<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-27886
WORLDTALK COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0303581
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
5155 OLD IRONSIDES DRIVE
SANTA CLARA, CALIFORNIA 95054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
----------------
(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:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
----------------
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. Yes [X] No [ ]
The number of outstanding shares of the Registrant's Common Stock, par value
$0.01 per share, on April 30, 1998 was 10,607,661 shares.
================================================================================
<PAGE> 2
- --------------------------------------------------------------------------------
FORM 10-Q
WORLDTALK COMMUNICATIONS CORPORATION
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997........ 3
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 1998 and 1997................................................................. 4
Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1998 and 1997................................................................. 5
Notes to Condensed Consolidated Financial Statements.................................... 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 8
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.............................. 15
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings....................................................................... 16
ITEM 5. Change in Management.................................................................... 16
ITEM 6: Exhibits and Reports on Form 8-K........................................................ 16
Signature............................................................................... 17
Exhibits................................................................................ 18,19
</TABLE>
2
<PAGE> 3
WORLDTALK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................... $ 6,450 $ 4,662
Short-term investments ............................. 3,482 6,415
Accounts receivable, net of allowance for doubtful
accounts of $121 and $121, respectively .......... 3,337 3,039
Prepaid expenses ................................... 903 935
-------- --------
Total current assets ....................... 14,172 15,051
Property and equipment, net .......................... 1,506 1,658
Other assets ......................................... 525 556
-------- --------
$ 16,203 $ 17,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 883 $ 760
Short-term debt .................................... 243 243
Capital lease obligations .......................... 382 471
Accrued expenses ................................... 3,093 3,041
Deferred revenue ................................... 3,591 4,094
-------- --------
Total liabilities .......................... 8,192 8,609
======== ========
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000 shares
authorized, 10,487 and 10,290 shares issued and
outstanding in 1998 and 1997, respectively ....... 105 105
Additional paid-in capital ......................... 32,323 32,301
Deferred compensation .............................. (78) (89)
Accumulated deficit ................................ (24,339) (23,661)
-------- --------
Total stockholders' equity ................. 8,011 8,656
-------- --------
$ 16,203 $ 17,265
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
WORLDTALK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31,
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Software licenses ...................... $ 2,599 $ 1,364
Maintenance, installation and training . 1,008 1,297
-------- --------
Total revenues ................. 3,607 2,661
-------- --------
Cost of revenues:
Software licenses ...................... 194 281
Maintenance, installation and training . 648 852
-------- --------
Total cost of revenues ......... 842 1,133
-------- --------
Gross profit ........................ 2,765 1,528
-------- --------
Operating expenses:
Product development .................... 1,049 1,087
Sales and marketing .................... 1,760 1,796
General and administrative ............. 670 600
-------- --------
Total operating expenses ....... 3,479 3,483
-------- --------
Operating loss ........................... (714) (1,955)
Interest income, net ..................... 121 121
-------- --------
Loss before income taxes ....... (593) (1,834)
Income taxes ............................. 85 65
-------- --------
Net loss ....................... $ (678) $ (1,899)
======== ========
Basic and diluted net loss per share ..... $ (0.06) $ (0.18)
======== ========
Shares used in computing basic and diluted
net loss per share ....................... 10,511 10,298
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
WORLDTALK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................... $ (678) $(1,899)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .................. 195 161
Amortization of deferred compensation .......... 11 11
Changes in operating assets and liabilities:
Accounts receivable .......................... (298) 2,445
Prepaid expenses ............................. 32 178
Accounts payable ............................. 123 (537)
Accrued expenses ............................. 52 (360)
Deferred revenue ............................. (503) 45
Other liabilities ............................ -- (100)
------- -------
Net cash used in operating activities ..... (1,066) (56)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ............... (43) (303)
Purchase of short-term investments ............... -- (496)
Sales and maturities of short-term investments ... 2,933 1,158
Other assets ..................................... 31 (197)
------- -------
Net cash provided by (used in) investing
activities .............................. 2,921 162
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock ....... 22 10
Repayment of shareholder receivable .............. -- 233
Principal payments under capital lease obligations (89) (89)
------- -------
Net cash provided by (used in) financing
activities .............................. (67) 154
------- -------
Change in cash and cash equivalents ................ 1,788 260
Cash and cash equivalents at beginning of period ... 4,662 7,012
------- -------
Cash and cash equivalents at end of period ......... $ 6,450 $ 7,272
======= =======
Supplemental disclosures:
Cash paid for interest: .......................... $ 16 $ 36
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
WORLDTALK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated balance sheet of Worldtalk
Corporation and its subsidiaries ("Worldtalk" or the "Company") as of March 31,
1998 and December 31, 1997 and the related unaudited condensed consolidated
statements of operations and cash flow for the three months ended March 31, 1998
and 1997 have been prepared on substantially the same basis as are the annual
consolidated financial statement. The December 1997 balance sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principle. The results of operation for the
three months ended March 31, 1998 are not necessary indicative of results to be
expected for the entire year.
