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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-27886
WORLDTALK COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE 77-0303581
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification Number)
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5155 OLD IRONSIDES DRIVE
SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices)
(408) 567-1500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of Class
Common Stock, $.001 Par Value
Indicate by check mark 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
__________ __________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or
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information statements incorporated by reference in Part III of this form 10-K
or any amendment to this Form 10-K.
Yes X No
__________ __________
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price of such stock on February 28, 1997, as
reported by the Nasdaq National Market was approximately $74,713,962
The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on February 28, 1997 was 10,305,374 shares.
Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held on June 12, 1997, are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
The discussion in this report on Form 10K 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.
Readers should pay particular attention to the risk factors described in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and particularly under the heading "Additional Factors That May
Effect Future Results". Readers should also carefully review the risk factors
described in the other documents the Company files from time to time with the
Securities and Exchange Commission, specifically the Quarterly Reports on Form
10-Q filed by the Company in 1996, any current Reports on Form 8-K filed by the
Company and the Company's Registration Statement on Form S-1 as declared
effective by the Securities and Exchange Commission on April 11, 1996 (File No.
333-1482).
INTRODUCTION
Worldtalk Communications Corporation, a Delaware Corporation founded in 1992,
and its subsidiary (collectively "Worldtalk" or the "Company"), is a leading
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 an enterprise's existing
infrastructure investment.
Organizations moving to today's intranet technology face significant
implementation and management challenges which carry heavy cost and management
burdens. In distributed client/server environments, intranets are frequently
decentralized and therefore unmanaged beyond the local level.
Interconnectivity among heterogeneous networks and legacy systems within the
corporate intranet, whether proprietary or open in network architecture, is
often insufficient to overcome these challenges. Organizations need to manage
the networks within the corporate intranet.
In 1996, Worldtalk continued to focus on products and services designed to
provide "Managed Intranet Solutions." Managed Intranet Solutions enable
organizations to implement enterprise-wide communications backbones which
centralize managed messaging, groupware, directory services and security
services for their intranets. The foundation for these backbones, and the key
to centralized management, is a distributed directory containing comprehensive
access information on all end users throughout the enterprise. Worldtalk's
Managed Intranet Solutions product suite is currently available on the HP-UX
(HP 9000 servers from Hewlett Packard) platform with the introduction of a
series of Windows NT based products scheduled to begin in 1997.
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 and $225,000 in cash, and $418,000 of direct acquisition costs. Through
this acquisition, the Company believes that it enhanced its ability to deliver
an integrated suite of Internet/intranet security solutions. The Company
plans to combine Deming's digital identification and encryption experience with
Worldtalk's messaging and directory services experience in the development of
these products. 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, see Item 8 - Note (2) of Notes to Consolidated Financial
Statements.
In the future, Worldtalk will continue to develop software and services to
furnish the building blocks for corporate intranets. Worldtalk will also seek
to expand channels of distribution from reliance on a direct sales model through
the expansion of relationships with OEMs, VARs and distributors. During 1996,
the Company recruited in excess of 200 VAR's and other third-party resellers.
The Company believes that the process introduction of several Windows NT based
products during 1997 will accelerate this process. Through this strategy,
Worldtalk expects to become a leading provider of both departmental and
enterprise-wide intranet's software solutions. Worldtalk believes its key to
success is leveraging Worldtalk's technical
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skills, engineering talent, sales and marketing skills and an installed base of
customers to bring to market high-quality cost- competitive products that
appeal to a wide variety of customers.
MARKET OVERVIEW
E-mail has become the most prominent network application. According to several
industry analysts, companies today depend more and more on e-mail to conduct
day-to-day business. E-mail usage varies from one organization to another.
Such usage ranges from a pure and simple communications mechanism among
employees to a platform for all workflow applications, electronic commerce, and
line of business applications. This usage has driven network capacity to new
limits. In fact, industry experts believe that e-mail accounts for 60% of
network traffic within a Local Area Network and 75% of traffic within a Wide
Area Network. While the network infrastructure (bridges and routers) in most
organizations has been revamped to sustain such growth in network traffic, the
e-mail infrastructure, if any, is still in catch-up mode.
As a result of growth, decentralized applications purchasing and
merger/acquisition, many companies found themselves with several incompatible
e-mail systems, from host-based systems such as IBM PROFS and Fischer TAO/EMC2,
to LAN-based systems such as Lotus cc:Mail and Microsoft Mail, to proprietary
client-server based groupware applications such as Lotus Notes and Microsoft
Exchange. The initial solution implemented to connect these incompatible
e-mail systems together was a series of point-to-point gateways, loosely tying
the e-mail systems together. However, as e-mail usage continued to grow,
gateways became the weakest link in the network and the bottleneck as well.
The emergence of the importance of the Internet and the intranet initiated a
drive towards desktop consolidation around a single communication application
- -- The Browser. Companies are being driven to consolidate their intranet
architecture with their messaging and directory backbones, and to migrate users
to standards-based applications such as POP3/IMAP4 e-mail applications and LDAP
directory services. A noted industry research organization predicts that
intranet messaging will affect 72% of corporate e- mail networks in 1997, and
32% of organizations will start implementing standards-based messaging and
directory systems. Initial return on investment for standards-based e-mail is
relatively high, but so is the challenge of integrating these with the existing
e-mail backbone.
THE WORLDTALK SOLUTION
Worldtalk's messaging and directory solutions can meet this challenge.
Worldtalk provides directory-based software solutions which allow organizations
to integrate their e-mail and directory systems with their intranets and
provide a scaleable, efficient, standards-based and secure e-mail and directory
infrastructure. Worldtalk's robust software products are complemented by its
Professional Services Organization (PSO) which offers a complete package of
consulting, custom engineering, training and educational services to meet
customer needs from initial planning and network design to system testing and
production implementation. Worldtalk's current product offerings include:
Enterprise Solutions - NetJunction(TM) Product Line, allows organizations to
integrate all their proprietary e-mail and directory applications and provide
consolidated access to the Internet and X.400 VANs.
Departmental Solutions - NetTalk(TM) Product Line, which allows organizations
to deploy standards-based messaging and directory systems (POP3/IMAP4/LDAP) and
connect them to client/server groupware desktop e-mail security solutions over
the existing e-mail infrastructure.
Security Solutions - Secure Messenger product line, which allows organizations
to deploy desktop-to-desktop e-mail security solution over the existing e-mail
infrastructure.
During 1996, the Company introduced a number of new products and product
enhancements including:
o NetOps, a Windows NT-based, remote management station for NetJunction
enterprise backbone networks.
o Worldtalk Messaging Security Services, which provide Internet/intranet
e-mail security for NetJunction networks.
o NetJunction Version 4.1, the latest release of NetJunction.
o Secure Messenger, which provides secure messaging, based on the S/MIME
protocol, for the Windows 95 and Windows NT platforms.
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At the heart of the Network, NetJunction, the UNIX based e-mail and directory
switch, provides the following services:
o Connectivity among e-mail and directory applications (host-based,
LAN-based, proprietary client/server-based, and intranet-standards-based).
o Consolidated access to the Internet and X.400 VANs.
o Flow Control and Virus checking on traffic incoming from the Internet and
X.400 VANs and between proprietary systems.
o Internet-exposed directory services using the LDAP protocol.
Within departments, NetTalk, the Windows NT-based intranet e-mail and
directory solution, provides the following services:
o POP3/IMAP4 Message Stores for standards-based e-mail clients (Eudora,
Microsoft Internet Explorer, Netscape Communicator, Esys Simeon, etc.).
o LDAP-based directory services allowing all clients to use NetTalk as their
sole directory server.
o Connectivity to Lotus Notes, Microsoft Exchange, and other LAN-based (such
as Lotus, cc:Mail) systems to provide local switching and allow choice of
applications for users and departments.
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PRODUCTS AND PRODUCT ARCHITECTURE
ENTERPRISE SOLUTION - NETJUNCTION, THE BACKBONE
NetJunction is the heart of the e-mail backbone. NetJunction runs on HP/UX and
provides e-mail and directory synchronization connectivity to over fourteen
e-mail and directory systems. Based on industry standards (1988 and 1992 X.400
and SMTP/MIME for e-mail, and 1993 X.500 and LDAP for directory services),
NetJunction merges heterogeneous and less-scalable e-mail systems into a
scalable, efficient, standards-based e-mail and directory backbone.
NetJunction allows customers to fully leverage existing investment in e-mail
and directory products. Communication between NetJunction servers uses X.400
or SMTP/MIME for e-mail and X.500 for directory services. X.500 is ideal for
backbone directory services, as it provides the much needed robustness and
flexibility required at the backbone. X-500's protocols (such as DISP and DSP)
are more mature than those of LDAP, especially for replication and chaining.
1993 X.500 also contains richer access controls which are critical for backbone
directory services, especially when the service is extended to departments,
multiple sites, and to the Internet.
NetJunction consists of a server that provides message translation, directory
synchronization, white and yellow page directory services, Internet message
flow control, and virus checking. By centralizing Internet e-mail traffic
through NetJunction, users can guarantee a virus-free e-mail environment. It
also consists of Access Units that reside on a specific e-mail system network
(the cc:Mail network for example) and provide connectivity to the NetJunction
Server (both e-mail and directory synchronization).
NetJunction also contains a high-end LDAP server exposing the company directory
(or a subset of that directory) internally to intranet user or externally to
the Internet user. Using an LDAP compliant browser (such as Netscape
Communicator and Internet Explorer) the user obtains access to the corporate
directory.
DEPARTMENTAL AND SMALLER ORGANIZATION SOLUTION - NETTALK
NetTalk extends the e-mail backbone to departments and smaller organizations.
It offers standards-based e-mail and directory services and complete
connectivity to Lotus Notes, Microsoft Exchange, and other LAN-based systems.
NetTalk includes POP3 and IMAP4 message stores, an X.500 directory exposing the
LDAP interface, and connectors to other mail systems. It allows customers to
fully adopt Internet standards for e-mail and directory applications.
NetTalk can be used as an e-mail and directory server for both Internet
Explorer and Netscape Communicator, eliminating the need for additional
hardware and software.
NetTalk itself communicates with NetJunction using SMTP/MIME for e-mail and
pure LDAP replication for directory services offering flexibility in naming
conventions and directory naming structures.
SECURITY SOLUTION - SECURE MESSENGER
Secure Messenger works with any existing e-mail client to provide
desktop-to-desktop e-mail security. Using the emerging S/MIME standards
(endorsed by RSA, Netscape, Microsoft, Worldtalk and VeriSign, among others),
Secure Messenger encrypts and digitally signs e-mail messages to ensure the
authenticity and privacy of the messages. Originators can guarantee that only
the intended recipient(s) can read the message and recipients can validate that
the message is from the stated originator.
