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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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)
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(408) 567-1500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
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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 October 26, 1998 was 10,602,697 shares.
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<PAGE>
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FORM 10-Q
WORLDTALK COMMUNICATIONS CORPORATION
INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION Number
ITEM 1: Financial Statements
<S> <C> <C>
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997............................................................................. 3
Condensed Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1998 and 1997..................................................... 4
Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 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
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................................................ 17
ITEM 5. Change in Management............................................................................. 17
ITEM 6: Exhibits and Reports on Form 8-K................................................................. 17
Signature........................................................................................ 18
Exhibits......................................................................................... 19
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
WORLDTALK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
ASSETS
September 30, December 31,
1998 1997
---------- --------
Current assets:
Cash and cash equivalents ....................... $ 4,942 $ 4,662
Short-term investments .......................... 2,078 6,415
Accounts receivable, net of allowance for doubtful
accounts of $1,791 and $121, respectively ...... 2,786 3,039
Prepaid expenses ................................ 623 935
------- -------
Total current assets .................... 10,429 15,051
Property and equipment, net ....................... 1,228 1,658
Other assets ...................................... 465 556
------- -------
$12,122 $17,265
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 1,039 $ 760
Short-term debt ................................ 243 243
Capital lease obligations ...................... 208 471
Accrued expenses ............................... 3,562 3,041
Deferred revenue ............................... 2,265 4,094
-------- --------
Total liabilities ...................... 7,317 8,609
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000 shares
authorized, 10,603 and 10,487
shares issued and outstanding in 1998
and 1997, respectively ........................ 106 105
Additional paid-in capital ..................... 32,617 32,301
Deferred compensation .......................... (58) (89)
Accumulated deficit ............................ (27,860) (23,661)
-------- --------
Total stockholders' equity ............. 4,805 8,656
-------- --------
$ 12,122 $ 17,265
======== ========
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
WORLDTALK CORPORATION AND SUBSIDIARY
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ....................................................... $ 1,810 $ 2,089 $ 7,427 $ 4,509
Maintenance, installation, and training ................................. 843 1,012 2,944 3,513
-------- -------- -------- --------
Total revenues .................................................... 2,653 3,101 10,371 8,022
-------- -------- -------- --------
Cost of revenues:
Software licenses ....................................................... 130 322 522 821
Maintenance, installation, and training ................................. 659 656 1,967 2,307
-------- -------- -------- --------
Total cost of revenues ............................................ 789 978 2,489 3,128
-------- -------- -------- --------
Gross profit ............................................................... 1,864 2,123 7,882 4,894
-------- -------- -------- --------
Operating expenses:
Sales and marketing ..................................................... 1,921 1,666 5,573 5,652
Product development ..................................................... 939 1,074 3,011 3,328
General and administrative .............................................. 2,262 718 3,629 1,974
-------- -------- -------- --------
Total operating expenses .......................................... 5,122 3,458 12,213 10,954
-------- -------- -------- --------
Operating loss ............................................................. (3,258) (1,335) (4,331) (6,060)
Other income, net .......................................................... 79 110 302 365
-------- -------- -------- --------
Loss before income taxes ......................................... (3,179) (1,225) (4,029) (5,695)
Income taxes ............................................................... -- 75 170 139
-------- -------- -------- --------
Net loss ................................................................... $ (3,179) $ (1,300) $ (4,199) $ (5,834)
======== ======== ======== ========
Basic and diluted net loss per share ....................................... $ (0.30) $ (0.12) $ (0.40) $ (0.56)
======== ======== ======== ========
Shares used in computing basic and diluted net loss
per share .................................................................. 10,594 10,480 10,559 10,387
======== ======== ======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
WORLDTALK CORPORATION AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Period ended September 30,
--------------------------
1998 1997
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $(4,199) $(5,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization................................ 590 632
Allowance for doubtful accounts ............................. 1,670 --
Amortization of deferred compensation........................ 32 32
Changes in operating assets and liabilities:
Accounts receivable........................................ (1,417) 2,988
Prepaid expenses........................................... 312 (198)
Accounts payable........................................... 279 (751)
Accrued expenses........................................... 521 (128)
Deferred revenue........................................... (1,828) (50)
Other liabilities.......................................... -- (100)
------- -------
Net cash used in operating activities................... (4,040) (3,409)
------- -------
Cash flows from investing activities:
Purchase of property and equipment............................. (159) (603)
Purchase of short-term investments............................. -- (6,459)
Sales and maturities of short-term investments................. 4,337 7,021
Other assets................................................... 91 147
------- -------
Net cash provided by investing activities............... 4,269 106
