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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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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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, 1999 was 10,904,392 shares.
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<PAGE>
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FORM 10-Q
WORLDTALK COMMUNICATIONS CORPORATION
INDEX
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Page
PART I FINANCIAL INFORMATION Number
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998..............................................3
Condensed Consolidated Statements of Operations for the
three month periods ended March 31, 1999 and 1998..................4
Consolidated Statements of Cash Flows for the three
month periods ended March 31, 1999 and 1998........................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..........14
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings...................................................15
ITEM 5. Change in Management................................................15
ITEM 6: Exhibits and Reports on Form 8-K....................................15
Signature...........................................................16
Exhibits............................................................17
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................................... $ 4,533 $ 3,858
Short-term investments ............................................................. 500 2,166
Accounts receivable, net of allowance for
doubtful accounts of $1,792 and $1,840 respectively .............................. 2,118 2,960
Prepaid expenses ................................................................... 589 613
-------- --------
Total current assets ....................................................... 7,740 9,597
Property and equipment, net .......................................................... 993 1,108
Other assets ......................................................................... 496 441
-------- --------
$ 9,229 $ 11,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................... $ 980 $ 787
Short-term debt .................................................................... 304 250
Capital lease obligations .......................................................... 72 128
Accrued expenses ................................................................... 2,912 3,419
Deferred revenue ................................................................... 1,455 2,474
-------- --------
Total liabilities .......................................................... 5,723 7,058
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000 shares authorized,
10,813 and 10,686 shares issued and outstanding
in 1999 and 1998, respectively .................................................... 108 107
Additional paid-in capital ......................................................... 33,051 32,773
Deferred compensation .............................................................. (36) (47)
Accumulated deficit ................................................................ (29,617) (28,745)
-------- --------
Total stockholders' equity ................................................. 3,506 4,088
-------- --------
$ 9,229 $ 11,146
======== ========
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
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WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months ended March 31,
----------------------------
1999 1998
------- -------
Revenues:
Software licenses............................. $ 2,289 $ 2,599
Maintenance, installation and training........ 925 1,008
------- -------
Total revenues........................ 3,214 3,607
------- -------
Cost of revenues:
Software licenses............................. 71 194
Maintenance, installation and training........ 553 648
------- -------
Total cost of revenues................ 624 842
------- -------
Gross profit............................... 2,590 2,765
------- -------
Operating expenses:
Product development........................... 977 1,049
Sales and marketing........................... 2,085 1,760
General and administrative.................... 558 670
------- -------
Total operating expenses.............. 3,620 3,479
------- -------
Operating loss.................................. (1,030) (714)
Interest income, net............................ 140 121
------- -------
Loss before income taxes.............. (890) (593)
Income taxes.................................... (18) 85
-------- -------
Net loss.............................. $ (872) $ (678)
======= =======
Basic and diluted net loss per share............ $ (0.08) $ (0.06)
======= =======
Shares used in computing basic and
diluted net loss per share...................... 10,758 10,511
======== ========
See accompanying notes to condensed consolidated financial statements.
4
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<TABLE>
WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (872) $ (678)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 193 195
Amortization of deferred compensation........................ 11 11
Changes in operating assets and liabilities:
Accounts receivable........................................ 842 (298)
Prepaid expenses........................................... 24 32
Accounts payable........................................... 193 123
Accrued expenses........................................... (507) 52
Deferred revenue........................................... (1,019) (503)
Net cash used in operating activities................... (1,135) (1,066)
------- -------
Cash flows from investing activities:
Purchase of property and equipment............................. (78) (43)
Purchase of short-term investments............................. -- --
Sales and maturities of short-term investments................. 1,666 2,933
Other assets................................................... (55) 31
-------- -------
Net cash provided by investing activities............... 1,533 2,921
------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock..................... 279 22
Proceeds from Bank borrowings.................................. 54 --
Principal payments under capital lease obligations............. (56) (89)
-------- --------
Net cash provided by (used in) financing activities..... 277 (67)
------- --------
Change in cash and cash equivalents.............................. 675 1,788
Cash and cash equivalents at beginning of period................. 3,858 4,662
------- -------
Cash and cash equivalents at end of period....................... $ 4,533 $ 6,450
======= =======
Supplemental disclosures:
Cash paid for interest:........................................ $ 16 $ 16
======= =======
<FN>
See accompanying notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
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WORLDTALK COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period ended March 31, 1999 and 1998
(In thousands, except per share data)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated balance sheet of
Worldtalk Communications Corporation and its subsidiaries ("Worldtalk" or the
"Company") as of March 31, 1999 and December 31, 1998 and the related unaudited
condensed consolidated statements of operations and cash flow for the three
months ended March 31, 1999 and 1998 have been prepared on substantially the
same basis as are the annual consolidated financial statements. The December 31,
1998 balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The results of operations for the three months ended March 31, 1999 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 earnings per share 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, 1999 and 1998, common stock options totaling 2,055 and 1,733,
respectively, were omitted from the computation, as their impact would be
antidilutive.
