned by Employee at any
time. The Company may assign its rights, together with its obligations
hereunder, to any parent, subsidiary, affiliate or successor, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets, provided, however, that any such assignee assumes the
Company's obligations hereunder. This Agreement shall be binding upon, and inure
to the benefit of, the permitted successors and representatives of the
respective parties hereto.
7.7 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the entire and only agreement between the parties relating to employment of
Employee with the Company, and supersedes and cancels any and all previous
contracts, arrangements or understandings with respect thereto. This Agreement
may be amended, modified, superseded, canceled, renewed or extended only by an
agreement in writing executed by both parties hereto.
24
<PAGE> 5
7.8 GENERAL INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural included the singular, and the masculine gender includes
both male and female referents. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement. This Agreement and the
rights and obligations of the parties hereto shall be construed in accordance
with the laws of the State of California, without giving effect to the
principles of conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EMPLOYEE: WORLDTALK COMMUNICATIONS
------------------------ CORPORATION
By:
- ----------------------------------- -------------------------------
(Signature) Mark A. Jung, President
Address: Address: 5155 Old Ironsides Drive
---------------------------- Santa Clara, California 95054
Attn: President
----------------------------
25
<PAGE> 1
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 10.3
Form of Employment Agreement, dated January 23, 1997,
between Registrant and Stephen R. Bennion, Steve M. Goldner
and Mark A. Jung
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION
EMPLOYMENT AGREEMENT
This Agreement is entered into as of January 23, 1997 by and between
Worldtalk Communications Corporation, a Delaware corporation (the "Company"),
and ("Employee"). In consideration of the terms and conditions set forth in this
Agreement, the parties agree as follows:
1. DEFINITIONS.
1.1 For purposes hereof "Cause" for termination of any
Employee's employment will exist at any time after the happening of one or more
of the following events: (a) the Employee's conviction of a felony involving
moral turpitude; (b) any willful act or acts of dishonesty undertaken by the
Employee and intended to result in substantial gain or personal enrichment of
the Employee, directly or indirectly, at the expense of the Company or a
Successor, Parent, Subsidiary or Affiliate of the Company (as such terms are
defined in the Company's 1996 Equity Incentive Plan); (c) any willful act or
misconduct which is materially and demonstrably injurious to the Company or a
Successor, Parent, Subsidiary or Affiliate of the Company; (d) substantial and
repeated neglect of the Employee's responsibility, or malfeasance thereof, that
remains uncured after 30 days written notice of such neglect or malfeasance; or
(e) the Employee's death or disability (within the meaning of Section 22(e)(3)
of the Internal Revenue Code of 1986, as amended.
1.2 A "Merger" shall mean (a) a merger or consolidation in
which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings), or (b) a merger in which the Company is the surviving corporation but
after which the stockholders of the Company (other than any stockholder which
merges (or which owns or controls another corporation which merges) with the
Company in such merger) cease to own at least 90% of the issued and outstanding
capital stock or other equity interests in the Company.
1.3 A "Sale" means a Merger, the sale of all or substantially
all of the assets of the Company as a going concern in a single transaction or
series of related transactions or the sale or transfer of a majority of the
outstanding shares of the Company by the stockholders of the Company in a single
transaction or a series of related transactions other than market transactions
to unrelated purchasers.
1.4 A "Transaction "means:
(a) a dissolution or liquidation of the Company;
(b) a merger or consolidation in which the Company is
not the surviving corporation (other than a merger or consolidation
with a wholly owned subsidiary, a reincorporation of the Company in a
different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company);
(c) a merger in which the Company is the surviving
corporation but after which the stockholders of the Company (other than
any stockholder which merges (or which owns or controls another
corporation which merges) with the Company in such merger) cease to own
at least 90% of the issued and outstanding capital stock or other
equity interests in the Company;
(d) the sale of all or substantially all of the
assets of the Company; or
26
<PAGE> 2
(e) any other transaction which qualifies as a
"corporate transaction" under Section 424(a) of the Internal Revenue
Code of 1986, as amended, wherein the stockholders of the Company give
up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the
outstanding shares of the Company from or by the stockholders of the
Company).