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock..................... 316 394
Payment of bank borrowings..................................... -- (7)
Repayment of shareholder receivable............................ -- 265
Principal payments under capital lease obligations............. (265) (156)
------- -------
Net cash provided by financing activities............... 51 496
------- -------
Change in cash and cash equivalents.............................. 280 (2,807)
Cash and cash equivalents at beginning of period................. 4,662 7,012
------- -------
Cash and cash equivalents at end of period....................... $ 4,942 $ 4,205
======= =======
Supplemental disclosures:
Cash paid for interest:........................................ $ 47 $ 73
======= =======
Noncash investing and financing activities equipment
acquired under capital lease obligations:....................... $ -- $ 110
======= =======
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
WORLDTALK CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 1998 and 1997
(In thousands, except per share data)
(Unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated balance sheets of
Worldtalk Corporation and its subsidiary ("Worldtalk" or the "Company") as of
September 30, 1998 and December 31, 1997 and the related unaudited condensed
consolidated statements of operations and cash flows for the three and nine
month periods ended September 30, 1998 and 1997 have been prepared on
substantially the same basis as are the annual consolidated financial
statements. The December 1997 balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The results of operation for the three and nine month
periods ended September 30, 1998 are not necessarily 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, revenues from
software licenses are generally recognized upon shipment of software and of a
permanent key, and that the revenue is collectible and the Company is not
obligated to provide significant customization for the software.
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 September 30, 1998
and 1997, common stock options approximately totaling 1,120,000 and 275,000
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. There are no material differences between
the net loss and the total comprehensive loss.
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.
6
<PAGE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated and accounted for as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. For a
derivative not designated as a hedging instrument, changes in the fair value of
the derivative are recognized in earnings in the period of change. This
statement will be effective for all annual and interim periods beginning after
June 15, 1999 and management does not believe the adoption of SFAS No. 133 will
have a material effect on the financial position of the Company.
In March 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP No. 98-1 requires that certain costs related to
the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. SOP 98-1 is effective
for financial statements issued for fiscal years beginning after December 15,
1998. The Company does not expect the adoption of SOP No. 98-1 to have a
material impact on its results of operations.
7
<PAGE>
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PART I: FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Overview
This discussion and analysis of financial condition and results of
operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Securities Litigation Reform Act of 1995.
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below and in "Additional Factors That May Affect Future Results".
The Company 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 sales of 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 has experienced a significant shift in product mix from almost
100% of software license revenue coming from UNIX-based NetJunction products in
1996 to 90% of software license revenue coming from Windows NT-based e-mail
security and connectivity products in the third quarter of 1998. A significant
portion of the revenue reported from these products during the first nine months
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. The realization of revenue in excess of the non-refundable prepaid
amount noted above has depended on the success of these resellers in the
marketplace, one of which is the Company's former Japanese distributor. 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 (ASG) based in Japan, Security Dynamics Technologies (SDTI)
worldwide, and various other resellers in the United States and in foreign
markets. As part of the financial results for the third quarter of 1998, the
Company announced that the distribution relationship with ASG had been
terminated by Worldtalk for ASG's failure to make payments totaling
approximately $1.7 million for software product fees and maintenance for the
first and second quarters of 1998. For further information regarding the
termination of ASG by Worldtalk and the associated impacts, please see the
discussions below. 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 will successfully replace its
Japanese distributor, that the Company's resellers will be successful
8
<PAGE>
in marketing these products or that the Company's new Windows NT-based products
will achieve broad market acceptance.
The Company is currently concentrating its development, sales and marketing
efforts 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 but decreasing 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 broad market
acceptance.
The Company's Windows NT-based Internet security and policy management
products has also placed the Company into competition with a new set of vendors,
many of whom have significantly greater resources than the Company. Accordingly,
the Company continues 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 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 has an active program to make all of its computer facilities
year 2000 compliant by the middle of 1999. The Company's product development
computer environment is currently year 2000 compliant to the best of the
Company's knowledge. The Company's desktop productivity (i.e., word processing,
spreadsheets, etc.) computer environment is anticipated to become year 2000
compliant with an upgrade to the Windows 98 operating system and associated
announced Office 2000 suite of products. The Company's financial systems
currently store data in a four-digit year format while the application itself is
not year 2000 compliant. The Company's telecommunications systems will become
year 2000 compliant with existing upgrades from the Company's current vendor.
The risks to the Company associated with the year 2000 compliant software
include the potential partial loss of customer information and voice mail
functionality. The company's contingency plan to address the above would
primarily consist of switching to alternative vendors for standard office
productivity and telecommunications software. The anticipated cost to become
year 2000 compliant is under $100,000.