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Secure Messenger works over any existing e-mail backbone. It does not require
the organization to fully adopt an SMTP backbone. Users can transfer S/MIME
messages over Microsoft Exchange, cc:Mail, or any other backbone. This makes
it a leading solution known by the Company to be available in the market today
that allows users to deploy inter-operable e-mail security solutions over an
existing network.
Secure Messenger supports the use of X.509 digital certificates that could be
self signed (self generated) or requested from a third-party vendor. It works
with any existing PKI (Public Key Infrastructure), and can store certificates
locally (person-to-person certificate exchange) or use the Worldtalk backbone
directory (NetTalk, NetJunction, etc.) as a certificate store. Access to that
store is obtained via LDAP. LDAP also allows users to submit their own
certificates to the store (including certificates retrieved from third-party
vendors). A digital certificate is a password-protected, encrypted data file
that includes the name of the holder and other identification information, a
public key which can be used to verify the digital signature, the name of the
issuer or certification authority, and the certificate's validity period.
SALES AND MARKETING
The primary market for the Company's software products is comprised of
organizations that implement geographically dispersed and/or heterogeneous
e-mail, groupware and electronic commerce systems, both locally and over the
Internet. Recently, the Company has expanded into product areas relating to
Internet/intranet security. The Company ships its products shortly after
receiving an order and has essentially no backlog.
SALES CHANNELS
The Company's objective is to develop multiple channels of distribution
worldwide for its products. The Company has designed its distribution strategy
to address the specific requirements of small companies, departments and large
enterprises and matches the sales and distribution channels to each of the
Company's software product offerings. Historically, the Company has relied
primarily on its direct sales and service organization for the license and
installation of its products in North America. For international sales, the
Company has entered into nonexclusive distribution relationships with a number
of international distributors. The Company has recruited a number of VARs and
other third-party resellers during 1996 and plans to expand these relationships
in order to maximize sales of its new Windows NT products. The Company also
markets and sells its products through its telesales organization.
The Company's direct sales force primarily targets medium to large-sized
organizations with enterprise-wide LAN implementations, across all vertical
markets. These organizations represent significant sales opportunities for the
Company's current and future products. The direct sales process for
NetJunction products involves the generation of leads through a combination of
industry trade show participation, direct mail and telemarketing programs,
requests for proposals from prospects or customer and channel referrals. The
field sales force conducts multiple presentations and demonstrations of the
Company's products to management at the customer's site. More recently, the
direct sales force has begun working with VARs and systems integrators to
deliver complete solutions for major customers. Typical sales cycles range
from three to six months, but may be significantly longer for very large sales.
At times, potential customers enter into 30-day evaluation agreements with the
Company, during which time the customer can evaluate the software without
charge. The Company also sells software upgrades and annual maintenance
agreements directly to customers, as well as through its international
distributors.
As noted, the Company pursues multiple channels for both its NetJunction and
Windows NT-based products. Systems integrators and VARs often bundle Worldtalk
products with other hardware, software and services as part of an integrated
offering. The Company utilizes systems integrators to assist in the deployment
and project management of its NetJunction products. These systems integrators
help the Company's customers design and implement complex computer
communication networks, which often consist of both hardware and software from
a variety of vendors. Agreements with resellers and distributors are generally
not exclusive and may be terminated by either party without penalty.
INTERNATIONAL SALES
International sales, which are denominated in U.S. dollars, accounted for 24%,
14% and 28% of the Company's total revenues in 1996, 1995 and 1994,
respectively. The Company has entered into distribution relationships with a
number of international distributors who do not have exclusive territories.
These distributors provide system installation, technical support and systems
integration services, as well as follow-on first-line support to local
customers. The Company plans to expand its international sales by
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establishing a more extensive network of international distributors, entering
into agreements with third parties to provide customer service and support
internationally and to develop localized versions of its products. No one
international distributor or OEM accounted for greater than 10% of the
Company's revenues in 1996, 1995 or 1994.
MARKETING
The Company uses its direct sales force and its internal telesales
organizations, in combination with a variety of marketing programs, to
stimulate demand for its software products. The Company seeks to build
awareness of its products through participation in industry trade shows and
conferences, publication of technical articles in the trade press and
communication with its installed base of customers. These programs are focused
on target markets and are supplemented by selected VARs, systems integrators
and international OEMs. In addition, the Company has developed co-marketing
programs such as domestic and international, with key partners designed to take
advantage of their complementary marketing capabilities.
PROFESSIONAL SERVICES
The Company established a professional services organization in 1995 to manage
the Company's on-site installation services and custom development programs,
offering customer training and professional consulting services to its customer
base. These services are delivered by a combination of full-time Company
employees and third-party consultants trained on Worldtalk applications, which
are intended to complement related integration services performed by the
Company's VARs, distributors and systems integrators. Professional services
are performed for an additional fee, and are offered in conjunction with the
licensing or deployment of Worldtalk's software products.
INSTALLATION AND CONSULTING
The Company provides on-site installation and consulting services, generally
billing for such services on a time-and-materials basis. Standard service
contracts typically range from two to four weeks in duration and are sold
primarily to support the installation and initial deployment of Worldtalk
products. The Company also offers longer-term arrangements for those customers
interested in broader network planning or program management services.
TRAINING
The Company offers monthly customer training classes for Worldtalk network
administrators and authorized resellers at the Company's headquarters in Santa
Clara, California, as well as customized on-site classes for large customers.
CUSTOM DEVELOPMENT
From time to time, the Company provides custom development services to
customers who request unique or proprietary product extensions that enhance the
value of Worldtalk solutions in their networks. These services may be
performed by third-party integrators, consultants or Company employees,
depending on the nature and complexity of the request.
CUSTOMER MAINTENANCE AND SUPPORT
The Company's software is generally deployed in mission critical environments,
where a high degree of customer support is important for the continuing success
of product deployment. The Company maintains a centralized technical support
group that is responsible for first-line telephone support as well as
distribution of product and documentation updates. This group works closely
with the Company's professional services and product development organizations
in order to ensure continuity in the areas of problem resolution and priority
response.
Maintenance and support contracts, which are typically for twelve months, are
offered concurrently with the initial license of a Company product. These
contracts may be renewed annually and are generally priced at a fixed 20% of
the list price of the licensed software. The Company has recently begun to
expand its emergency response service to 24 hours a day, seven days a week, for
those customers requiring around the clock support. Pricing for such support
is negotiated separately and is in addition to the standard 20% fee.
The Company believes that customer support will play an increasing role in
customer selection of products among competitive offerings. The Company plans
to continue to invest in personnel, training and systems in order to meet
expanding and evolving customer requirements. In particular, the Company
intends to continue to complement its traditional telephone support services
offering with other electronic media
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processes, including electronic mail and the Internet, which also facilitates
the expedited distribution of new releases of software and "patches" to correct
software "bugs".
STRATEGIC RELATIONSHIPS
The Company believes that strategic relationships with other technology vendors
and channels of distribution are important to the Company's business.
Accordingly, the Company has entered into strategic relationships with various
companies such as Microsoft Corporation, ICL, RSA Data Security, VeriSign and
Trend Micro. The Company plans to continue and to expand the utilization of
strategic technology licensing, marketing, distribution and other business
partnerships in the future.
PRODUCT DEVELOPMENT Since its inception, Worldtalk's product development efforts
have focused on developing a stable and robust core technology, such as the
Worldtalk directory and the surrounding architecture. The Company believes that
this architecture is critical to developing new products, as well as enhancing
existing products quickly. The Company's product development organization is
grouped by key product areas and is comprised of development engineers, quality
assurance engineers and technical writers. The approach used in product
development is a phase-oriented development process that includes formal
engineering specifications, design test documents, milestone inspections and
quality control. This process incorporates the monitoring of quality,
schedules, functionality, costs and customer satisfaction. The markets
addressed by the Company's products are very sensitive to quality and,
therefore, the Company focuses on continuously improving product quality.
The Company continues to leverage its technical expertise and product
innovation capabilities to address user requirements for business-critical
applications and electronic commerce. While UNIX/NetJunction products
currently remain the core of the Company's business, in 1996 the Company
continued to invest in advanced products and technologies including NetTalk, a
Windows NT based intranet server and Internet/intranet security product, which
the Company plans to introduce during 1997. In November, 1996, the Company
acquired Deming Software, Inc., to strengthen its position in the Internet
security market.
As of December 31, 1996, the Company had 34 full-time personnel employed in
product development. During 1996, 1995 and 1994, product development expenses
were $3.6 million, $2.4 million and $2.3 million, or 25.1%, 36.0% and 53.3% of
total revenues, respectively.
COMPETITION
The market for the Company's products is intensely competitive and subject to
rapid change. In the Company's NetJunction business, the Company primarily
encounters competition from large systems vendors and integrators, principally,
Control Data Systems, and SoftSwitch, a unit of International Business Machines
Corporation (IBM). Additionally, several companies offer alternative solutions
with point-to-point gateway connectivity products. The Company also
anticipates competition in the future from companies in related markets, such
as database vendors, Internet networking vendors and value added network or
Internet service providers. The Company believes that its new Windows NT based
products enhance the ability of customers to choose among disparate vendors
such as Microsoft, Netscape and Novell in the establishment of managed
corporate intranets. However, those companies may also be competitors,
particularly in a homogeneous environment.
The Company believes that the competitive factors affecting the market for the
Company's products and services include product functionality and features;
product quality, performance and price; ease of product integration with
disparate e-mail, groupware, LAN and WAN environments; quality of customer
support services, customer training and documentation; hardware platforms
supported; vendor and product reputation; and the strength of sales channels.
The relative importance of each of these factors depends upon the specific
customer environment. Although the Company believes that its products and
services currently compete favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors.
Many of the Company's current and potential competitors have longer operating
histories; significantly greater financial, technical, product development and
marketing resources; greater name recognition and larger customer bases than
the Company. The Company's present or future competitors may be able to
develop products comparable or superior to those developed by the Company;
adapt more quickly than the
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Company to new technologies, evolving industry trends or customer requirements;
or devote greater resources to the development, promotion and license of their
products than the Company.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's future success is dependent upon its proprietary software
technology. In addition, the Company licenses certain key technology from
other companies. The Company does not currently have any patents and relies
principally on trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures, to protect its technology.
The Company also believes that factors such as the technological and creative
skills of its personnel as well as new product developments and enhancements,
are essential to establishing and maintaining a technology leadership position.