For software arrangements entered into after December 31, 1997, the Company
recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, which supersedes SOP 91-1. SOP 97-2 requires the Company to
recognize revenue earned on software arrangements involving multiple elements to
be allocated to each element based on the relative fair values of the elements.
The fair value of an element must be based on evidence that is specific to the
vendor. If a vendor does not have evidence of the fair value for all elements in
a multiple-element, all revenue from the arrangement is deferred until such
evidence exists or until all elements are delivered. Accordingly, the Company
generally recognizes license fee revenue upon product shipment provided there
are no contingencies and collection is probable.
EARNINGS PER SHARE
Basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed using the
weighted average number of potentially dilutive common equivalent shares
outstanding for the period, if any. For the periods ending March 31, 1998 and
1997, common stock options totaling 1,733 and 1,613, respectively, were omitted
from the computation, as their impact would be antidilutive.
COMPREHENSIVE INCOME
Comprehensive income as defined by Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," is net income plus direct
adjustment to stockholders' equity.
The following table reconciles comprehensive income to reported net income
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
----- -------
<S> <C> <C>
Net loss $(678) $(1,899)
Unrealized holding loss on investments, net of tax (2) (18)
----- -------
Total comprehensive loss $(680) $(1,917)
===== =======
</TABLE>
6
<PAGE> 7
(2) LEGAL PROCEEDINGS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses and
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position and results of operation.
7
<PAGE> 8
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
OVERVIEW
This discussion and analysis of financial condition and results of operations
contains descriptions of the Company's expectations regarding future trends
affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Securities Litigation Reform Act of 1995.
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and in "Additional Factors That May Affect Future Results".
The Company is an Internet security company focused on providing e-mail
security and policy management solutions that enable organizations to safely and
efficiently use the Internet for global business communication. The Company's
products include WorldSecure Server, an e-mail firewall and security policy
manager, WorldSecure Client, a desktop e-mail encryption product, NetTalk, a
Windows NT-based e-mail and directory server, and NetJunction, a UNIX-based
directory and messaging switch. During 1996, Worldtalk initiated a major product
development program to leverage the Company's technology base and expertise in
UNIX-based e-mail connectivity backbones and directory services to develop new
Windows NT-based Internet e-mail security and connectivity products. These
products, WorldSecure Server and NetTalk, were released in 1997. During 1997,
the Company experienced a more rapid decline in its UNIX-based NetJunction
product than had been anticipated at the end of 1996. The Company believes that
this was caused by a combination of factors. These included a more rapid market
shift from UNIX-based systems to Windows NT-based systems and the desire of
organizations to utilize Internet standards-based technology to build corporate
intranets in place of private, proprietary network backbones. The Company's
results improved by the fourth quarter of 1997 as a result of increased revenue
from the new Windows NT-based products and the implementation of effective cost
control measures and this improvement continued for the first quarter of 1998.
