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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ________
Commission file number 0-27886
WORLDTALK COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0303581
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5155 Old Ironsides Drive
Santa Clara, California 95054
(Address of principal executive offices)
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of such stock on March 19, 1999, as
reported by the Nasdaq National Market was approximately $26,000,000.
The number of outstanding shares of the Registrant's Common Stock, par
value $0.01 per share, on March 19, 1999 was 10,791,418 shares.
Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of
Stockholders to be held on June 11, 1999, are incorporated by reference in Part
III of this Annual Report on Form 10-K.
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PART I
Item 1. Business
The discussion in this report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Readers should pay particular attention to the risk factors
described in the "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and particularly under the heading "Additional
Factors That May Effect Future Results". Readers should also carefully review
the risk factors described in the other documents the Company files from time to
time with the Securities and Exchange Commission, specifically the Quarterly
Reports on Form 10-Q filed by the Company in 1998, any current Reports on Form
8-K filed by the Company and the Company's Registration Statement on Form S-1 as
declared effective by the Securities and Exchange Commission on April 11, 1996
(File No. 333-1482).
Introduction
Worldtalk Communications Corporation, and its subsidiary (collectively
"Worldtalk" or 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, costs, and liabilities
associated with Internet communications. The Company delivered the industry's
first solution for managing and enforcing e-mail security policies in September
1997. Since then, organizations have deployed WorldSecure solutions to ensure
confidentiality of their external e-mail communications, protect their
intellectual property, and prevent SPAMs and viruses from entering the
organizations.
The Company's products include WorldSecure Server (also known as
WorldSecure/Mail), a Windows NT-based e-mail 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 and managed a significant shift in product mix
from almost 100% of software license revenue coming from UNIX-based NetJunction
e-mail productivity products in 1996 to approximately 84% of software license
revenue coming from Windows NT-based Internet content security, policy
management and e-mail directory products in 1998. By the last quarter of 1998,
the Company derived approximately 94% of its software license revenue from
Window NT-based products and approximately 89% of its software license revenue
from the WorldSecure Server product line. In 1998 and continuing into 1999, the
Company's marketing efforts will be almost entirely focused on the Windows
NT-based Internet content security and policy management products.
During 1998 and beyond, the Company's products are and will be sold and
marketed worldwide by Worldtalk's direct field and telephone sales forces, value
added resellers (VARs) and distributors.
E-mail Security
Today's widespread use of e-mail coupled with the growth of the Internet
has opened new avenues for business-level communication and electronic commerce.
E-mail has become an efficient mechanism for the transfer of critical files such
as contracts, purchase orders and financial information between organizations
over the Internet. Industry analysts estimate that e-mail accounts for about 70%
of Internet network traffic.
In today's competitive marketplace, sensitive information such as business
plans, contracts, and earnings reports are e-mailed over the Internet. However,
e-mail is not secure and presents severe risks to an organization's information
assets as well as increases the liability exposure. In addition, this has
resulted in financial risks and privacy and compliance issues for organizations
across a broad number of industries. Over the past few years, the network
firewall has served as the primary solution to protect networks from external
attacks. But it has
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failed to protect the number one Internet application: e-mail. A solution is
needed to protect an organization's e-mail system and enforce e-mail security
policies.
The Worldtalk Solution
Worldtalk's products provide solutions that allow organizations to expand
the reach of their messaging systems and provide the security and policy
management needed to safely use e-mail across the Internet. Organizations rely
on Worldtalk solutions to protect their e-mail networks and secure
communications with trading partners complementing their existing e-mail
environment. Worldtalk solutions protect e-mail communication by enhancing
privacy, integrity and non-repudiation. Worldtalk solutions also provide the
needed directory and messaging connectivity to establish secure e-mail
backbones.
Worldtalk's products are complemented by its Professional Services
Organization (PSO) that offers consulting, custom engineering, training and
educational services to meet customer needs from initial planning, security
assessment, and network design to system testing and production implementation.
Worldtalk's current product offerings include:
WorldSecure Server (also known as WorldSecure/Mail) -- WorldSecure Server
is a content firewall that incorporates content analysis, a policy enforcement
menu, and e-mail security countermeasures including content control, encryption,
archival, and virus scanning into a single integrated solution. Worldtalk
customers are using the WorldSecure product line to reduce the risks and
liabilities associated with Internet e-mail. Customers can enforce policies
regarding which data can leave or enter the organization; enforce corporate or
industry regulations overseeing the use of e-mail; and enforce the use of
encryption to secure Internet e-mail communications with partners, clients, and
remote offices. WorldSecure is also used by customers around the world to
prevent spams and unsolicited Internet mail from becoming a nuisance, as well as
block virus-infected messages from entering or leaving the organization's
network. The WorldSecure Server provides a graphical, wizard-based configuration
interface that simplifies the definition and enforcement of e-mail policies.
The dynamic content policy menu allows an authorized administrator to
define actions based on the company's security policy. The WorldSecure Server
automatically scans the content of e-mail and attachments, implementing actions
that include: sending, stopping, adding recipients to or returning e-mail;
quarantining e-mail for subsequent review; archiving, encrypting, annotating
e-mail; and sending an automatic policy notification message to the sender.
The directory-based content policy director adds enhanced granularity to
the automatic application of security policies by its ability to apply specific
policies by sender or recipient; site; data type; keywords and/or subject. All
of the content security policies, or any combination of them, can be implemented
and modified via the graphical user interface.