9
<PAGE>
<TABLE>
Results of Operations
The following table sets forth certain consolidated statements of operations
data for the periods indicated as a percentage of total revenues:
<CAPTION>
Three Months Nine Months Ended
Ended Sept. 30, Sept. 30,
---------------- -----------------
1998 1997 1998 1997
----- ----- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software licenses............... 68.2% 67.4% 71.6% 56.2%
Maintenance, installation and
training....................... 31.8 32.6 28.4 43.8
----- ----- ----- -----
Total revenue........... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenue:
Software licenses............... 4.9 10.4 5.0 10.2
Maintenance, installation and
training....................... 24.8 21.1 19.0 28.8
----- ----- ----- -----
Total cost of revenue... 29.7 31.5 24.0 39.0
----- ----- ----- -----
Gross margin...................... 70.3 68.5 76.0 61.0
----- ----- ----- -----
Operating expenses:
Product development............. 35.4 34.6 29.0 41.5
Sales and marketing............. 72.4 53.7 53.7 70.5
General and administrative...... 85.3 23.2 35.0 24.6
----- ----- ----- -----
Total operating expense. 193.1 111.5 117.7 136.6
----- ----- ----- -----
Operating loss.......... (122.8) (43.0) (41.7) (75.6)
Other income (expense), net....... 3.0 3.5 2.9 4.6
----- ----- ----- -----
Loss before income taxes (119.8) (39.5) (38.8) (71.0)
Income taxes...................... -- 2.4 1.7 1.7
------ ----- ----- -----
Net loss................ (119.8)% (41.9)% (40.5)% (72.7)%
====== ===== ===== =====
</TABLE>
10
<PAGE>
General
The financial results for the third quarter and the first nine months of
1998 were greatly impacted by Worldtalk's termination of the License and
Distribution Agreement with Worldtalk's Japanese distributor, Ascii Something
Good ("ASG"). The termination was the result of ASG's failure to make payments
totaling approximately $1.7 million for software product fees and maintenance
for the first and second quarters of 1998. As a result of the termination,
Worldtalk has established an allowance for doubtful accounts for the full amount
of approximately $1.7 million owed by Ascii Something Good in the financial
results for the third fiscal quarter of 1998 affecting General and
Administrative costs. In addition, Worldtalk did not recognize any revenue from
Ascii Something Good in the third fiscal quarter of 1998.
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 and
delivery of a permanent key, when the revenue is collectible and the Company is
not obligated to provide significant customization for the 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 also reported revenue in the first
nine months of 1998 from shipments pursuant to minimum non-refundable commitment
terms with two large resellers (one of which was ASG), which do not directly
reflect sales to end-users. During the remaining quarter of 1998 and in 1999,
the Company expects to report additional revenue from the recognition of the
balance of a non-refundable prepaid purchase commitment from one reseller.
The Company's total revenues for the three and nine months ended September
30, 1998 were $2.7 million and $10.4 million, respectively, a decrease of
$448,000 or 14% and an increase of $2.3 million or 29% when compared to the same
periods last year and a decrease of $1.5 million or 35% when compared with the
immediately preceding quarter ended June 30, 1998. The decrease in total revenue
in the third fiscal quarter of 1998 as compared to 1997 was primarily the result
of decreased Japanese and European revenues combined with lower installation and
consulting revenues associated with the older UNIX-based NetJunction product
line. The increase in total revenue for the first nine months of 1998, when
compared to the same period last year, was primarily attributable to increased
sales of the Windows NT-based e-mail security products, WorldSecure and NetTalk.
Software license revenues for the three and nine months ended September
30, 1998 were $1.8 million and $7.4 million, respectively, a decrease of
$279,000 or 13% and an increase of $2.9 million or 65% when compared to the same
periods last year and a decrease of $1.2 million or 40% when compared to the
immediately preceding quarter. The decrease in software license revenue for the
third quarter of 1998, when compared to the same period last year, was primarily
attributable to not recognizing any revenue from the Japanese distributor, lower
European revenue during the summer vacation months, and the shift in product
sales mix away from the older NetJunction product line. The increase in total
revenue for the first nine months of 1998, when compared to the same period in
1997, was primarily attributable to increased sales of the Windows NT-based
e-mail security products, WorldSecure and NetTalk.