The Company has experienced a significant shift in product mix from almost
100% of software license revenue coming from UNIX-based NetJunction products in
1996 to the majority of software license revenue coming from Windows NT-based
e-mail security and connectivity products in the last quarter of 1997 and the
first quarter of 1998. However, a significant portion of the revenue reported
from these products during the first quarter of 1998 came from shipments of
products pursuant to minimum non-refundable commitment terms with two large
resellers, which do not directly reflect sales to end-users. During each quarter
of 1998, the Company expects to report additional revenue from the recognition
of the balance of a non-refundable prepaid purchase commitment from one reseller
based on product sell-through and guaranteed quarterly minimum commitments from
another reseller. The realization of revenue in excess of the non-refundable
prepaid amount noted above will depend on the success of these resellers in the
marketplace. The Company believes that achievement of profitability will depend
on increased market acceptance of its new Windows NT-based e-mail security and
policy management products. Further revenue from these new Windows NT-based
products will depend increasingly on the success of third-party reseller
channels. In this regard, the Company entered into product distribution
relationships in 1997 with The Peapod Group (Peapod) based in the United
Kingdom, ASCII Something Good Corporation (ASCII) based in Japan, Secutiry
Dynamics Technologies (SDTI) worldwide, and various other resellers in the
United States and in foreign markets. A key element of the Company's future
revenue growth will be the ability of the Company's resellers to sell the
Company's products in volume. There can be no assurance that the Company's
resellers will be successful in marketing these products or that the Company's
new windows NT-based products will achieve bread market acceptance.
8
<PAGE> 9
By the second half of 1998, the Company anticipates that most of its
development and marketing efforts will be focused on the Windows NT-based
security products. The Company also plans to continue maintaining and supporting
its NetJunction product line and believes that there may be a continuing revenue
stream from this activity for a limited time in the future. Although the Company
believes that these products may continue to be viable in the marketplace, the
Company plans to utilize its resources to exploit the Internet security market.
There can be no assurance that the Company will continue to recognize revenue
from NetJunction or that the Company's Internet Security products will achieve
bread market acceptance.
The Company's Windows NT-based Internet security and policy management
products will also place the Company into competition with a new set of vendors,
many of whom have significantly greater resources than the Company. Accordingly,
the Company intends to invest significantly in its business. As a result, there
can be no assurance that the Company will be profitable on a quarterly or annual
basis size or that the Company will be able to successfully compete with vendors
that have greater resources than the Company. 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; success of the Company's
resellers; the introduction of new products and product enhancements by the
Company or its competitors; the budgeting cycles of customers; acceptance by the
market of the Company's products; changes in United States government policy on
encryption software; 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 believes that its products are or will be compliant with customer
requirements for operations through the year 2000 and beyond. Many customers
require such certification and warranties before purchasing products. Failure of
the Company's products to function through the year 2000 could cause material
liabilities to the Company to correct such defects. The Company does not believe
that any significant internal systems will be adversely affected by the
transition to years following 1999.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of operations
data for the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
PERIOD ENDED MARCH 31,
----------------------
1998 1997
----- -----
<S> <C> <C>
Revenue:
Software licenses .................. 72.1% 51.3%
Maintenance, installation and
training ......................... 27.9 48.7
----- -----
Total revenue .............. 100.0 100.0
----- -----
Cost of revenue:
Software licenses .................. 5.3 10.6
Maintenance, installation and
training ......................... 18.0 32.0
----- -----
Total cost of revenue ...... 23.3 42.6
----- -----
Gross margin ......................... 76.7 57.4
----- -----
Operating expenses:
Product development ................ 29.1 40.9
Sales and marketing ................ 48.8 67.5
General and administrative ......... 18.6 22.5
----- -----
Total operating expense .... 96.5 130.9
----- -----
Operating loss ............. (19.8) (73.4)
Other income (expense), net .......... 3.4 4.5
----- -----
Loss before income taxes ... (16.4) (68.9)
Income taxes ......................... 2.4 2.4
----- -----
Net loss ................... (18.8)% (71.4)%
===== =====
</TABLE>
REVENUES
The Company's total revenues are derived primarily from license fees for its
software and charges for services, including maintenance, customization
consulting, installation and training. License fees relate to both the initial
licenses of its software products, as well as subsequent purchases to expand
capacity or add 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, upon
delivery of a permanent key, and the sales price is collectible and the Company
has no remaining material arrangements. 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 also reported revenue from shipments pursuant to minimum
non-refundable commitment terms with two large resellers, which do not directly
reflect sales to end-users. During each other quarter of 1998, the Company
expects to report additional revenue from the recognition of the balance of a
non-refundable prepaid purchase commitment from one reseller based on product
sell-through and guaranteed quarterly minimum commitments from another reseller
The Company's total revenues were $3.6 million for the three months ended
March 31, 1998 as compared to $2.7 million for the same period in 1997,
representing an increase of 35.1%.