2. EMPLOYMENT. The Company hereby continues to employ Employee and
Employee hereby continues to accept employment with the Company upon the terms
and conditions set forth in this Agreement. Employee hereby represents and
warrants to the Company that he is free to enter into and fully perform this
Agreement and the Proprietary Rights and Confidentiality Agreement he has signed
for the benefit of the Company (the "Confidentiality Agreement").
3. SALARY AND BENEFITS. For the performance of all of Employee's
obligations under this Agreement, the Company shall set the Employee's salary
and bonuses from time to time, which salary and bonuses will be payable as
earned in accordance with the payroll policies of the Company as constituted
from time to time. During the term of this Agreement, Employee shall be entitled
to receive fringe benefits of employment generally available to the Company's
other similarly situated employees as he becomes eligible for them.
4. TERM. Employee's employment with the Company is not for a specified
term, is at will and may be terminated by either party with or without cause as
described in this Section 4. Employee, in his sole discretion, may, at any time,
terminate his employment, with or without cause (which will also terminate this
Agreement) after giving the Company two weeks prior written notice. The Company,
in its sole discretion, may terminate the employment of Employee, with or
without cause, immediately upon giving Employee written notice, but may not
terminate this Agreement. This Agreement shall also terminate upon the first to
occur of the fifth anniversary of this Agreement (except as provided in Section
5.2 below as to any effective employment or consulting obligations subsequent to
a Sale), the death of Employee (except as provided in Section 5.2.4 below) or
upon written notice given by the Employee to the Company.
5. TERMINATION IN CONNECTION WITH TRANSACTION.
5.1 CONTINUATION OF EMPLOYMENT. In the event of a
Transaction, then the Employee's employment may be continued with the successor
company, if any, under such terms as the Employee and the successor company may
mutually agree and:
(a) any or all shares of the Company's capital stock,
with respect to the vesting thereof, and any options for the purchase
of the same (collectively, as to all such shares and options, "Awards")
shall be assumed, converted, substituted or replaced by the successor
company, if any, by options or shares that are substantially equivalent
to the Awards, which assumption, conversion or replacement will be
binding on Employee; or
(b) subject to Section 5.4 below, the successor
corporation may provide substantially similar consideration to Employee
as was provided to stockholders with respect to any options to purchase
the Company's capital stock (after taking into account the existing
provisions of the Awards) and provide, with respect to shares of the
Company's capital stock, the same consideration as provided to
stockholders of the Company subject to repurchase restrictions no less
favorable to the Employee.
With respect to a Sale of the Company, if the successor company or any of its
affiliates, if any, does not offer Employee a position with the successor or any
of its affiliates that is within Employee's expertise and is reasonably similar
in duties and responsibilities to Employee's position with the Company, and as a
result, Employee declines employment with the successor company or any of its
affiliates, then (a) such failure shall be deemed a termination in connection
with the Sale with notice as provided in Section 5.2.1 below, (b) Employee shall
be deemed an employee for 12 months subsequent to the closing of the Sale
entitled to the benefits of Section 5.2.1 below, it being understood that
Employee may, at Employee's option during such 12-month
27
<PAGE> 3
period, seek and obtain full-time employment elsewhere to the exclusion of the
Company and its successor, without affecting his rights under Section 5.2.1
below and (c) Employee shall perform consulting services and be entitled to the
benefits provided in Section 5.2.3 below.
5.2 TERMINATION ON A SALE.
5.2.1 Notice and Continuation of Employment Upon a
Sale. The Employee's employment may not be terminated by the Company or any
potential acquirer in connection with the Sale without the acquirer giving the
Employee 12 months prior written notice of termination at the closing of the
Sale (the "Effective Date"). During the period of such notice, if any, the
Employee will be paid an amount for the 12-month period that is equal to his
then current salary and bonuses, whether or not the Employee's services are
actually required by the Company, its successor or this Agreement during the
notice period, which annual amount will be payable in 12 equal monthly
installments, as earned, in accordance with the Company's normal payroll policy
in effect from time to time, and the Employee will be obligated to render
consulting services to the Company as specified in Section 5.2.3 below. Employee
benefits will continue, and the Employee's options and shares of Common Stock
will continue to vest, during the 12-month period after the Effective Date of
the Sale so long as the Employee's employment is not terminated for Cause.