The Company generally enters into confidentiality and/or license agreements
with its employees, distributors and customers. The Company limits access to
and distribution of its software, documentation and other proprietary
information. Much of the Company's software is shipped with a software
security lock, which initially limits software access to authorized users. In
addition, the Company restricts third party access to its source code, except
in connection with source code escrow arrangements. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology, and such protections do not preclude competitors from developing
products with functionality or features similar to the Company's products.
Furthermore, there can be no assurance that third parties will not
independently develop competing technologies that are substantially equivalent
or superior to the Company's technologies. The loss of any significant
third-party license or the inability to license additional technology as
required, could have a materially adverse effect on the Company's results of
operations until such time as the Company could replace such technology.
EMPLOYEES
As of December 31, 1996, the Company had a total of 98 employees, of whom 33
were engaged in sales and marketing, 34 in research and development, 18 in
professional services and technical support and 13 in administration, finance,
MIS and operations. The Company's employees are not represented by labor
unions, nor are they generally bound by employment or noncompetition agreements
or covered by key-person life insurance policies. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.
The Company intends to continue to hire a significant number of sales,
professional services, marketing, and engineering personnel in the future.
Competition for such personnel is intense, and there can be no assurance that
the Company can hire and retain qualified personnel in the future. If the
Company is unable to hire required personnel on a timely basis, the Company's
business, operating results and financial condition could be adversely
affected.
ITEM 2. PROPERTIES
The Company's headquarters is located in Santa Clara, California, which houses
product development, sales, technical support and administrative operations in
approximately 30,000 square feet of space. This facility is under lease through
September 2005.
The Company has leased sales offices in Chicago, Illinois; Minneapolis,
Minnesota; New York, New York; Dallas, Texas; and McLean, Virginia. The
Company, through its subsidiary, Deming Software, also has a leased engineering
office in Bellevue, Washington.
ITEM 3. 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.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been included for quotation on the Nasdaq
National Market under the Nasdaq symbol "WTLK" since the Company's initial
public offering in April 1996. The following table sets forth, for the periods
indicated, the range of high low closing sale prices for the Company's Common
Stock since its initial public offering on April 11, 1996.
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HIGH LOW CLOSE
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1996:
Second Quarter 15 8 1/4 12 1/4
Third Quarter 12 1/2 6 7/8 9 1/4
Fourth Quarter 15 7 7 1/2
</TABLE>
As of December 31, 1996, there were approximately 119 holders of record of the
Company's Common Stock. The number of record holders does not include those
who hold in street or nominee name. When such shareholders are included, the
number of shareholders exceeds 500.
DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock.
The Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. The Company's bank prohibits the payment of
dividend without the bank's written consent, see Item 8 - Note (6) of Notes to
Consolidated Financial Statements.
11
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five years
in the period ended December 31, 1996 have been derived from the audited
consolidated financial statements of the Company. The selected consolidated
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SHARE AMOUNTS)
<C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue $ 14,205 $ 6,705 $ 4,392 $ 1,958 $ 938
Total cost of revenue 3,438 1,828 1,552 997 254
Gross profit 10,767 4,877 2,840 961 684
Total operating expense 16,547 8,548 6,674 3,865 1,918
Net loss $ (5,240)(1) $(3,640) $ (3,903) $ (2,922) $ (1,256)
Pro forma net loss per share ($0.57)(2) ($0.48)
Shares used in computing pro forma net 9,175 7,607
BALANCE SHEET:
Working capital (deficit) $ 12,581 $ 801 $ (1,192) $ (187) $ (132)
Total assets 21,719 5,727 2,170 1,792 670
Redeemable convertible preferred stock - 12,816 2,342 - -
Shareholders' equity (deficit) $ 14,396 $(11,405) $ (3,058) $ 180 $ (1,069)
</TABLE>
(1) Includes in-process research and development of 4.5 million and
Deming-related integration expenses of $279,000.
(2) Exclusive of the expenses noted on (1), net loss per share would have been
($.05)
ITEM 7. 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
12
<PAGE> 13
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 on 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.
The Company intends to continue to hire a significant number of sales,
professional services, marketing, and engineering personnel in the future.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its existing sales and professional services personnel
in the future. If the Company is unable to hire such personnel on a timely
basis, the Company's business, operating results and financial condition could
be adversely affected.
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>
YEARS ENDED DECEMBER 31, 1996
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue
Software licenses 68.4% 62.8% 51.6%
Maintenance , installation, and training 31.6 27.9 20.7
Software development contracts - 9.3 27.7
----- ----- -----
Total revenue 100.0 100.0 100.0
----- ----- -----
Cost of revenue
Software licenses 7.6 3.5 5.0
Maintenance , installation, and training 16.6 18.4 11.2
Software development contracts - 5.4 20.1
----- ----- -----
Total cost of revenue 24.2 27.3 35.3
Gross Margin 75.8 72.7 64.7
Operating expense
Product development 25.1 36.0 53.3
Sales and marketing 47.5 70.9 78.2
General and administrative 12.2 20.5 20.5
Purchased research and development 31.7 - -
----- ----- -----
Total operating expense 116.5 127.5 152.0
Operating loss (40.7) (54.8) (87.3)
Other income (expense), net 3.8 0.5 (1.6)
----- ----- -----
Net loss (36.9)% (54.3)% (88.9)%
===== ===== =====
</TABLE>
13
<PAGE> 14
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 historically have been higher in the fourth
quarter of each fiscal year than in the first quarter of the following fiscal
year. The Company's expects that this will continue for the foreseeable future
and may intensify depending upon a variety of factors included the timing of
new product introductions by the Company.
The Company's total revenues were $14.2 million in 1996 as compared to $6.7
million in 1995 and $4.4 million in 1994, representing increases of 111.9% and
52.7% from fiscal 1995 to fiscal 1996 and from fiscal 1994 to fiscal 1995,
respectively.
Software license and software development revenues were $9.7 million in 1996 as
compared to $4.8 million for 1995 and $3.5 million for 1994, representing
increases of 100.9% and 38.7% from fiscal 1995 to fiscal 1996 and from fiscal
1994 to fiscal 1995, respectively. The increases in software license and
software development revenues were attributable to increased sales volumes
while average selling prices stayed constant, and also as a result of increased
market acceptance of the Company's product offerings offset by decreases in
software development revenue as the Company transitioned out of that line of
business offset by decreases in software development revenues as the Company
transitioned out of that line of business.
Maintenance, installation and training revenues were $4.5 million in 1996 as
compared to $1.9 million in 1995 and $908,000 in 1994, representing increases
of 140.2% and 106.1% from fiscal 1995 to fiscal 1996 and from fiscal 1994 to
fiscal 1995, respectively. The increases in maintenance, installation and
training revenues were 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 Company expects that maintenance, installation and training
revenues will continue to increase in absolute amounts as its customer base
grows.
COST OF REVENUES
The Company's total costs of revenues were $3.4 million in 1996 as compared to
$1.8 million in 1995 and $1.6 million in 1994, representing increases of 88.1%
and 17.8% from fiscal 1995 to fiscal 1996 and from fiscal 1994 to fiscal 1995,
respectively.
Cost of product revenues, consisting of the costs of royalties paid to
third-party vendors, product media and duplication, packaging materials, and
shipping expenses, was $1.1 million in 1996, as compared to $596,000 for 1995
and $1.1 million for 1994, representing an increase of 81.7% from fiscal 1995
to fiscal 1996 and a decrease of 43.8% from fiscal 1994 to fiscal 1995. The
fluctuations in cost of product revenues were due principally to the mix of
sales of royalty bearing software products, and to the higher sales volume in
1996.
Maintenance, installation and training costs, consisting principally of
personnel-related costs for consulting, training and technical support, were
$2.4 million in 1996, as compared to $1.2 million in 1995 and $492,000 in 1994,
representing increases of 91.2% and 150.4% from fiscal 1995 to fiscal 1996 and
from fiscal 1994 to fiscal 1995, 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 will increase in dollar amount and may
increase as a percentage of total revenue in the future.
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
14
<PAGE> 15
development expenses as incurred. Product development expenses were $3.6
million in 1996 as compared to $2.4 million in 1995 and $2.3 million in 1994,
representing increases of 47.5% and 3.2% from fiscal 1995 to fiscal 1996 and
from fiscal 1994 to fiscal 1995, respectively. Product development expenses
represented 25.1%, 36.0% and 53.3% of total revenues for fiscal 1996, 1995 and
1994, respectively. The increases in absolute dollars in product development
expenses were due to increased staffing and associated support costs of
software engineers and consultants required to expand and enhance the Company's
products line. The decreases in product development expenses as a percentage
of total revenues are attributable to the increases 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 dollars amount and as a percentage of total revenues in the future.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, benefits, and
commission of sales and marketing personnel, trade shows expenses, and
promotional expenses. Sales and marketing expenses were $6.8 million in 1996,
as compared to $4.8 million in 1995 and $3.4 million in 1994, representing
increases of 41.9% and 38.5% from fiscal 1995 to fiscal 1996 and from fiscal
1994 to fiscal 1995, respectively. Sales and marketing expenses represented
47.5%, 70.9% and 78.2% of total revenues for fiscal 1996, 1995 and 1994,
respectively. The increases in absolute dollars were primarily the result of
the expansion of the Company's direct sales force and marketing efforts. The
decreases in sales and marketing expenses as a percentage of total revenues
were attributable to the increases 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 general management of the Company.
General and administrative expenses were $1.7 million in 1996 as compared to
$1.4 million in 1995 and $901,000 in 1994, representing increases of 25.9% and
52.7% from fiscal 1995 to fiscal 1996 and from fiscal 1994 to fiscal 1995,
respectively. General and administrative expenses represented 12.2%, 20.5% and
20.5% of total revenues for fiscal 1996, 1995 and 1994, respectively. The
increases in absolute dollars were attributable to increased staffing and
associated expenses necessary to manage and support the Company's growth. The
decreases in general and administrative expenses as a percentage of total
revenues are attributable to the increases 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.
PURCHASED RESEARCH AND DEVELOPMENT
In November 1996, the Company acquired Deming Software, Inc. for a total
purchase price of approximately $4.8 million of which $4.5 million was
allocated to purchased research and development. See Note (2) of Notes to
Consolidated Financial Statements for allocation of purchase price.
NET INTEREST INCOME (EXPENSE)
Net interest income (expense) consists of interest income and expense and other
miscellaneous income and expense items. Net interest income (expense) was
$544,000, $31,000 and $(69,000) for fiscal 1996, 1995 and 1994, respectively.
The increases in net interest income (expense) from fiscal 1995 to fiscal 1996
and from fiscal 1994 to fiscal 1195 were primarily attributable to increases in
the Company's cash and cash equivalent and short-term investments balances.
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 December 31, 1996 the Company had cash and cash
equivalents of $7.0 million, short-term investments of $6.0 million and working
capital of $12.6 million.