Software license revenue was $2.6 million for the three months ended March
31, 1998 as compared to $1.4 million for the same period in 1997, representing
an increase of 90.5%. The increase in software license revenue for the first
three months of 1998, when compared to the same period last year, was primarily
attributable to increased sales volumes while average selling prices stayed
constant.
Maintenance, installation and training revenues were $1.0 million for the
three months ended March 31, 1998 as compared to $1.3 million for the same
period in 1997, representing a decrease of 22.3%,
10
<PAGE> 11
when compared to the same period last year. Maintenance, installation and
training revenue for the first threes months of 1998 decreased from the first
threes months of 1997 due to weak NetJunction sales in the second half of fiscal
1997. This resulted in reduced consulting and integration services for the same
period, along with the increase in the percentage of total revenue from the sale
of Windows NT-based products which require less consulting and maintenance,
resulted in lower maintenance, installation and training revenue. The Company
expects that maintenance, installation and training revenues will decline as a
percentage of revenue in the future as the Company increases sales of Windows
NT-based e-mail security and policy management products which require less
maintenance, installation and training.
COST OF REVENUES
The Company's total cost of revenues was $842,000 for the three months ended
March 31, 1998 as compared to $1.1 million for the same period in 1997,
representing a decrease of 25.7%.
Cost of product revenues consists of the costs of royalties paid to
third-party vendors, product media and duplication, packaging materials and
shipping expenses. Cost of product revenues was $194,000 for the three months
ended March 31, 1998 as compared to $281,000 for the same period in 1997,
representing a decrease of 31.0%. The decrease in cost of product revenues for
the first three months of 1998, when compared to the same period last year, was
primarily due to reductions in the cost of certain fixed price royalty
arrangements with third-party vendors and other amortized costs. Amortized costs
include manuals, disk duplications and packaging materials, which do not
fluctuate in direct proportion to license revenues.
Maintenance, installation and training costs consist principally of
personnel-related costs for consulting, training and technical support.
Maintenance, installation and training costs were $648,000 for the three months
ended March 31, 1998 as compared to $852,000 for the same period in 1997,
representing a decrease of 23.9%. The decrease was due to the Company's
reduction of headcount early in the second half of 1997, and the Company's
continued efforts to control costs in the first three months of 1998. The
Company expects that maintenance, installation and training costs will decline
as a percentage of revenue in the future, as the Company increases sales of
Windows NT-based e-mail security and policy management products which require
less maintenance, installation and training.
PRODUCT DEVELOPMENT
Product development expenses consist primarily of personnel-related costs,
including salaries and benefits of personnel, as well as equipment and facility
costs. Product development expenses are incurred for the research, design and
development of new products, enhancements of existing products and quality
assurance activities. Costs related to research, design and development of
products are charged to product development expenses as incurred. Product
development expenses were $1.0 million for the three months ended March 31, 1998
as compared to $1.1 million for the same period in 1997, representing an
increase of 3.5%. Product development expenses represented 29.1% and 40.9% of
total revenues for the first quarter of 1998 and the first quarter of 1997,
respectively. The decrease in absolute dollars in product development for the
first three months of 1998, when compared to the same period in 1997, was due to
decreased staffing and associated support costs of software engineers and
consultants during the second half of 1997. The decreases in product development
expenses as a percentage of total revenues were attributable to the fluctuations
in revenues for the respective periods 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 is required for the
Company's products to obtain a competitive advantage. The Company intends to
continue to allocate resources to product research and development.
Consequently, such expenses may increase in both dollar amounts and as a
percentage of total revenues in the future.
11
<PAGE> 12
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, benefits and
commissions of sales and marketing personnel, trade show expenses and
promotional expenses. Sales and marketing expenses were $1.8 million for the
three months ended March 31, 1998 as compared to $1.8 million for the same
period in 1997. This represents no change in absolute dollars for the first
three months of 1998, when compared to the same period in 1997. Sales and
marketing expenses represented 48.8% and 67.5% of total revenues for the first
three months of 1998 and the first three months of 1997, respectively. The
decrease in sales and marketing expenses as a percentage of total revenues was
attributable to the fluctuations in revenues for the respective periods 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 expand internationally through a combination of
distributors, VARs and direct sales personnel. Consequently, such expenses may
increase in both dollar amounts 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 $670,000 for the three months ended
March 31, 1998 as compared to $600,000 for the same period in 1997, representing
an increase of 11.7%. General and administrative expenses represented 18.6% and
22.5% of total revenues for the first three months of 1998 and the first three
months of 1997, respectively. The increase in absolute dollars for the first
quarter of 1998, when compared to the same period in 1997, were attributable
primarily to increased staffing and associated expenses necessary to manage and
support the Company's business. The decrease in general and administrative
expenses as a percentage of total revenues was attributable to the fluctuations
in revenue for the respective periods 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.