5.2.2 Notice and Continuation of Employment During
the Year after Sale. During the 12-month period after the Sale, assuming the
notice of termination described in Section 5.2.1 above was not given, the
Employee's employment may be terminated by the Company (which, for purposes of
this Section 5.2.2 and Section 5.2.3 below, shall mean the Company or its
successor) for Cause at any time and may be terminated without Cause by the
Company only if such termination is effective on the date 12 months after the
Effective Date of the Sale. Such termination, whether with or without Cause,
must be effected by giving the Employee at least 14 days prior written notice.
Employee benefits will continue, and the Employee's options and shares of Common
Stock will continue to vest, during the 12-month period after the Effective Date
of the Sale so long as the Employee's employment is not terminated for Cause.
5.2.3 Consulting Obligations. If the Employee's
employment is terminated upon the Sale as described in Section 5.2.1 above or is
terminated by the Company without Cause during the 12-month period after the
Effective Date of the Sale as described in Section 5.2.2 above, the Employee
will be obligated to hold himself available to consult, at the request of the
Company and on such projects within the Employee's professional expertise as the
Company shall designate, during the 12-month period following the first
anniversary of the Effective Date. Such services will be rendered for up to 10
hours per month and will be paid an hourly rate equal to $300 for each hour
actually worked, payable monthly, as earned, in accordance with the Company's
normal payroll policy in effect from time to time. For so long as the Employee's
consulting obligation is not terminated for Cause, each of his options and
shares will continue to vest while the consulting arrangement is in effect, the
Board having determined that the Employee will be performing substantial
services for the Company during that time. The Employee's services as a
consultant may be terminated by the Company for Cause upon 14 days advance
written notice.
5.2.4 Employee's Death During Employment or Consulting
Period. Not-withstanding the foregoing, with respect to shares of Common Stock
held by Employee that were purchased in 1995 pursuant to the terms of
outstanding options and that are subject to a right of repurchase in favor of
the Company, the vesting of such shares will accelerate, and the shares will be
released from the Company's right of repurchase, in full, on the death of the
Employee if his death occurs during the 12-month period after the Effective Date
of the Sale as described in Section 5.2.1 or 5.2.2 above or during the 12-month
consulting period described in Section 5.2.3 above.
5.2.5 Supersede Other Rights, Unless Greater. Subject
to any greater rights granted to Employee under any Award, this provision will
supersede and replace any other provision for accelerated vesting that applies
to such Award held by the Employee, whether such Award is now granted or is
granted in the future and whether such Award is now owned or will be owned in
the future.
5.3 TERMINATION OF AWARDS ON A TRANSACTION. Except as provided
in this Section 5 and provided that the successor corporation (if any) does not
assume, replace, convert or substitute or pay for all
28
<PAGE> 4
outstanding Awards as provided in Section 5.1 above, in the event of a
Transaction, such Awards will expire on such event at such time and on such
conditions as the Board shall determine upon 20 days advance written notice to
Employee.
5.4 OTHER TREATMENT OF AWARDS. Subject to any greater rights
granted to Employee under the foregoing provisions of this Section 5, in the
event of the occurrence of any Transaction, any outstanding Awards will be
treated as provided in the applicable agreement or plan of merger,
consolidation, dissolution, liquidation, sale of assets or other "corporate
transaction."
6. COLLATERAL AGREEMENTS. Employee and the Company acknowledge
that the Confidentiality Agreement previously entered into between Employee and
the Company will continue in full force and effect in accordance with its terms
irrespective of any termination of this Agreement.