The comprehensive set of e-mail security countermeasures includes:
o Content Filtering -- WorldSecure Server provides
context-sensitive filtering tools that can be used to enforce
electronic communications policies and flag suspicious messages
for review. WorldSecure Server also scans embedded HTML and can
scan attachments by type or name.
o Encryption and Digital Signature -- WorldSecure Server provides
server-based encryption and digital signatures using the S/MIME
(Secure MIME) protocol. Two servers can provide standards-based,
secure e-mail over the Internet with complete transparency to
end-users. WorldSecure supports several encryption and signature
algorithms, with support for export to military grade key
lengths.
o Virus Detection and Disinfection -- WorldSecure Server provides
an optional virus scanning engine which is fully integrated with
the product. The WorldSecure Server detects and optionally cleans
or strips viruses from the incoming and outgoing messages.
Scheduled virus pattern updates provide protection from the
latest viral threats.
o Archiving -- WorldSecure Server provides content-based archiving
of e-mail messages providing a complete record of exchanged
messages. This feature, combined with an audit trail of message
exchange, offers comprehensive non-repudiation mechanisms.
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o Access Controls -- WorldSecure Server provides tools to monitor
or restrict e-mail usage based on source, destination and other
criteria. These filters can be easily combined with content
filters for fine-tuned control.
o Anti-Spam -- WorldSecure Server provides tools for anti-spam and
anti-relay connection management.
WorldSecure Client -- WorldSecure Client is the desktop component of
Worldtalk's WorldSecure family of products. Using the industry standard S/MIME
protocol, WorldSecure Client ensures the confidentiality and integrity of e-mail
messages and authenticates the sender's identity.
WorldSecure/ESP -- WorldSecure/ESP allows organizations to inspect their
e-mail network and determine the nature of e-mail exchanged with the outside
world over the Internet. Organizations can assess their overall exposure to
e-mail and content security risks and resulting liability. Through
WorldSecure/ESP, organizations can determine the nature of e-mail messages
exchanged over the Internet (jokes, spams, non-compliant e-mail, e-mail with
multi-media attachments and video trailers, etc.), and take the appropriate
policy actions regarding their e-mail networks.
NetTalk -- NetTalk is a comprehensive and easy-to-use directory solution
for company Intranets. It allows companies to deploy standards-based directory
connectivity services, integrate client/server-based applications such as Lotus
Notes and Microsoft Exchange, and maintain full connectivity to LAN-based e-mail
systems. The NetTalk Directory also acts as the X.509 certificate store for an
organization's security applications. This allows organizations to tie security
infrastructure to existing directory infrastructure.
NetJunction -- NetJunction is a UNIX-based enterprise level backbone and
directory solution. NetJunction allows organizations to integrate their
proprietary e-mail and directory applications and provide consolidated access to
the Internet and X.400 VANs.
Worldtalk's product offerings announced on November 2, 1998 for anticipated
third quarter 1999 availability include:
WorldSecure/Web -- WorldSecure/Web is a Web content security product that
provides an easy-to-use policy management interface that simplifies the
definition and enforcement of Web policies. It integrates multiple security
countermeasures including content filtering (on browsed and submitted data), URL
filtering, detection of malicious mobile code (Java and Active/X) and virus
detection and cleaning. Using WorldSecure/Web organizations can prevent end
users from surfing inappropriate sites or downloading offending material.
Organizations can reduce legal liability associated with Internet connectivity.
WorldSecure/Web is also a solution to offer organizations the necessary tools to
control posting of confidential information, through web browser, on Internet
chat rooms and message boards. The comprehensive set of countermeasures
includes:
o Content Filtering -- WorldSecure/Web will provide
context-sensitive filtering tools that can be used to enforce Web
communications policies regarding data that can be posted or
retrieved reducing corporate liability.
o URL Filtering -- WorldSecure/Web will include built-in categories
that can be updated daily, along with the flexibility of
custom-defined approved and denied lists. These filters can be
combined with content filers to fine-tune control.
o Mobile Code -- WorldSecure/Web will provide a fully integrated
mobile code scanning engine that allows IT managers to define
policies to control the type of applets entering the corporate
network based on applet behavior.
o Virus Detection and Disinfection -- WorldSecure/Web will provide
a fully integrated virus scanning engine. WorldSecure/Web detects
and optionally cleans or strips viruses from files downloaded
from the web.
Sales Channels
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The Company has developed multiple channels of distribution worldwide for
its products. The Company's distribution strategy addresses the requirements of
small companies to large enterprises and matches the appropriate sales and
distribution channels to the Company's software product offerings. In North
America, the Company has relied primarily on direct field sales, telesales,
value added resellers and its service organization for the license, support and
installation of its products. Internationally, sales are directed by
non-exclusive distributors and value added resellers acting in concert with
Worldtalk salespeople. In 1997, the Company entered into reseller arrangements
with Security Dynamics Technologies, Inc. (SDTI) worldwide and ASCII Something
Good Corporation (ASG) in Japan. In the third fiscal quarter of 1998, the
Company terminated the distribution agreement with ASG as a result of ASG's
failure to make contractually obligated payments.