NET INTEREST INCOME
Net interest income consists of interest income and expense and other
miscellaneous income and expense items. Net interest income was $121,000 and
$121,000 for the first three months of 1998 and the first three months of 1997,
respectively. The fluctuations in net interest were primarily attributable to
fluctuations in the Company's cash and cash equivalent and short-term
investments balances, coupled with interest rate fluctuations during the
comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had cash and cash equivalents of $6.4 million,
short-term investments of $3.5 million and working capital of $6.0 million. The
Company had a $2.0 million bank line of credit, which expired on January 9,
1998. As of April 30, 1998 the Company had not yet renewed this line of credit
agreement. As of March 31, 1998, the Company had an outstanding loan agreement
in the amount of $243,000 with General Bank.
Net cash used in operating activities amounted to $1.1 million for the three
months ended March 31, 1998, which was comprised principally of the Company's
net loss of $678,000, a decrease in deferred revenue of $503,000 and an increase
in accounts receivable of $298,000, offset by an increase in accounts
12
<PAGE> 13
payable, accrued expenses, and other liabilities of $175,000, a decrease in
prepaid expenses of $32,000 and depreciation and amortization of $206,000.
Net cash provided from investing activities amounted to $2.9 million for the
three months ended March 31, 1998, which included maturities of short-term
investments of $2.9 million and a decrease in other assets of $31,000, offset
by $43,000 for purchases of property and equipment. The Company currently has no
significant capital commitments for the remainder of fiscal 1998.
Net cash used in financing activities amounted to $67,000 for the three
months ended March 31, 1998 which included net proceeds from the issuance of
common stock of $22,000, offset by principal payments under capital lease
obligations of $89,000.
The Company may, in the future, pursue acquisitions of complementary
companies or technologies, or divest certain products and related services, to
further strategic corporate objectives. Such transactions could result in a
significant use of cash and earnings per share dilution caused by reduced
interest income and/or the issuance of additional stock. Additionally, costs
associated with the acquisition or divestiture of companies, products and
related services or technologies could materially impact future operating
results. Further, such acquisitions could result in the immediate write-off of
research and development in process and expenses relating to integration costs.
Such costs could result in significant losses in one or more fiscal quarters.
The Company believes that its cash balances and credit facilities will be
sufficient to meet its anticipated cash needs to fund operating losses, working
capital requirements, capital expenditures and business expansion for at least
the next twelve months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or convertible debt securities or obtain
additional credit facilities. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders and
may not be available on terms favorable to the Company if at all.
ADDITIONAL FACTORS THAT MAY AFFECT 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 $24.3
million as of March 31, 1998. 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 could result in substantial
fluctuations in operating results from period to period. In addition,
significant revenue was reported during the first quarter of 1998 from
non-refundable minimum commitments from two large resellers which do not
directly reflect sales to end-users. During each other quarter of 1998, the
Company expects to report additional revenue from the recognition of the balance
of a non-refundable prepaid purchase commitment from one reseller based on
product sell-through and guaranteed quarterly minimum commitments from another
reseller. The realization of revenue in excess of the non-refundable prepaid
amount noted above will depend on the success of these resellers in the
marketplace. The Company believes that achievement of profitability will depend
on increased market acceptance of its new Windows NT-based e-mail security and
policy management products. Failure of the Company's resellers to successfully
market the Company's products
13
<PAGE> 14
would cause a material adverse effect on the Company's anticipated future
revenue, and there can be no assurance that the Company's resellers will be
successful in marketing the Company's products. Further, there can be no
assurance that the Company's products will achieve broad market acceptance.