15
<PAGE> 16
The Company has a $750,000 bank credit facility comprised of a $500,000 line of
credit, which expired on October 15, 1996 and a $250,000 term loan facility
which expires on October 15, 1998. As of December 31, 1996, the term loan
facility was fully utilized. On January 7, 1997 the Company entered into a one
year, $2.0 million bank line of credit agreement to replace the $500,000 line
of credit.
Net cash used in operating activities amounted to $3.1 million in 1996 and was
comprised principally of the Company's net loss of $5.2 million offset by
noncash expense related to the purchased research and development of $4.5
million, an increase in accounts receivable of $4.0 million and by increases in
accounts payable and accrued expenses of $1.3 million.
Net cash used in investing activities amounted to $5.4 million in 1996, which
included $6.0 million for purchases of short-term investments, $1.4 million for
purchases of property and equipment, offset by $2.0 million of restricted cash
which became available for operations. Expenditures for property and equipment
in fiscal 1996 exceeded the original fiscal 1996 plan as a result of increased
staffing levels and the expansion and upgrade of the Company's operations and
management information systems. The Company currently has no significant
capital commitments for fiscal 1997.
Cash provided by financing activities in 1996 amounted to $14.5 million and was
comprised of net proceeds from issuance of common stock of $14.1 million,
$698,000 from bank and lease line borrowings, offset by payments of principal
for capital lease obligations of $256,000.
The Company may, in the future, pursue acquisitions of complimentary 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 $17
million as of December 1996. 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.
16
<PAGE> 17
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 many not 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 expects to experience a
significant product mix and sales channel shift. Specifically, the Company
plans to move from virtually complete reliance on NetJunction/UNIX products sold
primarily through a direct sales force to Windows NT products sold primarily
through third-party resellers. Accordingly, this fundamental change could 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 transition.
Although international sales accounted for 24% of the Company's total sales in
1996, compared to 14% in 1995, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
17
<PAGE> 18
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements Page
<S> <C>
Report of Independent Auditors 19
Consolidated Balance Sheets as of December 31, 1996 and 1995 20
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 21
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended 22
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 23
Notes to Consolidated Financial Statements 24
</TABLE>
Report of Independent Auditors
18
<PAGE> 19
The Board of Directors and Stockholders
Worldtalk Corporation:
We have audited the accompanying consolidated balance sheets of Worldtalk
Corporation and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1996.
Our audit also included the financial statement schedule listed in the Index at
Item 14(1)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Worldtalk
Corporation and subsidiary as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
- --------------------
San Jose, California
February 4, 1997
19
<PAGE> 20
WORLDTALK CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(In thousands except per share data)
<TABLE>
<CAPTION>
December 31,
----------------------
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents, including restricted cash of
$2,000 in 1995 $ 7,012 2,984
Short-term investments 6,027 -
Accounts receivable, net of allowance for doubtful accounts
of $149 and $150, respectively 5,524 1,567
Prepaid expenses 622 115
--------- ---------
Total current assets 19,185 4,666
Property and equipment, net 1,731 707
Other assets 803 354
--------- ---------
$ 21,719 5,727
========= =========
Liabilities, Redeemable Convertible Preferred Stock, and
Stockholders' Equity (Deficit)
------------------------------
Current liabilities:
Accounts payable $ 1,601 679
Current portion of capital lease obligations 343 254
Accrued expenses 3,094 1,927
Deferred revenue 1,566 1,005
--------- ---------
Total current liabilities 6,604 3,865
Capital lease obligations, less current portion 369 266
Other liabilities 350 185
--------- ---------
Total liabilities 7,323 4,316
--------- ---------
Redeemable convertible preferred stock, $.01 par value; 6,500
shares authorized in 1995, 6,025 shares issued and
outstanding in 1995. - 12,816
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value; 25,000 shares authorized in
1996 and 1995, 10,290 and 1,505 shares issued and
outstanding in 1996 and 1995, respectively 103 15
Additional paid-in-capital 31,650 670
Stockholder notes receivable (265) (194)
Deferred compensation (131) (175)
Accumulated deficit (16,961) (11,721)
-------- --------
Total stockholders' equity (deficit) 14,396 (11,405)
--------- --------
$ 21,719 5,727
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
WORLDTALK CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software licenses $ 9,711 $4,213 $2,268
Maintenance, installation, and training 4,494 1,871 908
Software development contracts - 621 1,216
-------- ------- ------
Total revenues 14,205 6,705 4,392
-------- ------- ------
Cost of revenues:
Software licenses 1,083 234 177
Maintenance, installation, and training 2,355 1,232 492
Software development contracts - 362 883
-------- ------- ------
Total cost of revenues 3,438 1,828 1,552
-------- ------- ------
Gross profit 10,767 4,877 2,840
-------- ------- ------
Operating expenses:
Product development 3,563 2,415 2,339
Sales and marketing 6,751 4,757 3,434
General and administrative 1,733 1,376 901
Purchased research and development 4,500 - -
-------- ------- -------
Total operating expenses 16,547 8,548 6,674
-------- ------- -------
Operating loss (5,780) (3,671) (3,834)
Other income (expense), net 548 31 (69)
-------- -------- -------
Net loss $ (5,240) $ (3,640) $(3,903)
======== ======== =======
Pro forma net loss per share $ (0.57) $ (0.48)
======= =======
Shares used in computing pro forma net loss per share 9,175 7,607
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
WORLDTALK CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ----------------- Additional
Shares Amount Shares Amount Paid-in-capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1993 371 $ 4 44 $ 1 4,353
Exercise of common stock options - 12 - 2
Issuance of common stock for cash - 30 - 61
Conversion of Series A and B preferred
stock to common stock (371) (4) 371 4 -
Issuance of common stock upon
conversion of convertible secured
promissory notes and for cash - - 3,000 30 570
Issuance of common stock for services
rendered - - 10 - 2
Repurchase of common stock - (4) - -
Net loss - - - - -
---- ---- ----- ---- -----
Balances as of December 31, 1994 - - 3,463 35 4,988
Conversion of common stock to
Series A redeemable preferred stock - - (3,000) (30) (4,741)
Exercise of common stock options - - 1,027 10 240
Issuance of common stock for services rendered - - 15 - 8
Deferred compensation related to grant
of stock options - - - - 175
Net loss - - - - -
---- ---- ----- ---- -----
Balances as of December 31, 1995 - - 1,505 15 670
Issuance of common stock in initial
public offering, net - - 2,000 20 13,812
Conversion of redeemable preferred stock
to common stock - - 6,025 60 12,756
Exercise of common stock options and warrants - - 178 2 49
Purchases under the Employee Stock Purchase Plan - - 35 - 238
Issuance of shareholders' notes receivable - - - - -
Issuance of common stock in acquisition - - 547 6 4,125
Amortization of deferred compensation - - - - -
Net loss - - - - -
---- ---- ----- ---- -----
Balances as of December 31, 1996 - $ - 10,290 $103 31,650
==== ==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholder Stockholders'
Note Deferred Accumulated Equity
Receivable Compensation Deficit (Deficit)
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balances as of December 31, 1993 - - (4,178) 180
Exercise of common stock options - - - 2
Issuance of common stock for cash - - - 61
Conversion of Series A and B preferred
stock to common stock - - - -
Issuance of common stock upon
conversion of convertible secured
promissory notes and for cash - - - 600
Issuance of common stock for services
rendered - - - 2
Repurchase of common stock - - -
Net loss - - (3,903) (3,903)
---- ---- ----- -----
Balances as of December 31, 1994 - - (8,081) (3,058)
Conversion of common stock to
Series A redeemable preferred stock - - - (4,771)
Exercise of common stock options 194 - - 56
Issuance of common stock for services rendered - - - 8
Deferred compensation related to grant
of stock options - (175) -
Net loss - - (3,640) (3,640)
---- ---- ----- -----
Balances as of December 31, 1995 (194) (175) (11,721) (11,405)
Issuance of common stock in initial
public offering, net - - - 13,832
Conversion of redeemable preferred stock
to common stock - - - 12,816
Exercise of common stock options and warrants - - - 51
Purchases under the Employee Stock Purchase Plan - - - 238
Issuance of shareholders' notes receivable (68) - - (68)
Issuance of common stock in acquisition (3) - - 4,128
Amortization of deferred compensation - (44) - 44
Net loss - - (5,240) (5,240)
---- ---- ----- -----
Balances as of December 31, 1996 (265) (131) (16,961) 14,396
==== ==== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
WORLDTALK CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,240) $(3,640) (3,903)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 452 253 257
Amortization of deferred compensation 44 - -
Common stock issued for services - 8 2
Purchased research and development 4,500 - -
Changes in operating assets and liabilities:
Accounts receivable (3,957) (286) (903)
Prepaid expenses (507) (47) 24
Accounts payable 647 120 223
Accrued expenses 714 1,066 440
Deferred revenue 561 (120) 890
Other liabilities (280) 185 -
------- ------ ------
Net cash used in operating activities (3,066) (2,461) (2,970)
------- ------ ------
Cash flows from investing activities:
Restricted cash 2,000 (2,000) -
Purchase of property and equipment (1,413) (92) (194)
Purchase of short-term investments (6,027) - -
Other assets 39 (270) 24
------- ------ ------
Net cash used in investing activities (5,401) (2,362) (170)
------- ------ ------
Cash flows from financing activities:
Net proceeds from issuance of common stock 14,053 56 63
Principal payments under capital lease obligations (256) (150) (139)
Proceeds from (payments on) bank borrowings 698 - (260)
Net proceeds from issuance of redeemable convertible
preferred stock - 4,703 1,942
Proceeds from issuance of convertible secured promissory notes - 1,000 1,000
------ ----- -----
Net cash provided by financing activities 14,495 5,609 2,606
------ ----- -----
Change in unrestricted cash and cash equivalents 6,028 786 (534)
Unrestricted cash and cash equivalents at beginning of year 984 198 732
------- ------ ------
Unrestricted cash and cash equivalents at end of year $ 7,012 $ 984 $ 198
======= ======= =======
Supplemental disclosures:
Cash paid during the period:
Interest $ 106 $ 39 $ 71
======= ======= =======
Noncash investing and financing activities:
Common stock issued in acquisition of Deming Software, Inc.