The Company's direct field sales force primarily targets medium to
large-sized organizations with enterprise-wide implementations. The Company's
telesales group typically targets smaller organizations with less complex
implementations. Leads for the direct sales force are generated through a
combination of industry trade show participation, seminars, direct mail and
telemarketing programs, Internet download evaluation copies, requests for
proposals from prospects and customer and channel referrals. The field sales
force conducts multiple presentations and demonstrations of the Company's
products to management at the customer's site. In addition, the potential
customers may evaluate the software on-site for a period of time without charge.
The direct sales force also works with VARs to sell the Company's Windows
NT-based WorldSecure and NetTalk products. The typical sales cycles can range
from several weeks to six months, but may be significantly longer for large
sales. The Company also sells software upgrades and annual maintenance
agreements directly to customers, as well as through its VARs and international
distributors.
The Company utilizes the Internet to market its Windows NT NetTalk and
WorldSecure products. Potential customers can download 30-day evaluation copies
of these products from the Company's web site.
Vertical Markets
The Company believes that its products serve the needs of organizations in
a variety of industries and sells its products into a diverse group of
industries. However, as e-mail communication becomes more prevalent, new risks
and liabilities are incurred by organizations in key industry segments. Some
organizations are bound by government compliance regulations. Others are
required to abide by a code of professional conduct and regulations. Worldtalk
is addressing the security needs of these organizations by providing solutions
that extend compliance and regulations policies to e-mail communications.
Worldtalk solutions allow these organizations to comply with federal and other
governing regulations and to offer a higher level of service to their customers
and partners. Three key and targeted vertical market segments identified and
marketed to by the Company during 1998 were:
Legal -- As more and more lawyers utilize Internet e-mail, their law firms
must define and enforce security policies in an effort to protect client
documents, shield privileged legal advice, and safeguard intellectual property.
Worldtalk solutions give legal firms the ability to protect their e-mail
networks while ensuring the privacy and integrity of e-mail between lawyers and
their clients via the encryption of e-mail. By the end of 1998, more than 25 of
the leading law firms worldwide had chosen WorldSecure solutions to secure their
Internet e-mail, including 16 law firms on the AmLaw 100 list.
Healthcare -- Healthcare firms use Internet e-mail to communicate with
government agencies such as the FDA, or with clients, partners and networks of
doctors. Healthcare companies have identified information security breaches as
major threats to their businesses. Worldtalk solutions in the healthcare
industry are enabling a better level of service to providers and physicians by
allowing the safe exchange of sensitive and confidential information, such as
patient files, medical claims, and information on eligibility and beneficiary
status. Worldtalk is making it possible for these firms to ensure doctor-patient
confidentiality, regulate and secure Internet e-mail usage, and protect patient
records, hospital records, and hospital policies, among other sensitive
information, via the encryption of e-mail.
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Financial -- Firms in the financial industry need to protect financial
information, secure communications with clients, and comply with government
regulations. Worldtalk solutions allow financial institutions to leverage the
Internet for the e-mail exchange of business-critical information. Through the
development and enforcement of corporate security policies, Worldtalk solutions
does extend SEC regulations and compliance to e-mail systems.
International Sales
International license sales, which are denominated in U.S. dollars,
accounted for 28% and 37% of the Company's total license revenues in 1998 and
1997, respectively. Included in the financial results for the third quarter of
1998, the Company announced that the distribution relationship with ASG in Japan
had been terminated by Worldtalk. The cause of the termination was 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. ASG accounted for 18%
and 63% of the Company's total license sales and total international software
license sales, respectively, in 1998. The remaining international software
license revenue was primarily sold by distributors in Europe, Singapore and
Australia. These distributors provide system installation, technical support and
systems integration services, as well as follow-on first-line support to local
customers. SDTI, with 17% of total software license sales, was the only other
single distributor, VAR, customer or OEM to account for greater than 10% of the
Company's license revenues in 1998.
Marketing
The Company uses its direct field sales force and internal telesales
organization, distributors, strategic partners and resellers, in combination
with a variety of marketing programs, to stimulate demand for its software
products. Lead generation through the internal telesales organization and
various marketing programs, such as direct mail campaigns, are utilized by the
direct sales force, distributors and resellers as part of the sales process. The
Company seeks to educate the marketplace and to build awareness of its products
through participation in industry trade shows and conferences, public relations
targeted at both the technical and general business press, publication of
technical articles in the trade press and communication with its installed-base
of customers. These programs are generally focused on target vertical markets.
In addition, the Company has developed domestic and international co-marketing
programs with key strategic partners such as Cisco, IBM and Hewlett Packard
designed to leverage their sales and marketing capabilities. As of December 31,
1998, the Company had 20 full-time personnel employed in sales and 13 full-time
personnel employed in marketing.
Professional Services Organization (PSO)
The professional services organization manages on-site installation
services and custom development programs and offers customer training and
professional consulting services to Worldtalk's customers. The WorldSecure/ESP
content security assessment service enables organizations to identify SPAM
e-mail, e-mail with sensitive or confidential information, e-mail with offensive
content, and virus-infected e-mail. In addition, WorldSecure/ESP also identifies
abuses of e-mail networks, such as the exchange of multimedia attachments and
e-mail messages sent to very large distribution lists. PSO services are
delivered by a combination of full-time Company employees and third-party
consultants trained on Worldtalk applications and programs. The group's products
and services are also intended to complement related integration services
performed by the Company's VARs, distributors and strategic partners.
Professional services are performed for an additional fee and are offered in
conjunction with the licensing or deployment of Worldtalk's software products.