(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.
On December 11, 1998, the Company filed a lawsuit against i4
Corporation, formerly known as ASCII Something Good Corporation in the United
States District Court for the Northern District of California (Case No.
C-98-21231) regarding alleged breach by i4 of a Distribution Agreement for the
Company's products in Japan, seeking damages in excess of $2.7 million plus
attorneys' fees and costs. On April 13, 1999, the Company announced that it had
entered into a settlement agreement with i4. Under the terms of the settlement,
i4 has agreed to pay the Company $1.5 million in scheduled payments over the
succeeding four quarters. The Company has received the first payment, and the
last payment is due by February 15, 2000. i4 may reduce the total amount owed to
the Company by up to $200,000 if it exercises certain prepayment options.
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Recent 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.
7
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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 a leading provider of Internet content security and
policy management solutions. The Company's WorldSecure(TM) policy management
platform enables organizations to define and manage Internet e-mail and Web
security and usage policies, reducing the risks and liabilities associated with
Internet communications. The Company delivered the industry's first solutions
for managing and enforcing e-mail security policies in September 1997. The
Company's products include WorldSecure Server (also known as WorldSecure/Mail),
a Windows NT-based content firewall and policy management solution,
WorldSecure/ESP, a surveillance program for Internet e-mail, WorldSecure Client,
a desktop e-mail encryption product, NetTalk(TM), a Windows NT-based e-mail and
directory solution, and NetJunction, a UNIX-based directory and messaging
switch.
The Company has experienced a significant and planned shift in product
mix from almost 100% of software license revenue coming from UNIX-based
NetJunction products in 1996 to over 90% of software license revenue coming from
Windows NT-based Internet content security, policy management and e-mail
directory products in the first quarter of 1999. A significant portion of the
revenue reported from these products during the first three months of 1999 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 The
Company believes that reaching and maintaining profitability will depend on
increased market acceptance of its WorldSecure product line. A key element of
the Company's future revenue growth will be the ability of the Company's
resellers and international distributors to sell the Company's products in
volume. In 1998, the Company terminated its relationship with its Japanese
distributor and has not yet entered into an agreement with a replacement
distribution partner in Japan. There can be no assurance that the Company will
successfully replace its Japanese distributor, that the Company's resellers will
be successful in marketing these products or that the Company's 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 have 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
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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; competitive conditions in the industry; and
the distraction to the information technology departments of many corporations
that Year 2000 problems are creating.
Results of Operations
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:
Three Months Ended March 31,
----------------------------
1999 1998
--------- -------
Revenue:
Software licenses............... 71.2% 72.1%
Maintenance, installation and
training....................... 28.8 27.9
----- -----
Total revenue........... 100.0 100.0
----- -----
Cost of revenue:
Software licenses............... 2.2 5.3
Maintenance, installation and
training....................... 17.2 18.0
----- -----
Total cost of revenue... 19.4 23.3
----- -----
Gross margin...................... 80.6 76.7
----- -----
Operating expenses:
Product development............. 30.4 29.1
Sales and marketing............. 64.8 48.8
General and administrative...... 17.4 18.6
----- -----
Total operating expense. 112.6 96.5
----- -----
Operating loss.......... (32.0) (19.8)
Other income (expense), net....... 4.3 3.4
----- -----
Loss before income taxes (27.7) (16.4)
Income taxes...................... (.6) 2.4
----- -----
Net loss................
(27.1)% (18.8)%
===== =====
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's total revenues were $3.2 million for the three months
ended March 31, 1999 as compared to $3.6 million for the same period in 1998,
representing an decrease of 10.9%.
Software license revenue was $2.3 million for the three months ended
March 31, 1999 as compared to $2.6 million for the same period in 1998,
representing an decrease of 11.9%.
A significant portion of the revenue reported during the first three
months of 1999 came from shipments of products pursuant to minimum
non-refundable, non-recurring commitment terms with two resellers.