(see Note 2) $ 4,131 $ - $ -
======= ======= =======
Conversion of convertible preferred stock to common stock $12,816 $ - $ -
======= ======= =======
Notes receivable from stockholders $ 68 $ 194 $ -
======= ======= =======
Equipment acquired under capital lease agreements $ 506 $ 329 $ 120
======= ======= =======
Conversion of Series AA redeemable preferred stock and
common stock into Series A redeemable convertible
preferred stock $ - $7,113 $ -
======= ======= =======
Conversion of convertible secured promissory notes in
connection with sale of Series B redeemable convertible
preferred stock $ - $1,000 $ -
======= ======= =======
Conversion of Series A and B preferred stock to
common stock $ - $ - $4,357
======= ======= =======
Conversion of convertible secured promissory notes in
connection with sale of Series AA redeemable preferred
stock and common stock $ - $ - $1,000
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 24
WORLDTALK CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(All amounts in thousands, except per share data)
(1) SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
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.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant intercompany
transactions and accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Cash equivalents consist of highly liquid investments, principally money market
accounts and marketable debt securities, with maturities of three months or
less at the time of purchase.
The Company has classified its short-term marketable investments as
"available-for-sale." Available-for-sale securities are carried at fair market
value, with the unrealized gains and losses, net of tax, reported in a separate
component of stockholder's equity. Gains and losses on securities sold are
based on the specific identification method.
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash equivalents, short- term marketable
investments, and accounts receivable. The Company's cash equivalents and
short-term marketable investments are primarily in U.S. treasury notes and
federal government agency obligations that have maturities ranging through
1998. The Company believes no significant concentration of credit risk exists
with respect to these financial instruments. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and their dispersion across
different industries and geographic areas. Generally, the Company requires no
collateral on trade receivables. The Company believes that any credit risks
are substantially mitigated by its credit evaluation process.
RESTRICTED CASH
Restricted cash at December 31, 1995, includes the proceeds from the sale of
the Company's Series C redeemable preferred stock (Note 7). The proceeds were
being held on behalf of the Company by the Company's counsel, pending receipt
of verification of the Company's December 29, 1995 filing of its Amended
Articles of Incorporation with the California Secretary of State. Such
verification was received on January 2, 1996, and the funds became
unrestricted.
24
<PAGE> 25
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121
requires the Company to review the recoverability of the carrying amount of its
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset might not be recoverable.
In the event that facts and circumstances indicate that the carrying amount of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down is required. Long-lived assets would then
be written down to the amount determined by reference to discounted future cash
flows over the remaining useful life of the related asset. Adoption of SFAS
No. 121 did not have a material effect on the Company's consolidated financial
position or results of operations in 1996.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
generally three to five years. Equipment recorded under capital leases and
leasehold improvements are amortized using the straight-line method over the
respective useful lives of the assets or the lease term, whichever is shorter.
REVENUE RECOGNITION
The Company's revenue recognition policies are in accordance with Statement of
Position 91-1 Software Revenue Recognition and are as follows:
o Software licenses revenues are recognized upon shipment of the software.
For licenses which provide for a trial period using a temporary key,
revenue is recognized upon delivery of a permanent key. Software license
revenues are not recognized until there is a signed license agreement, the
sales price is collectible and the company has no remaining significant
vendor obligations.
o Maintenance revenues relating to contracts which entitle customers to
receive technical support and future enhancements of the computer software
is deferred and recognized ratably over the contract period.
o Installation and training revenues are recognized when the services are
performed.
o Software development contract revenues are recognized using the percentage
of completion method based on contract milestones achieved. The Company
periodically evaluates estimated costs of completion and accrues the excess
of estimated costs over anticipated contract revenue.
RESEARCH AND DEVELOPMENT
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility in the form of a working model has
been established. To date, the Company's software development has been
completed concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense is recorded on the date of grant if the current market price of the
underlying stock exceeds the exercise price.
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those
25
<PAGE> 26
temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a allowance to an amount whose realization is more likely
than not.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using net loss and is based on the
weighted average number of shares of common stock outstanding, convertible
preferred stock, on an "as if converted" basis, using the exchange rate in
effect at the initial public offering date and 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.
RECLASSIFICATIONS
Certain reclassifications were made to the 1995 and 1994 consolidated financial
statements to conform to the 1996 presentation.
(2) BUSINESS COMBINATION
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 $4,773, including 569 shares of the Company's common stock,
$225 in cash, and $418 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. The purchase price has been
allocated as follows:
<TABLE>
<S> <C>
Net liabilities assumed $ (226)
Goodwill, covenant not to compete, and workforce in place 499
Purchased research and development 4,500
--------
$ 4,773
========
</TABLE>
The $4,500 allocated to purchased research and development was charged to
operations in the quarter ended December 31, 1996. The amount allocated to
goodwill, covenant not to compete, and workforce in place will be amortized
using the straight-line method over 48 months.
In connection with the acquisition of Deming, the Company issued common stock
of $4,131, assumed net liabilities of $226, and incurred acquisition costs
payable of $418 in exchange for in-process research and development of $4,500
and intangible assets of $499.
The following pro forma combined results of operations for the years ended
December 31, 1996 and 1995, are presented as if the acquisition had occurred at
the beginning of each period. The pro forma results of operations for the year
ended December 31, 1995, include the results of operations of Deming from its
inception at December 11, 1995. The charge for in process research and
development has not been reflected in the following pro forma summary. The pro
forma summary does not necessarily reflect the results of operations as if the
Company and Deming had been consolidated during such periods:
26
<PAGE> 27
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues $14,734 $ 6,705
Net loss $(1,507) $(3,640)
Pro forma net loss per share $ (0.15) $ (0.48)
</TABLE>
(3) SHORT-TERM INVESTMENTS
Fair values of short-term marketable investments are based on quoted market
values as of December 31, 1996. As of December 31, 1996, the difference
between the fair value and amortized cost of short-term marketable investments
was not material. As of December 31, 1996, short-term marketable investments
consisted of U.S. government securities due within one year or less.
(4) FINANCIAL STATEMENT DETAILS
Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Equipment $2,034 891
Furniture and fixtures 567 288
Purchased software 164 116
Leasehold improvements 110 92
------ -----
2,875 1,387
Less accumulated depreciation and amortization 1,144 680
------ ----
$1,731 707
====== =====
</TABLE>
Equipment recorded under capital leases aggregated $1,423 and $923 with related
accumulated amortization of $657 and $432 for the years ended December 31, 1996
and 1995, respectively.
Accrued Expenses
Accrued expenses consisted of the following
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
Accrued employee compensation $ 797 572
Accrued commissions 224 230
Other accrued liabilities 2,073 1,125
------- -----
$ 3,094 1,927
======= =====
</TABLE>
Other Income (Expense)
Other income (expense), net, consisted of the following:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income $ 650 81 17
Interest expense (106) (50) (86)
----- --- ---
$ 544 31 (69)
=== ==== ===
</TABLE>
(5) INCOME TAXES
The Company's effective tax rate differs from the federal income tax rate of
34% for the years ended December 31, as follows:
27
<PAGE> 28
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate $ (1,780) (1,238) (1,327)
Nondeductible purchased research and development 1,652 - -
Losses for which no benefit is realized 101 1,238 1,327
State income tax 4 - -
Other 23 - -
-------- ------ ------
Actual tax expense $ - - -
======== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities as of December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accruals and reserves $ 431 469
Depreciation of property and equipment 98 98
Deferred research and development costs 3,190 2,729
Net operating loss carryforward - federal 1,274 1,120
Net operating loss carryforward - state 59 80
Research and development credit carryover 693 620
------- -------
5,745 5,116
Less valuation allowance (5,745) (5,116)
------- -------
Net deferred tax assets $ - -
======= =======
</TABLE>
The net change in the valuation allowance for the year ended December 31, 1996
was an increase of $629. Deferred tax assets as of December 31, 1996 include
approximately $135 relating to stock option compensation, which will be
credited to equity when realized.
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $3,700, expiring in the tax years 2008 through
2010. For California income tax purposes, the Company has net operating loss
carryforwards of approximately $900, expiring in the tax years 1997 through
2001. The difference between the net operating loss carryforward for federal
income tax purposes and for state income tax purposes results primarily from a
50% limitation on the California loss carryforwards.
The Company has research and development tax credit carryovers for federal and
California tax purposes of approximately $420 and $270, respectively.
Internal Revenue Code Section 382 limits the utilization of net operating
losses incurred prior to an "ownership change," as defined. The Company
believes an ownership change resulted from the issuance of the Series B
preferred stock on December 31, 1993.
(6) BANK BORROWINGS AND CONVERTIBLE SECURED PROMISSORY NOTES
On October 25, 1995, the Company entered into a loan and security agreement
comprised of a $500 line of credit, which expired on October 25, 1996 and a
$250 term facility, which expires on October 15, 1998, bearing interest at the
prime rate plus 2% and prime rate plus 3%, respectively. The agreement which
is collateralized by the asset of the Company, contains certain financial
covenants and certain restrictions on other indebtedness and payment of
dividends. As of December 31, 1996 and 1995, the Company had no balances
outstanding under the line of credit. The balance outstanding under the term
facility was $250 and $-0- as of December 31, 1996 and 1995, respectively.
(7) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
28
<PAGE> 29
REDEEMABLE PREFERRED STOCK
In June 1994, the Company sold 3,000 units, comprised of one share each of
common stock at $0.20 per share and newly created Series AA redeemable
preferred stock at $0.80 per share for $2,000 in cash and in exchange for
$1,000 of 1994 Stockholder Notes.
On March 3, 1995, the 3,000 shares of common stock and Series AA redeemable
preferred stock units were converted into 3,000 shares of Series A redeemable
preferred stock which had a liquidation preference and redemption value of
$2.40 per share. Concurrently, the Company sold 2,500 shares of newly created
Series B redeemable preferred stock for $2,750 cash and in exchange for $1,000
of 1995 Stockholder Notes.
On December 29, 1995, the Company sold 500 shares of Series C redeemable
preferred stock at $4.00 per share, net of $50 issuance costs.
Upon the closing of the Company's initial public offering, all outstanding
shares of redeemable convertible preferred stock were converted into shares of
common stock on a one-for-one basis. As of December 31, 1996, there were 6,500
authorized shares of redeemable preferred stock, none of which are outstanding,
with a $0.01 per share par value.
STOCK OPTION AND STOCK PURCHASE PLANS
In February 1996, the Company adopted the 1996 Equity Incentive Plan (the 1996
Plan), under which 1,000 shares of common stock were reserved for issuance.
The 1996 Plan became effective in April 1996 on the effective date of the
Company's initial public offering. The 1996 Plan provides for the grant of
options, stock bonuses and restricted stock purchase rights. The compensation
committee of the Board of Directors has the authority to set exercise dates (no
longer than 10 years from date of grant), payment terms and other provisions
for each grant. Options are subject to vesting as determined by the
compensation committee, generally over 48 months. In connection with certain
acquisitions, certain outstanding options and other stock awards under the 1996
Plan accelerate vesting and become exercisable in full.