Customer Maintenance and Support
The Company's software is generally deployed in business-critical
environments, where a high degree of customer support is important for the
continuing success of product deployment. The Company maintains a centralized
technical support group that is responsible for first-line telephone support as
well as distribution of product and documentation updates. This group works
closely with the Company's professional services and
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product development organizations in order to ensure continuity in the areas of
problem resolution and priority response.
Maintenance and support contracts, which are typically for twelve months,
are offered concurrently with the initial license of a Company product. These
contracts may be renewed annually and are generally priced at 20% of the list
price of the licensed software. The Company also offers customer support 24
hours a day, seven days a week, for those customers requiring around the clock
support. Pricing for such support is negotiated separately and is in addition to
the standard fees.
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Strategic Relationships
The Company believes that strategic relationships with other technology
vendors and channels of distribution are important to the Company's business.
Accordingly, the Company has entered into strategic relationships with various
companies such as Cisco, Hewlett-Packard, IBM, GTE, SDTI, Entrust, ICL, Inc.,
RSA Data Security, VeriSign, Inc. and Trend Micro, Inc. The Company plans to
continue utilizing strategic technology licensing, marketing, distribution and
other business partnerships in the future.
Product Development
The primary focus of Worldtalk's product development activities is to
leverage its technical expertise and product innovation capabilities to provide
Internet content security and policy management solutions. The Company's product
development organization is grouped by key product area and is comprised of
development engineers, quality assurance engineers and technical writers. The
approach used in product development is a phase-oriented development process
that includes formal engineering specifications, design test documents,
milestone inspections and quality control. This process incorporates the
monitoring of quality, schedules, functionality, costs and customer
satisfaction. The markets addressed by the Company's products are very sensitive
to quality and, therefore, the Company focuses on continuously improving product
quality. As of December 31, 1998, the Company had 25 full-time personnel
employed in product development.
Competition
The market for the Company's products is intensely competitive and subject
to rapid changes. The enterprise security market is characterized by various
products and solutions that compete with Worldtalk's Internet content security
and policy management solutions. These include products offered by Content
Security Inc. (which is partially owned by Integralis Technology, Ltd.), Network
Associates, Inc. and Trend Micro Incorporated. The Company believes that its
Windows NT Internet content security and policy management product family
competes favorably with these products. The Company also anticipates competition
in the future from other companies in the enterprise security market as the
industry continues to grow.
The Company believes that the competitive factors affecting the market for
the Company's products and services include: product functionality and features;
product quality and documentation, performance and price; ease of product
integration with disparate e-mail and groupware solutions; quality of customer
support services, customer training; hardware platforms supported; vendor and
product reputation; and the strength of sales channels. The relative importance
of each of these factors depends upon the specific customer environment.
Although the Company believes that its products and services currently compete
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors.
Many of the Company's current and potential competitors have longer
operating histories; significantly greater financial, technical, product
development and marketing resources; and greater name recognition and larger
customer bases than the Company. The Company's present or future competitors may
be able to develop products comparable or superior to those developed by the
Company. They may also be able to adapt more quickly than the Company to new
technologies, evolving industry trends or customer requirements, or devote
greater resources to the development, promotion and licensing of their products
than the Company.
Intellectual Property and Other Proprietary Rights
The Company's future success is dependent upon its proprietary software
technology. In addition, the Company licenses certain key technology from other
companies. The Company has applied for a patent in regard to certain aspects of
its technology. In addition, the Company relies on trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures, to protect its technology. The Company
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also believes that factors such as the technological and creative skills of its
personnel as well as new product developments and enhancements, are essential to
establishing and maintaining a technology leadership position. The Company
generally enters into confidentiality and/or license agreements with its
employees, distributors and customers. The Company limits access to and
distribution of its software, documentation and other proprietary information.
Much of the Company's software is shipped with a software security lock, which
initially limits software access to authorized users. In addition, the Company
restricts third party access to its source code, except in connection with
source code escrow arrangements. There can be no assurance that the steps taken
by the Company will prevent misappropriation of its technology, and such
protections do not preclude competitors from developing products with
functionality or features similar to the Company's products. Furthermore, there
can be no assurance that third parties will not independently develop competing
technologies that are substantially equivalent or superior to the Company's
technologies. The loss of any significant third-party license or the inability
to license additional technology as required, could have a material adverse
effect on the Company's results of operations unless or until such time as the
Company could replace such technology. The Company has not yet agreed to terms
with Trend Micro to renew the OEM agreement for anti-virus technology that is
scheduled to expire in April 1999. Both Trend Micro and alternative sources are
being examined. In the event that these sources do not provide replacement
software, the Company will no longer provide an anti-virus software module
option.
Export License Requirements
Export of the Company's WorldSecure product family is restricted by various
United States laws and regulations governing the export of encryption technology
administered principally by the United States Department of Commerce, Bureau of
Export Administration. The Company currently is authorized to export WorldSecure
products of various encryption key lengths subject to the limitations and
conditions of export licenses or license exceptions pursuant to the Export
Administration Regulations administered by the Bureau of Export Administration.
The Company is also responsible for monitoring customer compliance with these
laws and regulations. Failure to obtain necessary export authorization or future
adverse changes in United States government policy relative to the export of
encryption technology could materially decrease the Company's ability to compete
in foreign markets thereby adversely affecting revenue.
Year 2000 Compliance
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 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.