Maintenance, installation and training revenues for the three and nine
months ended September 30, 1998 were $843,000 and $2.9 million, respectively, a
decrease of $169,000 or 17% and $569,000 or 16% when compared to the same
periods last year and a decrease of $250,000 or 23% when compared to the
immediately preceding quarter. The decreases in maintenance, installation and
training revenues from the comparable periods last year were attributable to the
shift in product sales.
11
<PAGE>
Cost of Revenues
The Company's total costs of revenues for the three and nine months ended
September 30, 1998 were $789,000 and $2.5 million, respectively, as compared to
$978,000 and $3.1 million for the same periods in 1997 and $858,000 for the
immediately preceding quarter ended June 30, 1998, representing decreases of 19%
and 20% from the same periods last year and a decrease of 8% from the quarter
ended June 30, 1998.
Cost of product revenues, consisting of the costs of royalties paid to
third-party vendors, product media and duplication, packaging materials, and
shipping expenses, were $130,000 and $522,000 for the three and nine months
ended September 30, 1998, as compared to $322,000 and $821,000 for the same
periods last year and $198,000 for the quarter ended June 30, 1998, representing
decreases of 60%, 36% and 34%, respectively. The decrease in cost of product
revenues, 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, consisting principally of
personnel-related costs for consulting, training and technical support, were
$659,000 and $2.0 million for the three and nine months ended September 30,
1998, as compared to $656,000 and $2.3 million for the same periods last year
and $660,000 for the immediately preceding quarter ended June 30, 1998,
representing an increase of 0%, a decreases of 15%, and a decrease of 0%,
respectively. The decrease for the first nine months of 1998 as compared to the
same period last year were 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
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 that 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 were incurred for the research, design and
development of new products, enhancements of existing products, and quality
assurance activities. Costs related to research, design and development of
products are charged to product development expenses as incurred. Product
development expenses for the three and nine months ended September 30, 1998 were
$939,000 and $3.0 million as compared to $1.1 million and $3.3 million for the
same periods last year and $1.0 million for the immediately preceding quarter,
representing decreases of 13%, 10% and 8%, respectively. Product development
expenses represented 35% and 35% of total revenues for the third quarter of 1998
and the third quarter of 1997, respectively. The decrease in absolute dollars in
product development for the first three and nine months of 1998, when compared
to the same periods in 1997, was due to decreased staffing and associated
support costs of software engineers and consultants during the second half of
1997. The lack of change in product development expenses as a percentage of
total revenues was attributable to decreasing expenses offset by lower revenues
and to 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
absolute dollar amounts in the future.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, benefits, and
commissions of sales and marketing personnel, trade show expenses, and
promotional expenses. Sales and marketing expenses for the three and nine months
ended September 30, 1998 were $1.9 million and $5.6 million, as compared to $1.7
million and $5.7 million for the same periods in 1997 and $1.9 million for the
quarter ended June 30,
12
<PAGE>
1998, representing an increase of 15%, a decrease of 1% and an increase of 2%,
respectively. Sales and marketing expenses represented 72% and 54% of total
revenues for the third quarters of 1998 and 1997, respectively. The increase in
sales and marketing expenses as a percentage of total revenues was attributable
to decreasing revenues for the respective periods combined with higher spending
on marketing programs 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 executive management of the Company.
General and administrative expenses for the three and nine months ended
September 30, 1998 were $2.3 million and $3.6 million as compared to $718,000
and $2.0 million for the same periods in 1997 and $697,000 for the immediately
preceding quarter ended June 30, 1998. As a result of the termination and
associated non-payments by the Japanese distributor, general and administrative
expenses for the third quarter of 1998 included an approximate $1.7 million
allowance for doubtful accounts for the full amount owed by the Japanese
distributor. Excluding the $1.7 million allowance for doubtful accounts, general
and administrative expenses for the three and nine months ended September 30,
1998 were approximately $600,000 and $1.9 million as compared to $718,000 and
$2.0 million for the same periods in 1997 and $697,000 for the immediately
preceding quarter ended June 30, 1998 representing decreases of 16%, 5% and 14%,
respectively. General and administrative expenses (including the allowance for
doubtful accounts) represented 85% and 23% of total revenues for the third
quarters of 1998 and 1997, respectively. General and administrative expenses
(excluding the allowance for doubtful accounts) represented 23% and 23% of total
revenues for the third quarters of 1998 and 1997, respectively. The decrease in
absolute dollars (excluding the allowance for doubtful accounts) for the third
quarter and first nine months of 1998, when compared to the same periods in
1997, were attributable primarily to decreased staffing and general expense
controls. The increase in general and administrative expenses as a percentage of
total revenues was attributable to the $1.7 million allowance for doubtful
accounts relating to the Japanese distributor. The Company believes that general
and administrative expenses (excluding the impact for the third quarter
allowance for doubtful accounts) will remain relatively flat in absolute dollar
amounts in the future.