The Company's 1992 Stock Option Plan (the 1992 Plan) terminated at the
effective date of the Company's initial public offering, at which time the 1996
Plan became effective. As a result, no further options may be granted under
the 1992 Plan. However, termination of the 1992 Plan does not affect
outstanding options, all of which remain outstanding until exercised or until
they terminate or expire. The terms of options granted under the 1992 Plan and
the administration of the Plan are substantially the same as the 1996 Plan,
except that vesting of options under the 1992 Plan does not accelerate upon
acquisition.
29
<PAGE> 30
Activity under the option plans follows:
<TABLE>
<CAPTION>
Weighted-
Shares Exercise average
available Options price per exercise
for grant outstanding share price
--------- ----------- --------- -----
<S> <C> <C> <C> <C>
Balances as of December 31, 1993 19 102 $ 2.00 $ 2.00
Additional shares reserved 1,378 - - -
Options granted (916) 916 .20 0.20
Options exercised - (12) .20 - 2.00 0.20
Options canceled 179 (179) .20 - 2.00 1.23
------ -----
Balances as of December 31, 1994 660 827 .20 0.20
Additional shares reserved 500 - - -
Options granted (1,327) 1,327 .20 - 2.00 0.64
Options exercised - (1,027) .20 - .50 0.27
Options canceled 300 (300) .20 0.20
------ -----
Balances as of December 31, 1995 133 827 .20 - 2.00 0.83
Additional shares reserved 1,200 - - -
Options granted (722) 722 6.00 - 12.75 9.23
Options exercised - (171) .20 - 14.00 0.33
Options canceled 127 (127) .20 - 8.00 3.62
------ -----
Balances as of December 31, 1996 738 1,251 $ .20 - 10.63 $5.46
====== ======
Options exercisable as of December 31, 1996 235 $ 2.08
======
</TABLE>
The following table summarizes information about options outstanding under the
plans as of December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exerciable
--------------------------------------------- ----------------------
Number Weighted- Number
outstanding average Weighted- execisable Weighted-
Range of remaining average average
exercise contractual exercise exercise
prices life price price
------ ---- ----- -----
<S> <C> <C> <C> <C> <C>
$0.20 296 8.21 years $ 0.20 130 $0.20
From $0.21 to $2.00 272 8.96 1.62 59 1.54
From $2.01 to $8.00 331 9.20 7.61 41 7.71
From $8.01 to $13.00 352 9.64 10.84 5 10.62
----- ---
1,251 235
===== ===
</TABLE>
In October 1994, the Company canceled all its outstanding options under the
1992 Plan that had an exercise price of $2.00 per share and reissued the
options at an exercise price of $.20 per share, representing the fair market
value of the Company's common stock at the time of the option repricing. These
reissued options were subject to the same vesting schedule as the canceled
options.
On November 7, 1995, the Board of Directors approved a change to certain
outstanding options under the stock option plan whereby options granted to
officers would become immediately exercisable but subject to repurchase by the
Company at a rate equivalent to the current vesting schedule of each option. As
of December 31, 1996 and 1995, 454 and 689 shares were subject to repurchase,
respectively.
30
<PAGE> 31
In November 1995, three officers exercised options for 865 shares of common
stock in exchange for full recourse promissory notes payable of $194 to the
Company. In March 1996, an officer borrowed an additional $68 related to the
exercise of stock options in exchange for a full recourse promissory note. All
of the notes accrue interest at 5.83% and are payable in five years from date
of inception.
The Company has recorded deferred compensation of $175 for the difference
between the grant price and the deemed fair value of the common stock
underlying the options granted in November and December 1995. This amount is
being amortized over the vesting period of the individual options, generally
four years.
In February 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the Purchase Plan) and reserved a total of 1,000 shares of common stock for
issuance thereunder. The Purchase Plan become effective in April 1996, on the
effective date of the Company's initial public offering and permits eligible
employees to acquire shares of the Company's common stock through payroll
deductions at a price equal to 85% of the lower of the fair market value at the
beginning or end of each six month offering period. As of December 31, 1996, a
cumulative total of 35 shares had been issued under the Purchase Plan.
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $4.26 and $0.40, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: 1996
expected dividend yield 0%, risk- free interest rate of 6.25%, expected
volatility of 57% and expected life of 4 years; 1995 expected dividend yield
0%, risk-free interest rate of 6.10%, expected volatility of 57%, and expected
life of 4 years.
The per share weighted-average fair value of employees' purchase rights,
included in the pro forma amounts were estimated using the Black-Scholes model
with the following assumptions for 1996: dividend yield of 0%, expected life
of six months, expected volatility of 57%, and risk-free interest rate of
6.25%. The weighted-average fair value of purchase rights granted in 1996 was
$4.39.
The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized for
these plans in the financial statements. Had the Company determined
compensation cost for its stock-based compensation plans under Statement of
Financial Accounting Standards (SFAS) No. 123, the Company's net loss would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss:
As reported $ 5,240 3,640
Pro forma 5,870 3,654
Pro forma loss per share:
As reported $ .57 .48
Pro forma .64 .48
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of three to four years and compensation cost for options granted
prior to January 1, 1995, is not considered.
WARRANTS
In conjunction with various financing arrangements in 1994 and 1995, the
Company issued warrants to purchase 28 shares of common stock at prices ranging
from $1.50 per share to $18.16 per share and 7 shares of Series B redeemable
preferred stock at $2.24 per share. These warrants expire at various dates
through 2004.
31
<PAGE> 32
(8) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities and certain equipment under operating lease
agreements. The equipment operating leases expire in 1997 and the facilities
lease expires in 2005. Additionally, the Company leases certain equipment under
capital lease agreements. These leases expire at various dates through 2000.
Future minimum lease payments as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------- ------
<S> <C> <C>
1997 $ 410 $ 638
1998 337 478
1999 54 463
2000 3 479
2001 - 497
Thereafter - 2,024
------ ------
Future minimum lease payments 804 $4,579
======
Less amount representing interest 92
------
Present value of future minimum lease payments 712
Less current portion 343
------
Long-term portion $ 369
======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995, and 1994 was
approximately $367, $392, and $260, respectively.
EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that allows eligible employees to contribute up
to 20% of their compensation up to a statutory maximum amount. Employee
contributions and earnings thereon vest immediately. The Company may make
discretionary contributions to the 401(k) plan; none have been made to date.
LEGAL ACTIONS
In May 1996, a subcontractor of the Company filed a claim against the Company
seeking payment for certain cost overruns and alleging breach of contract and
interference by the Company with certain contracts the subcontractor has with
the Company's customers. The complaint seeks over $12 million in unspecified
damages, as well as punitive damages.
Although it is reasonably possible the Company may incur a loss upon conclusion
of this claim, an estimate of any loss or range of loss cannot be made. The
Company believes it has meritorious defenses and will vigorously defend against
these matters. The results of legal proceedings cannot be predicted with
certainty; however, in the opinion of management, the Company does not have a
potential liability in connection with this or any other legal proceedings that
would have a material adverse effect on the Company's financial position.
9) INTERNATIONAL SALES
International sales accounted for 24%, 14%, and 28% of the Company's total
revenues in 1996, 1995, and 1994, respectively. Europe accounted for 22% and
24% of the Company's total revenues in 1996 and 1994, respectively. No
international geographic region accounted for greater than 10% of the Company's
total revenues in 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
32
<PAGE> 33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company, their ages and their
positions with the Company are provided in the table below. The other
information called for by Item 10 is incorporated by reference to the
Registrant's Proxy Statement being sent to stockholders in connection with the
1997 Annual Meeting of Stockholders to be held on June 12, 1997 (the "Proxy
Statement").
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------- --- ---------------------------------------------
<S> <C> <C>
Mark A. Jung 34 Chairman of the Board, President and Chief Executive Officer
Stephen R. Bennion 53 Vice President, Finance and Operations, Chief Financial Officer
and Secretary
Steven M. Goldner 45 Vice President, Engineering
Christopher J. Andrews 40 Vice President, Sales
Bernard J. Harguindeguy 38 Vice President, Marketing and Business Development
David J. Cowan 31 Director
Max D. Hopper 62 Director
Anthony Sun 44 Director
Wade Woodson 38 Director
</TABLE>
Executive officers serve at the pleasure of the Board of Directors of the
Company.
Mr. Jung is a founder and has served as President, Chief Executive Officer and
a director of the Company since its inception in February 1992 and its Chairman
of the Board since February 1996. From June 1991 to February 1992, he served as
Vice President, Marketing and Divisional Vice President, of Touch
Communications, Inc., a networking software company. From September 1989 to May
1991, Mr. Jung served as Vice President and General Manager, OSI Product Unit,
of Retix, Inc., a supplier of data communications software. Prior to his
employment at Retix, Mr. Jung was a consultant with McKinsey & Co., Inc., a
management consulting firm. Mr. Jung received his Bachelor of Science degree
in Electrical Engineering from Princeton University and his Master of Business
Administration from Stanford University.
Mr. Bennion has served as Chief Financial Officer and Assistant Secretary of
the Company since April 1995 and as Vice President, Finance and Operations
since November 1995. From September 1994 to March 1995, he was Vice President
and Chief Financial Officer of Catapult Entertainment, Inc., a developer of
video game networks. From September 1991 to September 1994, Mr. Bennion served
as Vice President and Chief Financial Officer of Molecular Dynamics, Inc., a
manufacturer of life sciences instrumentation. From October 1988 to September
1991, Mr. Bennion served as Vice President and Treasurer of MIPS Computer
Systems, Inc., a developer of RISC microprocessors and computers. Mr. Bennion
received his Bachelor of Science degree in Accounting and Economics from Weber
State University and is a Certified Public Accountant.
Mr. Goldner has served as Vice President, Engineering, of the Company since
October 1994. From October 1992 to October 1994, Mr. Goldner was Vice
President, Engineering, of Polycom, Inc., a manufacturer of communications
equipment. From May 1985 to October 1992, Mr. Goldner served as Director of
Engineering, and in other positions, at Sun Microsystems, Inc., a computer
company. Mr. Goldner received his Bachelor of Science and Master of Science
degrees in Electrical Engineering from the University of Michigan.
Mr. Andrews has served as Vice President, Sales of the Company since December
1995. From August 1990 to December 1995, he served as Director of North
American Sales, and in other positions, of NETFRAME Systems, Inc., a supplier
of fault-tolerant servers for Novell Netware and Windows NT environments and
from March 1988 to August 1990 as an Area Manager at 3COM Corporation, a
computer communications company. Prior to his employment at 3COM, Mr. Andrews
held sales and management positions at Unisys Corporation. Mr. Andrews
received a Bachelor of Science degree in Biology from Drew University.