7. GENERAL PROVISIONS.
7.1 WITHHOLDING. All sums payable to Employee under this
Agreement shall be reduced by all federal, state, local and other withholding
and similar taxes and payments required by applicable law.
7.2 NOTICES. All notices required under this Agreement shall
be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, to the address of the relevant party as set forth below such party's
signature hereto, or as may be changed by notice given hereafter in accordance
with the provisions of this Section 7.2.
7.3 ARBITRATION. Employee and the Company shall submit to
binding arbitration in any controversy or claim arising out of, or relating to,
this Agreement or any breach hereof, provided, however, that the Company retains
its right to, and shall not be prohibited, limited or in any other way
restricted from, seeking or obtaining equitable relief from a court having
jurisdiction over the parties. Such arbitration shall be conducted in accordance
with the Rules of the American Arbitration Association in effect at that time,
and judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
7.4 ENFORCEABILITY. If any provision of this Agreement shall
be found by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, the parties hereby waive such provision to the extent that it is
found to be invalid or unenforceable and to the extent that to do so would not
deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect. Remedies provided for in this
Agreement are cumulative and are in addition to any other right or remedy
granted to any party by contract, at law, in equity or otherwise.
7.5 NO WAIVER. The failure by either party at any time to
require performance or compliance by the other of any of its obligations or
agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of any
provision hereof shall not be taken or held to be a waiver of any preceding or
succeeding breach of such provision or any other provision of this Agreement. No
waiver of any kind shall be effective or binding, unless it is in writing and is
signed by the party against whom such waiver is sought to be enforced.
7.6 ASSIGNMENT. This Agreement and all rights hereunder are
personal to Employee and may not be transferred or assigned by Employee at any
time. The Company may assign its rights, together with its obligations
hereunder, to any parent, subsidiary, affiliate or successor, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets, provided, however, that any such assignee assumes the
Company's obligations hereunder. This Agreement shall be binding upon, and inure
to the benefit of, the permitted successors and representatives of the
respective parties hereto.
29
<PAGE> 5
7.7 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the entire and only agreement between the parties relating to employment of
Employee with the Company, and supersedes and cancels any and all previous
contracts, arrangements or understandings with respect thereto. This Agreement
may be amended, modified, superseded, canceled, renewed or extended only by an
agreement in writing executed by both parties hereto.
7.8 GENERAL INTERPRETATION. The headings contained in this
Agreement are for reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural included the singular, and the masculine gender includes
both male and female referents. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement. This Agreement and the
rights and obligations of the parties hereto shall be construed in accordance
with the laws of the State of California, without giving effect to the
principles of conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EMPLOYEE: WORLDTALK COMMUNICATIONS
--------------------------- CORPORATION
By:
- ------------------------------------ ---------------------------------
(Signature) Mark A. Jung, President
Address: Address: 5155 Old Ironsides Drive
----------------------------- Santa Clara, California 95054
Attn: President
-----------------------------
30
<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
MARCH 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Net income (loss) $ (1,899) $(579)
Weighted average common shares outstanding 10,298 1,569
Preferred stock, on an "as if converted basis" using the
exchange rate in effect at the initial public offering date -- 6,025
-------- ------
Number of common shares and common share equivalents used
in computation 10,298 7,594
======== ======
Net income (loss) per share $ (0.18) $(0.08)
======== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,272
<SECURITIES> 5,365
<RECEIVABLES> 3,079
<ALLOWANCES> 148
<INVENTORY> 0
<CURRENT-ASSETS> 16,160
<PP&E> 1,873
<DEPRECIATION> 161
<TOTAL-ASSETS> 19,033
<CURRENT-LIABILITIES> 5,741
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 12,648
<TOTAL-LIABILITY-AND-EQUITY> 12,751
<SALES> 2,661
<TOTAL-REVENUES> 2,661
<CGS> 1,133
<TOTAL-COSTS> 1,133
<OTHER-EXPENSES> 3,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> (1,834)
<INCOME-TAX> 65
<INCOME-CONTINUING> (1,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,899)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