Net Interest Income
Net interest income consists of interest income and expense. Net interest
income for the three and nine months ended September 30, 1998 was $79,000 and
$302,000, as compared to $110,000 and $365,000 for the same periods last year
and $102,000 for the immediately preceding quarter, 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 September 30, 1998, the Company had cash, cash equivalents and short term
investments of $7.0 million and working capital of $3.1 million. The Company had
a $2.0 million bank line of credit, which expired on January 9, 1998. As of
October 28, 1998 the Company had not yet renewed this line of credit agreement.
As of September 30, 1998, the Company had an outstanding term loan in the amount
of $243,000 with the bank.
Net cash used in operating activities amounted to $4.0 million for the
nine months ended September 30, 1998, which was comprised principally of the
Company's net loss of $4.2 million and a decrease in deferred revenue of $1.8
million offset by a decrease in net accounts receivable of $253,000, an increase
in
13
<PAGE>
accounts payable, accrued expenses, and other liabilities of $800,000, a
decrease in prepaid expenses of $312,000 and depreciation and amortization of
$590,000.
Net cash provided from investing activities amounted to $4.3 million for the
nine months ended September 30, 1998, which included maturities of short-term
investments of $4.3 million and a decrease in other assets of $91,000, offset by
$159,000 for purchases of property and equipment. The Company currently has no
significant capital commitments for the remainder of fiscal 1998.
Net cash provided by financing activities amounted to $51,000 for the nine
months ended September 30, 1998 which included net proceeds from the issuance of
common stock of $316,000, offset by principal payments under capital lease
obligations of $265,000.
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 or an increase in cash and earnings per share dilution or
increase caused by reduced or increased 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 or gains 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. However, 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
$27.9 million as of September 30, 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 and second quarters of 1998
from non-refundable minimum commitments from two large resellers which do not
directly reflect sales to end-users. Also, significant revenue was reported
during the third quarter of 1998 from non-refundable minimum commitments from a
single large reseller which did not directly reflect sales to end-users. The
realization of revenue in excess of the non-refundable prepaid amount noted
above will depend on the success of the remaining 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 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
14
<PAGE>
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 factors. Any unfavorable changes in these or
other factors could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's success depends on the performance of management and key
personnel. There have been several executive level changes during 1997 and
during the first nine months 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.
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.
The financial results for the third quarter and the first nine months of
1998 were greatly impacted by the termination of the License and Distribution
Agreement with Worldtalk's Japanese distributor, Ascii Something Good ("ASG").
The termination was the result of ASG's failure to make payments totaling
approximately $1.7 million for software product fees and maintenance for the
first and second quarters of 1998. As a result of the termination, Worldtalk has
established an allowance for doubtful accounts for the full amount of
approximately $1.7 million owed by Ascii Something Good in the financial results
for the third fiscal quarter of 1998. In addition, Worldtalk did not recognize
any revenue from Ascii Something Good in the third fiscal quarter of 1998. Also,
see "General" and other sections in Part I, Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Worldtalk will not
recognize revenue from the Japanese marketplace until a new distributor is
established. The potential distribution agreement with a new Japanese partner
may or may not contain minimum royalty provisions similar to those with ASG. The
availability and timing to engage a new Japanese distribution partner is
uncertain as well as the time frame to generate significant sales to replace the
revenue stream from ASG. The failure to identify and engage a new distribution
partner in Japan could have a material adverse effect on the Company's future
results of operations. The ability to recover any of the outstanding amounts
owing by Ascii Something Good Corporation is also uncertain.
15
<PAGE>
International license sales accounted for 7% of the Company's total sales
for the three months ended September 30, 1998 compared to 52% 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 grow to the percentage
levels achieved in 1997. International sales involve a number of risks,
including the impact of possible recessionary environments in economies outside
of the United States, credit risks, 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 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.
16
<PAGE>
- --------------------------------------------------------------------------------
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. Other Information
Colin Crosby, Vice President, Worldwide Sales, of Worldtalk joined the
company on October 1, 1998.