Mr. Harguindeguy has served as Vice President, Marketing and Business
Development of the Company since December 1996. From August 1994 to December
1996, he served as Vice President, Marketing of emotion, Inc., a company
focused on the delivery of digital video and graphics over networks. From
33
<PAGE> 34
February 1989 to August 1994, Mr. Harguindeguy was Acting General Manager and
Vice President of Worldwide Marketing for the Netware Enterprise Division of
Novell, Inc. Prior to joining Novell, Inc., he held a series of management
positions at 3COM Corporation and Bridge Communications. Mr. Harguindeguy
received a Bachelor of Science degree in Electrical Engineering from the
University of California, Irvine and a Master in Engineering Management from
Stanford University.
Mr. Cowan has served as a director of the Company since March 1993. He has been
an associate of Deer II & Co., a venture capital investment firm which is the
general partner of Bessemer Venture Partners III, L.P. since August 1992. Mr.
Cowan is a director of Webflow Corporation, an Internet-based software company,
VeriSign, Inc., an Internet security company for which Mr. Cowan serves as
Chief Financial Officer, and Coral Systems, a telecommunications software
company. Mr. Cowan received his A.B. degree in Math and Computer Science and
his Master of Business Administration degree from Harvard University.
Mr. Hopper has served as a director of the Company since September 1995. He has
been Principal and Chief Executive Officer of Max D. Hopper & Associates, a
consulting and information management firm since January 1995. From November
1985 to January 1995, Mr. Hopper served AMR Corporation as Chairman of the
SABRE Group and Senior Vice President. Mr. Hopper holds a B.S. in Mathematics
from the University of Houston.
Mr. Sun has served as a director of the Company since March 1995. He has been a
general partner of Venrock Associates, a venture capital firm, since 1980. He
is a director of Photonics, Inc., a computer peripherals company, Cognex
Corporation, a computer systems company, Conductus Inc., a superconductive
electronics company, Gupta Corporation, a client/server software company,
Inference Corporation, a client/server and Internet help desk software company,
Komag Inc., a computer storage component company and Stratacom Inc., a
telecommunications company. Mr. Sun received S.B.E.E, S.M.E.E. and Engineer
degrees from the Massachusetts Institute of Technology and a Master of Business
Administration degree from Harvard University.
Mr. Woodson has served as a director of the Company since March 1993. He is a
general partner with Sigma Partners, a venture capital organization, with which
he has been affiliated since 1987. Mr. Woodson also serves as a director of
Tylan General, a process management components and systems manufacturer and
PSINet, a provider of Internet access services. Mr. Woodson received his B.S.
in Electrical Engineering from Stanford University, his J.D. degree from
Harvard University and his Masters in Business Administration degree from the
University of California, Berkeley.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption "Executive
Compensation" in the Company's Proxy Statement to be filed in connection with
the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with the 1997 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Transactions" in the Company's Proxy Statement to be filed in connection with
the 1997 Annual Meeting of Stockholders.
34
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a)
(1) Financial Statements. The following financial statements are filed
as part of this report on Form 10-K beginning on page 19.
Report of Independent Accountants
Consolidated Balance Sheet as of December 31, 1996 and 1995
Consolidated Statements of Operation for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) Schedule II-Valuation and Qualifying Accounts
(b) Report on Form 8-K
On November 12, 1996, the Company filed a report on Form 8-K relating the
acquisition of Deming Software, Inc.
On January 27, 1997 the Company filed Form 8-K/A including the financial
statements of Deming Software, Inc. and combined proforma financial information
for the Company and Deming Software, Inc. listed below:
Financial Statement of Deming Software, Inc.
Report of Independent Auditors
Balance Sheet as of November 9, 1996
Statements of Operations, period from December 11, 1995 (inception)
to November 9, 1996
Statements of Stockholder's Deficit, period from December 11, 1995
(inception) to November 9, 1996
Statements of Cash Flows, period from December 11, 1995 (inception)
to November 9, 1996
Notes to Financial Statements
Pro Forma Financial Information
Unaudited Pro Forma Combined Balance Sheet at September 30, 1996
Unaudited Pro Forma Combined Statements of Operations at September 30, 1996
Notes to Unaudited Pro Forma Combined Financial Statements
35
<PAGE> 36
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.01 Agreement and Plan of Reorganization between Registrant and Worldtalk
Corporation, a California corporation, and material exhibits thereto (1)
2.02 Agreement and Plan of Merger dated as of November 12, 1996 by and between
Worldtalk Merger Corporation and Deming Software, Inc. (2)
2.03 Escrow Agreement dated November 12, 1996 among Registrant, the Deming
Shareholders, Robert D. Dickinson, as Representative, and Harris Trust and
Savings Bank, as Escrow Agent. (2)
3.01 Registrant's Certificate of Incorporation. (1)
3.02 Registrant's Certificate of Designation. (1)
3.03 Registrant's Certificate of Elimination. (1)
3.04 Registrant's Bylaws. (1)
4.01 Form of Specimen Certificate for Registrant's Common Stock. (1)
4.02 Third Amended and Restated Registration Rights Agreements between Registrant
and certain investors dated March 3, 1996, as amended. (1)
4.03 Shareholders' Agreement dated November 12, 1996 among Registrant, Deming
and the Deming Shareholders. (2) (**)
10.01 Registrant's 1992 Stock Option Plan and related documents (1) (4)
10.02 Registrant's 1996 Equity Incentive Plan and related documents (1) (4)
10.03 Registrant's 1996 Directors Stock Option Plan and related documents (1) (4)
10.04 Registrant's 1996 Employee Stock Purchase Plan and related documents (1) (4)
10.05 Form of Indemnification Agreement to be entered into by Registrant with
each of its directors and executive officer. (1) (4)
10.06 Lease Agreement, date June 15, 1995, between Registrant and John Arrillaga. (1)
10.07 Consulting and Development Services Agreement and Copyright Assignment
between Microsoft Corporation and Registrant dated September 7, 1995. ** (1)
10.08 Loan and Security Agreement, dated October 20, 1995, between Registrant and
General Bank. (1) (4)
10.09 Restricted Stock Purchase Agreement, dated March 3, 1992, between Registrant and
Mark A. Jung. (1) (4)
10.10 Promissory Note, dated December 6, 1995, in the principal amount of $105,000.00
and Promissory Note, dated March 26, 1996, in the principal amount of $68,000,
both issued by Mark A. Jung to Registrant, and related Security Agreement. (1) (4)
10.11 Promissory Note, dated December 6, 1995, in the principal amount of $60,000.00
issued by Stephen Bennion to Registrant and related Security Agreement. (1) (4)
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C>
10.12 Promissory Note, dated December 6, 1995, in the principal amount of $29,000.00
issued by Steve Goldner to Registrant and related Security Agreement. (1) (4)
10.13 Restricted Stock Purchase Agreement, dated December 8, 1995, between
Registrant and Mark Leslie. (1) (4)
10.14 Restricted Stock Purchase Agreement, dated December 15, 1995, between
Registrant and Max Hopper. (1) (4)
10.15 Secured Full Recourse Promissory Note and related Security Agreement, dated
October 24, 1996, between Registrant and Christopher J. Andrews. (3) (4)
10.16 Agreement and Plan of Reorganization dated as of November 9, 1996 by and
among Registrant, Deming Software, Inc. and the Deming Shareholders (2) (**)
10.17 Form of Employment Agreement entered into by Deming with each of the Deming
Shareholders on November 12, 1996. (2)
11.01 Statement regarding computation of per share earnings. (3)
21.01 List of Registrant's subsidiaries
23.01 Consent of KPMG Peat Marwick LLP, Independent Auditors. (3)
24.01 Power of Attorney
27.01 Financial Data Schedule
</TABLE>
** Confidential treatment has been granted with respect to
certain portions of this agreement. Such portions have been
filed separately with the Securities and Exchange Commission.
(1) Incorporated by reference to the Exhibit to the Company's
Registration Statement on form S-1, as amended (File No. 333-
1482) as declared effective by the Securities and Exchange
Commission
(2) Incorporated by reference to the Exhibit to the Company's report
on Form 8-K, as amended (File No. 0-27886) filed with the
Securities and Exchange Commission on November 12, 1996.
(3) Filed herewith.
(4) Management contract or compensatory plan.
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized. Date: March 31, 1997
WORLDTALK COMMUNICATIONS CORPORATION
By: /s/ Stephen R. Bennion
---------------------------------------
Stephen R. Bennion
Vice President, Finance and Operations,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Mark A. Jung President and Chief Executive Officer March 31, 1997
- ------------------------------------- and Director (Principal Executive Officer)
/s/ Stephen R. Bennion Vice President, Finance and Operations, March 31, 1997
- ------------------------------------- Chief Financial Officer and Secretary
(Principal Accounting Officer)
/s/ Wade Woodson Director March 31, 1997
- -------------------------------------
/s/ David Cowan Director March 31, 1997
- -------------------------------------
/s/ Max Hooper Director March 31, 1997
- -------------------------------------
/s/ Anthony Sun Director March 31, 1997
- -------------------------------------
</TABLE>
38
<PAGE> 39
WORLDTALK CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS:
BALANCE AT WRITE OFFS
BEGINNING OF OF BALANCE AT
CLASSIFICATION YEAR ADDITIONS ACCOUNTS END OF YEAR
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1993 $ 8 $ - $ (1) $ 7
===== ===== ===== =====
Year ended December 31, 1994 $ 7 $ 93 $ (6) $ 94
===== ===== ===== =====
Year ended December 31, 1995 $ 94 $ 56 $ $ 150
===== ===== ===== =====
Year ended December 31, 1996 $ 150 $ 10 $ (11) $ 149
===== ===== ===== =====
</TABLE>
39
<PAGE> 1
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 10.15
SECURED FULL RECOURSE PROMISSORY NOTE
Santa Clara, California
PRINCIPAL: $325,000.00 OCTOBER 24, 1996
1. OBLIGATION. In return for an advance of funds by Worldtalk
Communications Corporation ("Lender"), in the amount of Three Hundred
Twenty-five Thousand Dollars ($325,000.00) (the "Principal"), receipt of which
is hereby acknowledged, the undersigned borrowers ("Borrowers") hereby promise
to pay to the order of Lender the full amount of the Principal, together with
interest at the rate of six and sixty-one hundredths percent (6.61%) per annum
compounded semi-annually (which rate is not less than the minimum rate
established pursuant to Section 1274(d) of the Internal Revenue Code of 1986,
as amended, on the earliest date on which there was a binding contract relating
to this loan) on the earlier of (i) October 24, 2001; (ii) the date of sale by
Borrowers of the house located at Oakhurst Drive, Monte Sereno, CA 95030 (the
"Residence"), against which this Note may be secured at a later date upon
substitution of collateral and pursuant to that certain Deed of Trust described
in Section 4 hereof; or (iii) the occurrence of any event of default or any
other event that would require repayment under such Deed of Trust.