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, product mix and general economic factor. Any
unfavorable changes in these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's success also depends on the performance of management and key
personnel. There have been several executive level changes during 1997 and the
first quarter of 1998. A key element in the Company's future success is the
ability of the Company's management team to implement the Company's business
strategy.
The Company's success is also dependent upon market acceptance of its
products in preference to competing products and products that may be developed
by others. There can be no assurance that the Company will be successful in
developing and marketing product enhancements or new products that respond to
technological change, evolving industry standards and changing customer
requirements or that such new products will achieve a sufficient level of market
acceptance to result in profitable operations. In addition, the introduction or
announcement of new product offerings by the Company or its competitors could
cause customers to defer or cancel purchases of existing Company products.
Failure of the Company to develop and introduce new products and product
enhancements in a timely and cost-effective manner or to anticipate and respond
adequately to changing market conditions, as well as any significant delay in
product development or introduction, could cause customers to delay or decide
against purchases of the Company's product, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company's future operating results are significantly dependent upon
market acceptance of its new Windows NT-based e-mail security and policy
management products. The Company has devoted substantial resources to the
introduction of these new products and the development of new sales channels
during the second and third quarters of fiscal 1997. The Company has experienced
revenue growth in part of the sales of the new products. However, there can be
no assurance that the Company will be successful in this regard in the future.
There are a number of factors that 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, which could
have a material adverse effect on the Company's future revenue growth.
International sales accounted for 35.7% of the Company's total sales for the
three months ended March 31, 1998 compared to 28.9% for the same period in 1997.
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. Exports of the Company's WorldSecure products require export
licenses from the United States Department of Commerce, Bureau of Export
Administration. These licenses contain certain restrictions as well as
administrative requirements which must be assumed by the Company. Export of
"strong encryption" products requires that the Company comply with certain key
recovery requirements imposed by the United States government. There is no
assurance that the Company will be successful in obtaining additional licenses.
Failure to do so would adversely affect international sales of the Company's
14
<PAGE> 15
WorldSecure products. Additionally, United States government policy relative to
encryption software is subject to change and any change resulting in increased
restrictions could adversely affect sales of the Company's WorldSecure products.
Recently Network Associates, a competitor, announced that it would allow its
Swiss subsidiary to begin selling an international version of a strong
encryption program, which it maintains does not require a Department of Commerce
approved export license. To the extent that Network Associates is successful
with this position, other companies, including Worldtalk, would be at a
competitive disadvantage in foreign markets for some period of time, possibly
resulting in lower than anticipated sales. 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 results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
15
<PAGE> 16
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses and
that ultimate outcome of these actions will not have a material effect on the
Company's financial position and results of operation.
ITEM 5. CHANGE IN MANAGEMENT
Stephen R. Bennion, Executive Vice President, Finance and Administration,
Chief Financial Officer and Secretary of World talk has resigned as of May 8,
1998.
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report on Form 10-Q:
11.1 Statement re: Computation of Net Income (Loss) per Share
27.1 Financial Data Schedule
(b) Report on Form 8-K
None
16
<PAGE> 17
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: May 14, 1998
ORLDTALK COMMUNICATIONS
CORPORATION
By: /s/ BERNARD HARGUINDEGUY
-----------------------------------------
Bernard Harguindeguy
President and Chief Executive Officer
(Duly authorized officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 11.1
Computation of Net Loss Per Share
(in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Net loss $ (678) $(1,899)
Weighted average common shares outstanding 10,511 10,298
Number of common shares and common share equivalents
used in computing basic and diluted net loss 10,511 10,298
======= =======
Basic and diluted net loss per share $ (0.06) $ (0.18)
======= =======
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,450
<SECURITIES> 3,482
<RECEIVABLES> 3,121
<ALLOWANCES> 148
<INVENTORY> 0
<CURRENT-ASSETS> 14,172
<PP&E> 1,506
<DEPRECIATION> 195
<TOTAL-ASSETS> 16,203
<CURRENT-LIABILITIES> 8,169
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 8,011
<TOTAL-LIABILITY-AND-EQUITY> 16,203
<SALES> 3,607
<TOTAL-REVENUES> 3,607
<CGS> 842
<TOTAL-COSTS> 842
<OTHER-EXPENSES> 3,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121
<INCOME-PRETAX> (593)
<INCOME-TAX> 85
<INCOME-CONTINUING> (678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (678)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