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:
10.01 Form of Employment Agreement entered into with each of its
executive officers (3)
27.1 Financial Data Schedule
(b) Report on Form 8-K
None
17
<PAGE>
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: November 13, 1998
WORLDTALK COMMUNICATIONS
CORPORATION
By: /s/ TODD HAGEN
-------------------------------
Todd Hagen
Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
18
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 10.01
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION
EMPLOYMENT AGREEMENT
This Agreement is entered into as of _______ between Worldtalk
Communications Corporation, a Delaware corporation (the "Company"), and
_________ ("Employee"). In consideration of the terms and conditions set forth
in this Agreement, the parties agree as follows:
1. Definitions.
1.1 For purposes hereof "Cause" for termination of any
Employee's employment will exist at any time after the happening of one or more
of the following events: (a) the Employee's conviction of a felony involving
moral turpitude; (b) any willful act or acts of dishonesty undertaken by the
Employee and intended to result in substantial gain or personal enrichment of
the Employee, directly or indirectly, at the expense of the Company or a
Successor, Parent, Subsidiary or Affiliate of the Company (as such terms are
defined in the Company's 1996 Equity Incentive Plan); (c) any willful act or
misconduct which is materially and demonstrably injurious to the Company or a
Successor, Parent, Subsidiary or Affiliate of the Company; (d) substantial and
repeated neglect of the Employee's responsibility, or malfeasance thereof, that
remains uncured after 30 days written notice of such neglect or malfeasance; or
(e) the Employee's death or disability (within the meaning of Section 22(e)(3)
of the Internal Revenue Code of 1986, as amended.
1.2 A "Merger" shall mean (a) a merger or consolidation in
which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings), or (b) a merger in which the Company is the surviving corporation but
after which the stockholders of the Company (other than any stockholder which
merges (or which owns or controls another corporation which merges) with the
Company in such merger) cease to own at least 90% of the issued and outstanding
capital stock or other equity interests in the Company.
1.3 A "Sale" means a Merger, the sale of all or substantially
all of the assets of the Company as a going concern in a single transaction or
series of related transactions or the sale or transfer of a majority of the
outstanding shares of the Company by the stockholders of the Company in a single
transaction or a series of related transactions other than market transactions
to unrelated purchasers.
1.4 A "Transaction "means:
(a) a dissolution or liquidation of the Company;
(b) a merger or consolidation in which the Company is
not the surviving corporation (other than a merger or consolidation
with a wholly owned subsidiary, a reincorporation of the Company in a
different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company);
(c) a merger in which the Company is the surviving
corporation but after which the stockholders of the Company (other than
any stockholder which merges (or which owns or controls another
corporation which merges) with the Company in such merger) cease to own
at least 90% of the issued and outstanding capital stock or other
equity interests in the Company;
(d) the sale of all or substantially all of the
assets of the Company; or
(e) any other transaction which qualifies as a
"corporate transaction" under Section 424(a) of the Internal Revenue
Code of 1986, as amended, wherein the stockholders of the Company give
up all of their equity interest in the Company (except for the
acquisition, sale or transfer of all or substantially all of the
outstanding shares of the Company from or by the stockholders of the
Company).
20
<PAGE>
2. Employment. The Company hereby continues to employ Employee and
Employee hereby continues to accept employment with the Company upon the terms
and conditions set forth in this Agreement. Employee hereby represents and
warrants to the Company that he is free to enter into and fully perform this
Agreement and the Proprietary Rights and Confidentiality Agreement he has signed
for the benefit of the Company (the "Confidentiality Agreement").
3. Salary and Benefits. For the performance of all of Employee's
obligations under this Agreement, the Company shall set the Employee's salary
and bonuses from time to time, which salary and bonuses will be payable as
earned in accordance with the payroll policies of the Company as constituted
from time to time. During the term of this Agreement, Employee shall be entitled
to receive fringe benefits of employment generally available to the Company's
other similarly situated employees as he becomes eligible for them.
4. Term. Employee's employment with the Company is not for a specified
term, is at will and may be terminated by either party with or without cause as
described in this Section 4. Employee, in his sole discretion, may, at any time,
terminate his employment, with or without cause (which will also terminate this
Agreement) after giving the Company two weeks prior written notice. The Company,
in its sole discretion, may terminate the employment of Employee, with or
without cause, immediately upon giving Employee written notice, but may not
terminate this Agreement. This Agreement shall also terminate upon the first to
occur of the fifth anniversary of this Agreement (except as provided in Section
5.2 below as to any effective employment or consulting obligations subsequent to
a Sale), the death of Employee or upon written notice given by the Employee to
the Company.