Employees
As of December 31, 1998, the Company had a total of 83 employees, of whom
33 were engaged in sales and marketing, 25 in research and development, 14 in
professional services and technical support and 11 in administration, finance,
MIS and operations. The Company's employees are not represented by labor unions,
nor
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are they generally bound by employment or non-competition agreements or covered
by key-person life insurance policies. The Company has not experienced any work
stoppages and considers its relations with its employees to be good.
The Company intends to continue to hire sales, marketing and engineering
personnel in the future. Competition for such personnel is intense, and there
can be no assurance that the Company can hire and retain qualified personnel in
the future. If the Company is unable to hire required personnel on a timely
basis, the Company's business, operating results and financial condition could
be adversely affected.
Item 2. Properties
The Company's headquarters is located in Santa Clara, California, which
houses product development, sales, technical support and administrative
operations in approximately 30,000 square feet of space. This facility is under
lease through September 2005.
The Company has leased sales offices in San Ramon, California; Chicago,
Illinois; New York, New York; London, United Kingdom and McLean, Virginia. The
Company, through its subsidiary, Deming Software, also has a leased engineering
office in Redmond, Washington.
Item 3. 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.
As part of the financial results for the third quarter of 1998, the Company
announced that the distribution relationship with Ascii Something Good
Corporation (now known as I4 Corporation, a Japanese corporation) ("ASG") had
been terminated by Worldtalk for ASG's failure to make agreed payments for
software product fees and maintenance then totaling approximately $1.7 million
for the first and second quarters of 1998. On December 11, 1998, the Company
filed a lawsuit against ASG in the United States District Court for the Northern
District of California, which case was assigned Case Number C-98-21231. The
Complaint alleges the breach by ASG of the Distribution Agreement by ASG through
default of its payment obligations. The lawsuit seeks payment of unpaid
balances, currently in excess of $2.7 million, interest thereon, and reasonable
attorneys' fees and costs. ASG has until May 12, 1999 in which to respond to the
Complaint.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock has been included for quotation on the Nasdaq
National Market under the Nasdaq symbol "WTLK" since the Company's initial
public offering in April 1996. The following table sets forth, for the periods
indicated, the range of high and low bid information for the Company's Common
Stock for 1998 and 1997.
High Low
---- ---
1997:
First Quarter.......................... 10 1/4 6
Second Quarter......................... 7 3 1/8
Third Quarter.......................... 8 1/8 3 3/8
Fourth Quarter......................... 8 1/8 3 1/8
1998:
First Quarter.......................... 4 3/4 2 7/8
Second Quarter......................... 6 3/8 2 3/4
Third Quarter.......................... 5 1/8 1 3/8
Fourth Quarter......................... 4 1 5/8
These over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down, or commissions and may not represent actual
transactions. As of February 28, 1999, there were approximately 101 holders of
record of the Company's Common Stock. The number of record holders does not
include those beneficial owners who hold in street or nominee name. When such
beneficial owners are included, the Company believes the number of shareholders
exceeds 500.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain all cash for use in the operation and expansion of
the Company's business and does not anticipate paying any cash dividends in the
near future. The Company's bank line of credit agreement prohibits the payment
of dividends without the bank's written consent. See Item 8 "Financial
Statements and Supplemental Data, Note (6) of Notes to Consolidated Financial
Statements."
11
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
The following selected consolidated financial data for each of the last
five fiscal years has been derived from the audited consolidated financial
statements of the Company. The selected consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and notes thereto included elsewhere in this report.
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ----------- ---------- ---------- --------
(All amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue .......................... $ 13,448 $ 11,327 $ 14,205 $ 6,705 $ 4,392
Total cost of revenue .................. 3,306 3,991 3,438 1,828 1,552
Gross profit ........................... 10,142 7,336 10,767 4,877 2,840
Total operating expense ................ 15,600 14,361 16,547 8,548 6,674
Net loss ............................... $ (5,084)(3) $ (6,700) $ (5,240)(1) $ (3,640) $ (3,903)
Basic and diluted net loss per share ... $ (0.48) $ (0.65) $ (0.68)(2) $ (3.59) $ (1.92)
Shares used in computing basic and
diluted net loss per share ........ 10,584 10,355 7,669 1,014 2,038
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet:
Working capital (deficit) ............ $ 2,552 $ 6,574 $ 12,581 $ 801 $ (1,192)
Total assets ......................... 11,146 17,265 21,719 5,727 2,170
Redeemable convertible preferred stock -- -- -- 12,816 2,342
Stockholders' equity (deficit) ....... $ 4,088 $ 8,656 $ 14,396 $(11,405) $ (3,058)
<FN>
- ----------
(1) Includes in-process research and development of $4.5 million and
Deming-related integration expenses of $279,000.
(2) Exclusive of the expenses noted in footnote (1) above, net loss per
share would have been ($.06).
(3) Includes an allowance for doubtful accounts for the full amount of
approximately $1,700,000 owed by ASG as result of the termination and
associated non-payments.
</FN>
</TABLE>
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
This discussion and analysis of financial condition and results of
operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Securities Litigation Reform Act of 1995.
The discussion in this report contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that could
cause or 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 solution 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 approximately 84% of software license revenue coming from
Windows NT-based Internet content security, policy management and e-mail
directory products in 1998. By the last quarter of 1998, the Company derived
approximately 94% of its software license revenue from Window NT-based products
and approximately 89% of its software license revenue from the WorldSecure
Server product line. However, a significant portion of the revenue reported from
these products during the 1998 fiscal year came from shipments of products
pursuant to minimum non-refundable commitment terms with two large resellers,
which do not directly reflect sales to end-users. During the first two quarters
of 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 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. There can be no assurance that the Company's resellers or
international distributors will be successful in marketing these products.