2. PAYMENT. Unless otherwise agreed in writing by the Lender,
all payments will be made in lawful tender of the United States and will be
applied first to the payment of accrued interest, and the remaining balance of
such payment, if any, will then be applied to the payment of principal. All
payments will be made at the Lender's principal place of business, 5155 Old
Ironsides, Santa Clara, California 94054, or at such other place as the Lender
may direct.
3. SECURITY; ACCOUNTS HELD WITH FINANCIAL INSTITUTIONS. Payment
of this Note is secured by a security interest in the deposit, broker and other
accounts listed on Attachment A to this Note (the "Accounts"), the assets held
in such Accounts and by an interest in all general intangibles now owned or
hereafter acquired by Borrowers. The Accounts, assets and general intangibles
taken together will be referred to herein as the "Collateral". Borrowers agree
to sign any Uniform Commercial Code financing statement deemed necessary by
Lender to evidence such security interest and grant Lender, through its
officers and employees, a limited power of attorney for the sole purpose of
executing, in the name or names of any Borrowers, any financing statement or
related document deemed necessary by Lender to perfect the security interest
granted in this Section 3.
4. SUBSTITUTION OR ADDITION OF COLLATERAL. No later than forty
(40) days following the execution of this Note, the Borrowers shall execute,
have notarized and deliver to Lender a Deed of Trust relating to the Residence
executed by Borrowers, as Trustor, to Trustors Security Service, as Trustee, in
favor of Lender, as Beneficiary (the "Deed of Trust") and a security interest
will thereby be granted in the Residence. Lender shall have the option, in
Lender's sole discretion, to release all or any portion of the Collateral
securing performance under this Note and to substitute or supplement any
portion of the existing Collateral with the Residence. Nothing in this Section
4 shall require Lender to release any Collateral upon receipt of the Deed of
Trust. Lender will have thirty (30) days from the date on which it receives
from Borrowers the executed and notarized Deed of Trust in which to record the
Deed of Trust with the appropriate county agency to perfect its security
interest in the Residence. Borrowers hereby agree, upon notice from the
Lender, to enter into a new promissory note or notes and/or security agreements
as the Lender deems necessary to grant and perfect Lender's security interest
in the Collateral and/or the Residence. If Lender has not recorded the Deed of
Trust by the end of the thirty-day period following receipt of the Deed of
Trust, Lender agrees to reconvey the Deed of Trust to Borrowers.
5. COVENANTS OF BORROWERS. In order to induce Lender to enter
into this Note, Borrowers hereby agree (i) that they will not pledge or
otherwise encumber any of the Accounts or any securities or other assets held
in the Accounts, or borrow against such Accounts or assets or engage in margin
or other transactions the repayment of which would be secured by any Account or
assets held in the Accounts; (ii) that they will furnish to the Lender, at
least once per month upon written request of lender, current statements
indicating the balance in each of the Accounts; (iii) that they will maintain a
minimum balance in the Accounts of $325,000; and (iv) that, if the aggregate
balance of the Accounts taken together falls below $325,000, Borrowers will pay
additional cash into the Accounts within seven (7) days after
40
<PAGE> 2
notice of such shortfall to raise the aggregate balance to $325,000. If the
balance on the Accounts remains below $325,000 for greater than seven (7) days,
the Borrowers shall be deemed to be in default under the Terms of this Note.
If the balance on the Accounts falls below $300,000, the Borrowers will be
deemed to be in default under the terms of this Note.
6. DEFAULT; ACCELERATION OF OBLIGATION. In addition to any other
events of default specified in this Note, Borrowers will be deemed to be in
default under this Note and, without any other action required to be taken by
any person or entity, the principal sum of this Note, together with all
interest accrued thereon, will become due and payable in full on a date three
months after the occurrence of any of the following: (a) any Borrower's
failure to make any payment when due under this Note; (b) in the event
Christopher J. Andrews ceases to provide services as an employee to the Lender
for any reason other than death or a period of no more than three (3) months
due to disability (meaning a disability, whether temporary or permanent,
partial or total, within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended); (c) the filing by or against any Borrower of
any voluntary or involuntary petition in bankruptcy or any petition for relief
under the federal bankruptcy code or any other state or federal law for the
relief of debtors; or (d) upon the execution by any Borrower of an assignment
for the benefit of creditors or the appointment of a receiver, custodian,
trustee or similar party to take possession of any Borrower's assets or
property.
7. REMEDIES ON DEFAULT. Upon any default of any Borrower under
this Note, the Lender will have, in addition to its rights and remedies under
this Note or given to the Lender by law, full recourse against any real,
personal, tangible or intangible assets of any Borrower, and may pursue any
legal or equitable remedies that are available to the Lender, and may declare
the entire unpaid principal amount of this Note and all unpaid accrued interest
under this Note to be immediately due and payable in full. The remedies set
forth in this Note are cumulative and shall be in addition to any rights or
remedies available to Holder by contract, by law or in equity.
8. PREPAYMENT; GENERAL. Prepayment of principal and/or interest
due under this Note may be made at any time without penalty. If Borrowers
prepay all or a portion of the principal amount of this Note, the Collateral or
any substituted collateral described in Section 4 will continue to serve as
independent collateral for the outstanding portion of this Note unless
Borrowers notify the Lender in writing otherwise and the Lender consents to a
release of the Collateral.
9. PREPAYMENT UPON SALE OF STOCK. Borrowers agree to prepay any
outstanding amount owed under this Note with 35% of the net proceeds (before
taking into account any taxes owed) that any Borrower receives during the term
of this Note from the sale by that Borrower of any shares of Lender's Common
Stock. This Section 9 shall not create a security interest, but is an
agreement between the parties as to the manner of repayment of the Note.
Notwithstanding any prepayment by Borrowers, each Borrower will remain jointly
and severally liable for any remaining principal and interest on this Note.
10. REPRESENTATION OF BORROWERS. Borrowers hereby represent (i)
that the aggregate balance of the Accounts on the date of this Note is in
excess of $325,000; and (ii) that Borrowers have not pledged or otherwise
encumbered any of the Accounts or any securities or other assets held in the
Accounts, or borrowed against such Accounts or assets or engaged in margin or
other transactions the repayment of which is secured by an interest in any of
the Accounts or any assets currently held in the Accounts.
11. GOVERNING LAW; WAIVER. The validity, construction and
performance of this Note will be governed by the internal laws of the State of
California, excluding that body of law pertaining to conflicts of law.
Borrowers hereby waives presentment, notice of non-payment, notice of dishonor,
protest, demand and diligence.
12. JOINT AND SEVERAL LIABILITY. The obligations under this Note
of each Borrower whose signature appears below will be joint and several.
13. ATTORNEYS' FEES. If suit is brought for collection of this
Note, Borrowers agrees to pay all reasonable expenses, including attorneys'
fees, incurred by the holder in connection therewith whether or not such suit
is prosecuted to judgment.
IN WITNESS WHEREOF, Borrowers have executed this Note as of the date
and year first above written.
<TABLE>
<S> <C>
CHRISTOPHER J. ANDREWS /s/ Christopher J. Andrews
- ----------------------------------------------- --------------------------
BORROWER'S NAME [TYPE OR PRINT] BORROWER'S SIGNATURE
</TABLE>
41
<PAGE> 3
<TABLE>
<S> <C>
HEIDI B. ANDREWS /s/ Heidi B. Andrews
- ----------------------------------------------- --------------------
BORROWER'S NAME [TYPE OR PRINT] BORROWER'S SIGNATURE
</TABLE>
42
<PAGE> 1
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 11.1
Computation of Loss Per Share
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
-------- -------
<S> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $(5,240) $(3,640)
======= =======
Weighted average common shares outstanding . . . . . . . . . . 7,669 1,014
Number of common share equivalents resulting from option
and warrants, computed using the treasury stock method . . . . - -
Preferred stock, on an "as if converted basis" using the
exchange rate in effect at the initial public offering date . . 1,506 2,485
Staff Accounting Bulletin No. 83 issuances and grants(1) - 4,108
------- -------
Number of common shares and common share equivalents
used in computation . . . . . . . . . . . . . . . . . . . . . . 9,175 7,607
------- -------
Net income (loss) per share . . . . . . . . . . . . . . . . . . $ (0.57) $ (0.48)
======= =======
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock warrants, options and other potentially dilutive
securities issued during the 12 month period preceding the date of initial
filing of the Company's Registration Statement on Form S-1 (File No. 333-1482),
have been included in the calculation of common equivalent shares, using the
treasury stock method, as if they were outstanding for all periods presented,
even if anti-dilutive.
43
<PAGE> 1
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 23.01
- -------------------------------------------------------------------------------
Consent of Independent Auditors
The Board of Directors and Stockholders
Worldtalk Corporation
We consent to incorporation by reference in the registration statement (No.
333-3510) on Form S-8 of Worldtalk Corporation of our report dated February 4,
1997, relating to the consolidated balance sheets of Worldtalk Corporation and
subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the years in the three year period ended December 31, 1996, and the
related schedule, which report appears in the December 31, 1996 annual report
on Form 10-K of Worldtalk Corporation.
KPMG Peat Marwick LLP
San Jose, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,012
<SECURITIES> 6,027
<RECEIVABLES> 5,375
<ALLOWANCES> (149)
<INVENTORY> 0
<CURRENT-ASSETS> 19,185
<PP&E> 2,875
<DEPRECIATION> (1,144)
<TOTAL-ASSETS> 21,719
<CURRENT-LIABILITIES> 6,604
<BONDS> 0
0
0
<COMMON> 31,753
<OTHER-SE> (17,357)
<TOTAL-LIABILITY-AND-EQUITY> 21,719
<SALES> 14,205
<TOTAL-REVENUES> 14,205
<CGS> 3,438
<TOTAL-COSTS> 3,438
<OTHER-EXPENSES> 16,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,240)<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,240)<F1>
<EPS-PRIMARY> (0.57)<F2>
<EPS-DILUTED> (0.57)<F2>
<FN>
<F1>INCLUDES IN PROCESS RESEARCH AND DEVELOPMENT OF $4.5 MILLION AND DEMING RELATED
INTEGRATION EXPENSES OF $279,000.
<F2>EXCLUSIVE OF EXPENSES NOTED ON (1), NET LOSS PER SHARE WOULD HAVE BEEN ($.05).
</FN>
</TABLE>