5. Termination in Connection with Transaction.
5.1 Continuation of Employment. In the event of a
Transaction, then the Employee's employment may be continued with the successor
company, if any, under such terms as the Employee and the successor company may
mutually agree and:
(a) any or all shares of the Company's capital stock,
with respect to the vesting thereof, and any options for the purchase
of the same (collectively, as to all such shares and options, "Awards")
shall be assumed, converted, substituted or replaced by the successor
company, if any, by options or shares that are substantially equivalent
to the Awards, which assumption, conversion or replacement will be
binding on Employee; or
(b) subject to Section 5.4 below, the successor
corporation may provide substantially similar consideration to Employee
as was provided to stockholders with respect to any options to purchase
the Company's capital stock (after taking into account the existing
provisions of the Awards) and provide, with respect to shares of the
Company's capital stock, the same consideration as provided to
stockholders of the Company subject to repurchase restrictions no less
favorable to the Employee.
With respect to a Sale of the Company, if the successor company or any of its
affiliates, if any, does not offer Employee a position with the successor or any
of its affiliates that is within Employee's expertise and is reasonably similar
in duties and responsibilities to Employee's position with the Company, and as a
result, Employee declines employment with the successor company or any of its
affiliates, then (a) such failure shall be deemed a termination in connection
with the Sale with notice as provided in Section 5.2.1 below, (b) Employee shall
be deemed an employee for 12 months subsequent to the closing of the Sale
entitled to the benefits of Section 5.2.1 below, it being understood that
Employee may, at Employee's option during such 12-month period, seek and obtain
full-time employment elsewhere to the exclusion of the Company and its
successor, without affecting his rights under Section 5.2.1 below and (c)
Employee shall perform consulting services and be entitled to the benefits
provided in Section 5.2.3 below.
5.2 Termination on a Sale.
5.2.1 Notice and Continuation of Employment Upon a
Sale. The Employee's employment may not be terminated by the Company or any
potential acquirer in connection with the Sale without
21
<PAGE>
the acquirer giving the Employee 12 months prior written notice of termination
at the closing of the Sale (the "Effective Date"). During the period of such
notice, if any, the Employee will be paid an amount for the 12-month period that
is equal to his then current salary and bonuses, whether or not the Employee's
services are actually required by the Company, its successor or this Agreement
during the notice period, which annual amount will be payable in 12 equal
monthly installments, as earned, in accordance with the Company's normal payroll
policy in effect from time to time, and the Employee will be obligated to render
consulting services to the Company as specified in Section 5.2.3 below. Employee
benefits will continue, and the Employee's options and shares of Common Stock
will continue to vest, during the 12-month period after the Effective Date of
the Sale so long as the Employee's employment is not terminated for Cause.
5.2.2 Notice and Continuation of Employment During
the Year after Sale. During the 12-month period after the Sale, assuming the
notice of termination described in Section 5.2.1 above was not given, the
Employee's employment may be terminated by the Company (which, for purposes of
this Section 5.2.2 and Section 5.2.3 below, shall mean the Company or its
successor) for Cause at any time and may be terminated without Cause by the
Company only if such termination is effective on the date 12 months after the
Effective Date of the Sale. Such termination, whether with or without Cause,
must be effected by giving the Employee at least 14 days prior written notice.
Employee benefits will continue, and the Employee's options and shares of Common
Stock will continue to vest, during the 12-month period after the Effective Date
of the Sale so long as the Employee's employment is not terminated for Cause.
5.2.3 Consulting Obligations. If the Employee's
employment is terminated upon the Sale as described in Section 5.2.1 above or is
terminated by the Company without Cause during the 12-month period after the
Effective Date of the Sale as described in Section 5.2.2 above, the Employee
will be obligated to hold himself available to consult, at the request of the
Company and on such projects within the Employee's professional expertise as the
Company shall designate, during the 12-month period following the first
anniversary of the Effective Date. Such services will be rendered for up to 10
hours per month and will be paid an hourly rate equal to $300 for each hour
actually worked, payable monthly, as earned, in accordance with the Company's
normal payroll policy in effect from time to time. For so long as the Employee's
consulting obligation is not terminated for Cause, each of his options and
shares will continue to vest while the consulting arrangement is in effect, the
Board having determined that the Employee will be performing substantial
services for the Company during that time. The Employee's services as a
consultant may be terminated by the Company for Cause upon 14 days advance
written notice.
5.2.4 Supersede Other Rights, Unless Greater. Subject
to any greater rights granted to Employee under any Award, this provision will
supersede and replace any other provision for accelerated vesting that applies
to such Award held by the Employee, whether such Award is now granted or is
granted in the future and whether such Award is now owned or will be owned in
the future.
5.3 Termination of Awards on a Transaction. Except as provided
in this Section 5 and provided that the successor corporation (if any) does not
assume, replace, convert or substitute or pay for all outstanding Awards as
provided in Section 5.1 above, in the event of a Transaction, such Awards will
expire on such event at such time and on such conditions as the Board shall
determine upon 20 days advance written notice to Employee.