The financial results for the third quarter, fourth quarter, and fiscal
1998 were greatly impacted by Worldtalk's termination of the License and
Distribution Agreement with Worldtalk's Japanese distributor, Ascii Something
Good. 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
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
or the Japanese market in the third and fourth fiscal quarter of 1998. As a
result, the Company experienced a sequential quarter decline in revenue in the
third quarter of 1998 and a significant operating loss for 1998. The Company's
results improved by the fourth quarter of 1998 as a result of increased revenue
from the WorldSecure product line and continued cost control measures.
The Company's Internet content security and policy management products
continue to place the Company in competition with a set of vendors, many of whom
have significantly greater resources than the Company. Accordingly, the Company
intends to invest significantly in its business. As a result, there can be no
assurance that the Company will be profitable on a quarterly or annual basis.
The Company's future operating results may
13
<PAGE>
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 and international
distributors; 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.
Results of Operations
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenues:
Years Ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
Revenue:
Software licenses .......................... 71.6% 60.6% 68.4%
Maintenance, installation and training ..... 28.4 39.4 31.6
----- ----- -----
Total revenue ...................... 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Software licenses .......................... 5.5 9.1 7.6
Maintenance, installation and training ..... 19.1 26.1 16.6
----- ----- -----
Total cost of revenue .............. 24.6 35.2 24.2
----- ----- -----
Gross margin ................................. 75.4 64.8 75.8
----- ----- -----
Operating expenses:
Product development ........................ 29.3 37.9 25.1
Sales and marketing ........................ 55.6 65.1 47.5
General and administrative ................. 31.1 23.8 12.2
Purchased research and development ......... -- -- 31.7
----- ----- -----
Total operating expense ............ 116.0 126.8 116.5
----- ----- -----
Operating loss ..................... (40.6) (62.0) (40.7)
Interest income, net ......................... 2.8 4.5 3.8
----- ----- -----
Loss before income taxes ........... (37.8) (57.5) (36.9)
Income taxes ................................. -- 1.6 --
----- ----- -----
Net loss ........................... (37.8)% (59.1)% (36.9)%
===== ===== =====
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. Revenues
from maintenance contracts are recognized over the contract term, which
generally is one year, while installation and training revenues are recognized
when the services are performed. The Company also reported revenue from
shipments of products pursuant to minimum non-refundable commitment terms with
two large resellers.
The Company's total revenues were $13.4 million in 1998 as compared to
$11.3 million in 1997 and $14.2 million in 1996, representing an increase of 19%
from fiscal 1997 to fiscal 1998 and a decrease of 20% from fiscal 1996 to fiscal
1997.
Software license and software development revenues were $9.6 million in
1998 as compared to $6.9 million in 1997 and $9.7 million for 1996, representing
an increase of 40% from fiscal 1997 to fiscal 1998 and a decrease of 29% from
fiscal 1996 to fiscal 1997. The increase in software license revenues from
fiscal 1997 to 1998 was attributable to the increased sales of the Company's
WorldSecure product line, which was first shipped in September 1997. The level
of software license revenue in 1998 was impacted by the termination of the
Japanese distributor in the third quarter resulting in no software license
revenue from the Japanese market in the third and fourth quarters of 1998. The
decrease in software license and software development revenues from fiscal 1996
to fiscal 1997 was primarily due to the decline in sales of NetJunction
enterprise backbone products which was not
14
<PAGE>
offset rapidly enough by increased sales of the Company's new Windows NT-based
products, WorldSecure and NetTalk.
Software license revenue for the Company's WorldSecure Server product line
was 72% of total software license revenue for fiscal 1998 as compared to 16% for
fiscal 1997. Also, the WorldSecure Server license revenue in 1998 grew by 524%
as compared to 1997. The WorldSecure Server product line was introduced in
September 1997. Geographically, the Company's software license revenue in 1998
was 72% for the United States, compared with 63% in 1997, and 28% for
international business in 1998, compared with 37% in 1997. The growth in
software license revenue combined with the lack of license sales in Japan of the
WorldSecure product line starting in the third quarter contributed to the
decreased percentage of international software license revenue for 1998 as
compared to 1997.
Maintenance, installation and training revenues were $3.8 million in 1998
as compared to $4.5 million in 1997 and $4.5 million in 1996, representing a 15%
decrease from fiscal 1997 to 1998 and no change from fiscal 1996 to fiscal 1997.
Maintenance, installation, and training revenue in 1998 decreased as compared to
1997 primarily as a result of lower maintenance, installation and consulting
revenues associated with the older UNIX-based NetJunction product line.
Maintenance, installation, and training revenue for fiscal 1997 was consistent
with fiscal 1996 due to an increase in the number of maintenance contracts
associated with new software licenses, the renewal of maintenance contracts by
existing customers, and increases in demand for customization consulting and
training services offset by various other factors. The Company expects that
maintenance, installation and training revenues will increase in the future as
the Company's sales of the WorldSecure product line increase and annual
maintenance agreements with existing WorldSecure customers are renewed.