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Maintenance, installation and training revenues were $925,000 for the
three months ended March 31, 1999 as compared to $1 million for the same period
in 1998, representing a decrease of 8.2%, when compared to the same period last
year. Maintenance, installation and training revenue for the first three months
of 1999 decreased from the first three months of 1998 due to weak NetJunction
sales in the second half of 1998 and the increase in the percentage of total
revenue from the sale of Windows NT-based products. The weak NetJunction sales
in the second half of 1998 resulted in reduced consulting and integration
services for the first quarter of 1999. The sale of Windows NT-based products
requires less consulting and maintenance, resulting in lower total maintenance,
installation and training revenue. The Company expects that maintenance,
installation and training revenue will decline as a percentage of revenue in the
future as the Company increases sales of Windows NT-based Internet content
security and policy management solutions which require less maintenance,
installation and training.
Cost of Revenues
The Company's total cost of revenues was $624,000 for the three months
ended March 31, 1999 as compared to $842,000 for the same period in 1998,
representing a decrease of 25.9%.
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 $71,000 for the three months
ended March 31, 1999 as compared to $194,000 for the same period in 1998,
representing a decrease of 63.4%. The decrease in cost of product revenues for
the first three months of 1999, when compared to the same period last year, was
primarily due to reductions in certain royalty and other amortized costs.
Maintenance, installation and training costs consist principally of
personnel-related costs for consulting, training and technical support.
Maintenance, installation and training costs were $553,000 for the three months
ended March 31, 1999 as compared to $648,000 for the same period in 1998,
representing a decrease of 14.7%. 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 $977,000 for the three months ended March 31, 1999 as
compared to $1.0 million for the same period in 1998, representing a decrease of
6.9%. Product development expenses represented 30.4% and 29.1% of total revenues
for the first quarter of 1999 and the first quarter of 1998, respectively. 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.
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 $2.1 million for the
three months ended March 31, 1999 as compared to $1.8 million for the same
period in 1998. Sales and marketing expenses represented 64.8% and 48.8% of
total revenues for the first three months of 1999 and the first three months of
1998, respectively. The increase in sales and marketing expenses as a percentage
of total revenues was attributable to the addition of sales personnel and the
opening of new sales office space during the quarter. 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
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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 $558,000 for the three months
ended March 31, 1999 as compared to $670,000 for the same period in 1998,
representing an decrease of 16.7%. General and administrative expenses
represented 17.4% and 18.6% of total revenues for the first three months of 1999
and the first three months of 1998, respectively. The decrease in absolute
dollars for the first quarter of 1999, when compared to the same period in 1998,
was attributable primarily to decreased staffing and overhead 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
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 $140,000 and
$121,000 for the first three months of 1999 and the first three months of 1998,
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, 1999, the Company had cash and cash equivalents and
short-term investments of $5 million and working capital of $2.0 million.
Net cash used in operating activities amounted to $1.1 million for the
three months ended March 31, 1999, which was comprised principally of the
Company's net loss of $872,000, a decrease in deferred revenue of $1.0 million
and a decrease in accrued expenses of $507,000, offset by an decrease in
accounts receivable of $842,000 and an increase in accounts payable of $193,000.
Net cash provided from $1.7 million in sales and maturities of
short-term investments offset by investing activities amounted to $1.5 million
for the three months ended March 31, 1999, which included $77,000 purchases of
property and equipment and $56,000 other assets. The Company currently has no
significant capital commitments for the remainder of fiscal 1999.
Net cash provided by financing activities amounted to $277,000 for the
three months ended March 31, 1999 which included net proceeds from the issuance
of common stock of $279,000, proceeds from bank borrowings of $54,000, offset by
principal payments under capital lease obligations of $56,000.
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
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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 $29.6 million as of March 31, 1999. 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. The Company
anticipates that its marketing strategy for the WorldSecure product line will,
in the future, depend more significantly on distribution by third-party
resellers and on managing the international distribution channel. In addition,
significant revenue was reported during 1998 and during the first quarter of
1999 from non-refundable, non-recurring minimum commitments from two large
resellers which do not directly reflect sales to end-users. The Company believes
that reaching and maintaining profitability will depend on increased market
acceptance of its WorldSecure Internet content security and policy management
products. Failure of the Company's resellers and international distributors 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 and international distributors 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. Also, new direct sales
and telesales personnel can take up to three quarters to become fully productive
against quotas that are in line with industry norms. 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 factors. Any unfavorable changes in
these or other factors could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's success also depends on the performance of management and
key personnel. There have been several executive level changes during 1998 and
during the first three months of 1999. 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 Common Stock is listed on the Nasdaq National Market.
There are two sets of criteria used to determine if a company, once listed on
the National Market, can remain listed. Each National Market company must meet
all of the requirements of at least one set of criteria to maintain its listing.