5.4 Other Treatment of Awards. Subject to any greater rights
granted to Employee under the foregoing provisions of this Section 5, in the
event of the occurrence of any Transaction, any outstanding Awards will be
treated as provided in the applicable agreement or plan of merger,
consolidation, dissolution, liquidation, sale of assets or other "corporate
transaction."
6. Collateral Agreements. Employee and the Company acknowledge that the
Confidentiality Agreement previously entered into between Employee and the
Company will continue in full force and effect in accordance with its terms
irrespective of any termination of this Agreement.
22
<PAGE>
7. General Provisions.
7.1 Withholding. All sums payable to Employee under this
Agreement shall be reduced by all federal, state, local and other withholding
and similar taxes and payments required by applicable law.
7.2 Notices. All notices required under this Agreement shall
be in writing and shall be deemed to have been duly given when delivered
personally or mailed by certified mail, return receipt requested, postage
prepaid, to the address of the relevant party as set forth below such party's
signature hereto, or as may be changed by notice given hereafter in accordance
with the provisions of this Section 7.2.
7.3 Arbitration. Employee and the Company shall submit to
binding arbitration in any controversy or claim arising out of, or relating to,
this Agreement or any breach hereof, provided, however, that the Company retains
its right to, and shall not be prohibited, limited or in any other way
restricted from, seeking or obtaining equitable relief from a court having
jurisdiction over the parties. Such arbitration shall be conducted in accordance
with the Rules of the American Arbitration Association in effect at that time,
and judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
7.4 Enforceability. If any provision of this Agreement shall
be found by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, the parties hereby waive such provision to the extent that it is
found to be invalid or unenforceable and to the extent that to do so would not
deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect. Remedies provided for in this
Agreement are cumulative and are in addition to any other right or remedy
granted to any party by contract, at law, in equity or otherwise.
7.5 No Waiver. The failure by either party at any time to
require performance or compliance by the other of any of its obligations or
agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of any
provision hereof shall not be taken or held to be a waiver of any preceding or
succeeding breach of such provision or any other provision of this Agreement. No
waiver of any kind shall be effective or binding, unless it is in writing and is
signed by the party against whom such waiver is sought to be enforced.
7.6 Assignment. This Agreement and all rights hereunder are
personal to Employee and may not be transferred or assigned by Employee at any
time. The Company may assign its rights, together with its obligations
hereunder, to any parent, subsidiary, affiliate or successor, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets, provided, however, that any such assignee assumes the
Company's obligations hereunder. This Agreement shall be binding upon, and inure
to the benefit of, the permitted successors and representatives of the
respective parties hereto.
7.7 Entire Agreement; Amendment. This Agreement constitutes
the entire and only agreement between the parties relating to employment of
Employee with the Company, and supersedes and cancels any and all previous
contracts, arrangements or understandings with respect thereto. This Agreement
may be amended, modified, superseded, canceled, renewed or extended only by an
agreement in writing executed by both parties hereto.
7.8 General Interpretation. The headings contained in this
Agreement are for reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural included the singular, and the masculine gender includes
both male and female referents. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement. This Agreement and the
rights and obligations of the parties hereto shall be construed in accordance
with the laws of the State of California, without giving effect to the
principles of conflict of laws.
23
<PAGE>
In Witness Whereof, the parties have executed this Agreement as of the
day and year first written above.
EMPLOYEE: WORLDTALKCOMMUNICATIONS
---------------------------- CORPORATION
By:
- -------------------------------------- ------------------------------
(Signature)
Address: Address: 5155 Old Ironsides Drive
------------------------------ Santa Clara, California 94554
Attn: President
------------------------------
24
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,942
<SECURITIES> 2,078
<RECEIVABLES> 2,786
<ALLOWANCES> 1,791
<INVENTORY> 0
<CURRENT-ASSETS> 10,429
<PP&E> 1,228
<DEPRECIATION> 590
<TOTAL-ASSETS> 12,122
<CURRENT-LIABILITIES> 7,317
<BONDS> 0
0
0
<COMMON> 106
<OTHER-SE> 4,805
<TOTAL-LIABILITY-AND-EQUITY> 12,122
<SALES> 10,371
<TOTAL-REVENUES> 10,371
<CGS> 2,489
<TOTAL-COSTS> 2,489
<OTHER-EXPENSES> 12,213
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> (4,029)
<INCOME-TAX> 170
<INCOME-CONTINUING> (4,199)
<DISCONTINUED> 0
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