Cost of Revenues
The Company's total cost of revenues was $3.3 million in 1998 as compared
to $4.0 million in 1997 and $3.4 million in 1996, representing a decrease of 17%
from fiscal 1997 to fiscal 1998 and an increase of 16% from fiscal 1996 to
fiscal 1997.
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 $737,000 in 1998 as compared to
$1.0 million in 1997 and $1.1 million for 1996, representing decreases of 28%
and 5% from fiscal 1997 to fiscal 1998 and fiscal 1996 to fiscal 1997,
respectively. The decrease from fiscal 1997 to 1998 was primarily as a result of
product mix and certain fixed price royalty arrangements with third-party
vendors. The slight decrease from fiscal 1996 to fiscal 1997 was due to the
decrease in license revenues, as the license costs fluctuate in direct
proportion to license revenues. This decrease was offset by certain fixed price
royalty arrangements with third-party vendors which do not fluctuate in direct
proportion to license revenues.
Maintenance, installation and training costs consist principally of
personnel-related costs for consulting, training and technical support.
Maintenance, installation and training costs were $2.6 million in 1998 as
compared to $3.0 million in 1997 and $2.4 million in 1996, representing a
decrease of 13% from fiscal 1997 to 1998 and an increase of 26% from fiscal 1996
to fiscal 1997. The reduction from 1997 to 1998 was primarily the result of the
continued impact of the headcount reduction in the second half of 1997 and lower
outside contracting expenses. The increase in fiscal 1997 as compared to 1996
was due to the significant expansion of the Company's customer service personnel
across all categories, including consulting, support and account management
staff, offset by the Company's later reduction of headcount early in the second
half of 1997. The Company expects that maintenance, installation and training
costs will remain approximately flat with the higher support requirements of new
WorldSecure customers offset by the lesser requirements of the decreased number
of support intensive NetJunction customers.
15
<PAGE>
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 $3.9 million in 1998 as compared to $4.3 million in
1997 and $3.6 million in 1996, representing a decrease of 8% from fiscal 1997 to
1998 and an increase of 21% from fiscal 1996 to fiscal 1997. Product development
expenses represented 29%, 38% and 25% of total revenues for fiscal 1998, 1997
and 1996, respectively. The decrease in dollar terms from 1997 to 1998 was
primarily attributable to the reduction of headcount early in the second half of
1997. The increase in absolute dollars from 1996 to 1997 in product development
was due to increased staffing and associated support costs of software engineers
and consultants required primarily to expand product lines and secondarily to
enhance the Company's existing product lines. The fluctuations in product
development expenses as a percentage of total revenues were attributable to the
fluctuations in revenues for the respective periods and the fact that product
development expenses do not fluctuate in direct proportion to total revenues.
The Company believes that continued commitment to product development is
required for the Company's products to obtain a competitive advantage. The
Company intends to continue to allocate resources to product research and
development. Consequently, such expenses may increase in dollar terms in the
future.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, benefits and
commissions of sales and marketing personnel and marketing program and
promotional expenses. Sales and marketing expenses were $7.5 million in 1998 as
compared to $7.4 million in 1997 and $6.8 million in 1996, representing
increases of 1% and 9% from fiscal 1997 to fiscal 1998 and from fiscal 1996 to
fiscal 1997, respectively. Sales and marketing expenses represented 56%, 65% and
48% of total revenues for fiscal 1998, 1997 and 1996, respectively. The
increases in absolute dollars were primarily the result of the expansion of the
Company's sales and marketing personnel and marketing program and promotional
costs associated with the WorldSecure product line. The fluctuations in sales
and marketing expenses as a percentage of total revenues were attributable to
the fluctuations in revenues for the respective periods and the fact that
certain sales and marketing expenses do not fluctuate in direct proportion to
total revenues. In the future, the Company expects to continue hiring additional
sales and marketing personnel, increase marketing program, promotion and
advertising efforts and expand internationally through a combination of
distributors, VARs and direct sales personnel. Consequently, such expenses may
increase in dollar amounts 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 $4.2 million in 1998 as
compared to $2.7 million in 1997 and $1.7 million in 1996, representing
increases of 56% and 55% from fiscal 1997 to fiscal 1998 and from fiscal 1996 to
fiscal 1997, respectively. General and administrative expenses represented 31%,
24% and 12% of total revenues for fiscal 1998, 1997 and 1996, respectively. As a
result of the termination and associated non-payments by the Japanese
distributor, general and administrative expenses in 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 would have decreased by
approximately $200,000 in 1998 as compared to 1997. The increases in 1997 as
compared to 1996 was attributable primarily to increased staffing and associated
expenses necessary to manage and support the Company's business, which included
public company related expenses. A secondary factor for this increase in
absolute dollars was the continuing amortization of goodwill related to the
acquisition of Deming Software, Inc. which occurred in the fourth quarter of
1996, as well as legal expenses and other costs associated with the negotiation
of new reseller arrangements. The fluctuations in general and administrative
expenses as a
16
<PAGE>
percentage of total revenues were 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 (excluding the impact of the $1.7
million allowance for doubtful accounts) will be relatively flat from 1998 to
1999 through the utilization of existing infrastructure.
Purchased Research and Development
In November 1996, the Company acquired Deming Software, Inc. for a total
purchase price of approximately $4.8 million of which $4.5 million was allocated
to purchased research and development. For allocation of the purchase price, see
Item 8 "Financial Statements and Supplemental Data, Note (2) of Notes to
Consolidated Financial Statements."