Criteria 1, among other things requires the Company to maintain a net tangible
worth (total assets, excluding goodwill, minus total liabilities) of at least
$4million. Although the Company met this requirement as of December 31, 1998,
the Company expects continued losses in the current and following quarters and
may not meet this continued listing requirement in the future if it is unable to
raise additional capital in the interim. The second criteria requires, among
other things, that the Company maintain a minimum bid price on the National
Market of at least $5.00 per share. The Company does not currently meet this
requirement and, therefore, until the Company's bid price exceeds $5.00, this
set of criteria will not apply to the Company. Should the Company fail to meet
either set of criteria, it believes it would be eligible for listing on the
Nasdaq Small Cap Market. The Company has received notification from Nasdaq that
the Company does not currently meet the criteria for continued listing on the
National Market. The Company has made a formal request for a hearing with a
Nasdaq Listing Qualifications Panel, and has been informed by Nasdaq that any
delisting action will be stayed pending a final decision by this panel. The
Company is engaged in resolving this matter with Nasdaq and believes that it
will return to compliance with one or both sets of listing criteria for the
National Market. However, there can be no assurance that the Company will be
successful in its efforts to comply with the National Market listing criteria or
that the Company will remain listed on the National Market.
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The Company's success is also dependent upon market acceptance of its
WorldSecure product line 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 products, 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 the Company's Windows NT-based Internet content security
and policy management products. The Company has devoted substantial resources to
market and sell these products and to develop new sales channels. The Company
has experienced revenue growth in the sales of these products in the first
quarter of 1999, compared to the first quarter of 1998. However, there can be no
assurance that the Company will be able to recognize increased revenues from
these products 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 27.7% of the Company's total sales
for the three months ended March 31, 1999 compared to 35.7% for the same period
in 1998. It is not certain that revenues from the licensing and support of the
Company's products in international markets will continue to grow, particularly
in light of the fact that the Company does not yet have a new Japanese
distributor. International sales involve a number of risks, including the impact
of possible recessionary economic environments 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 authorization by license or license
exemption pursuant to the Export Administration Regulations administered by 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. There is no assurance that the Company
will be successful in obtaining additional licenses or license exemptions.
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.
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.
Year 2000 Issues
The Company believes that its products are compliant with customer
requirements for operations through the year 2000 and beyond. The Company has an
active program to make all of its computer facilities year 2000 compliant by the
middle of 1999. The Company's Year 2000 compliance project team will establish
an inventory of all critical hardware, software and non-electronic equipment. In
addition, vendors will be contacted about their
13
<PAGE>
product and service Year 2000 compliance. The Company's test plan includes
checking for Year 2000 compliance on the hardware basic input output systems
(BIOS), operating systems, and server based software. 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 financial
software vendor currently has available a release which is Year 2000 compliant
and which will be used to upgrade the Company's existing financial systems. The
Company's telecommunications systems have been upgraded to 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. The Company's contingency plan
to address the above would primarily consist of switching to alternative vendors
for standard office productivity and financial application software. The
anticipated cost to become year 2000 compliant is under $100,000.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest rate sensitivity.
The primary objective of the Company's investment activities is to
preserve principal while at the same time maximizing the income received from
investments without significantly increasing risk. Some of the securities that
the Company has invested in may be subject to market risk. Market risk means
that a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. To minimize this risk, the Company maintains a
portfolio of cash equivalents and short-term investment in a variety of
securities. In addition, the Company invests in relatively short-term
securities. As of March 31, 1999, all of the Company's investments mature in
less than one year.
14
<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.
On December 11, 1998, the Company filed a lawsuit against i4
Corporation, formerly known as ASCII Something Good Corporation in the United
States District Court for the Northern District of California (Case No.
C-98-21231) regarding alleged breach by i4 of a Distribution Agreement for the
Company's products in Japan, seeking damages in excess of $2.7 million plus
attorneys' fees and costs. On April 13, 1999, the Company announced that it had
entered into a settlement agreement with i4. Under the terms of the settlement,
i4 has agreed to pay the Company $1.5 million in scheduled payments over the
succeeding four quarters. The Company has received the first payment, and the
last payment is due by February 15, 2000. i4 may reduce the total amount owed to
the Company by up to $200,000 if it exercises certain prepayment options.
Item 5. Other Information.
Change in Management.
Todd Hagen, the Company's Vice President, Finance and Administration,
Chief Financial Officer and Secretary of Worldtalk has resigned as of April 2,
1999.
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:
27.1 Financial Data Schedule
(b) Report on Form 8-K.
None.
15
<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: May 14, 1999
WORLDTALK COMMUNICATIONS
CORPORATION
By: /s/ BERNARD HARGUINDEGUY
------------------------------------------
Bernard Harguindeguy
President and Chief Executive Officer
(Duly authorized officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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