Net Interest Income
Net interest income consists of interest income and expense and other
miscellaneous income and expense items. Net interest income was $375,000,
$508,000 and $544,000 for fiscal 1998, 1997 and 1996, respectively. The
fluctuations in net interest income from fiscal 1997 to fiscal 1998 and from
fiscal 1996 to fiscal 1997 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
In April 1996, the Company completed its initial public offering of 2.1
million shares of Common Stock. The Company received net proceeds of
approximately $13.8 million, after deducting expenses which included
underwriting discounts and commissions. At December 31, 1998, the Company had
cash, cash equivalents, and short-term investments totaling $6.0 million and
working capital of $2.6 million.
The Company has a $1.75 million bank line of credit and equipment term loan
facility, which was entered into in December 1998. As of December 31, 1998, the
Company had no monies outstanding on the $1.5 million line of credit and had
fully utilized the $250,000 equipment term loan facility.
Net cash used in operating activities amounted to $5.1 million in 1998,
which was comprised principally of the Company's net loss of $5.1 million. Net
cash provided by investing activities amounted to $4.1 million in 1998, which
mainly included maturities of short-term investments of $4.2 million. The
Company currently has no significant capital commitments for fiscal 1999.
Net cash provided by financing activities amounted to $138,000 in 1998
which primarily included net proceeds from the issuance of common stock of
$474,000 offset by principal payments under capital lease obligations of
$343,000.
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. Such costs could result in significant losses in one or more fiscal
quarters.
The Company believes that its cash balances and credit facilities will be
sufficient to meet its anticipated cash needs to fund operating losses, working
capital requirements, capital expenditures and business expansion for at least
the next twelve months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or convertible debt securities or obtain
additional credit facilities. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders and
may not be available on terms favorable to the Company, if at all.
17
<PAGE>
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
$28.7 million as of December 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 new product 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. Because of the
reasons described in this paragraph, the Company's first quarter revenue of 1999
may or may not increase sequentially. Historically, a substantial portion of the
Company's revenues has been recognized in the last two weeks 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 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 from non-refundable minimum commitments from two large
resellers which do not directly reflect sales to end-users, including the
Japanese distributor who failed to make payments associated with the first and
second quarter revenue. During the first two quarters of 1999, the Company
expects to report additional revenue from the recognition of the balance of a
non-refundable prepaid purchase commitment from one reseller based on guaranteed
quarterly minimum commitments from a reseller. The realization of revenue in
excess of the non-refundable prepaid amount noted above will depend on the
success of these resellers in the marketplace. The Company believes that
reaching and maintaining profitability will depend on increased market
acceptance of its WorldSecure Internet content security and policy management
solutions. 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. Also, new direct sales and telesales personnel
can take up to three quarters to be 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 early
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 $4
million. 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'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
18
<PAGE>
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.
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 28% of the Company's total sales in 1998
and 1997. As part of the financial results for the third quarter of 1998, the
Company announced that the distribution relationship with ASG in Japan 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. ASG accounted for 18% and 63% of the
Company's total license sales and total international software license sales in
1998, respectively. 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
exception 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 exceptions.
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.
Item 7A. 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 December 31,
1998, all of the Company's investments mature in less than one year.
19
<PAGE>
Item 8. Financial Statements and Supplementary Data
Page
----
Index to Consolidated Financial Statements:
Independent Auditor's Report .............................................. 21
Consolidated Balance Sheets as of December 31, 1998 and 1997 .............. 22
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ....................................... 23
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996 ................... 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ....................................... 26
Notes to Consolidated Financial Statements ................................ 27
20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Worldtalk Corporation:
We have audited the accompanying consolidated balance sheets of Worldtalk
Corporation and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule listed in the Index at Item
14(a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Worldtalk
Corporation and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG LLP
Mountain View, California
January 28, 1999
21
<PAGE>
<TABLE>
WORLDTALK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except per share data)
ASSETS
<CAPTION>
As of December 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 3,858 $ 4,662
Short-term investments .................................... 2,166 6,415
Accounts receivable, net of allowance for doubtful
accounts of $1,840 and $121, respectively .............. 2,960 3,039
Prepaid expenses .......................................... 613 935
-------- --------
Total current assets .............................. 9,597 15,051
Property and equipment, net ................................. 1,108 1,658
Other assets ................................................ 441 556
-------- --------
$ 11,146 $ 17,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 787 $ 760
Short-term debt ........................................... 250 243
Current portion of capital lease obligations .............. 115 339
Accrued expenses .......................................... 3,419 3,041
Deferred revenue .......................................... 2,474 4,094
-------- --------
Total current liabilities ......................... 7,045 8,477
Capital lease obligations, less current portion ............. 13 132
-------- --------
Total liabilities ................................. 7,058 8,609
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 6,500 authorized, none
designated or outstanding ................................ -- --
Common stock, $.01 par value; 25,000 shares authorized,
10,686 and 10,487 shares issued and outstanding
in 1998 and 1997, respectively ........................... 107 105
Additional paid-in capital ................................ 32,773 32,301
Deferred compensation ..................................... (47) (89)
Accumulated deficit ....................................... (28,745) (23,661)
-------- --------
Total stockholders' equity ........................ 4,088 8,656
-------- --------
$ 11,146 $ 17,265
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
WORLDTALK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Software licenses ......................... $ 9,631 $ 6,860 $ 9,711
Maintenance, installation and training .... 3,817 4,467 4,494
-------- -------- --------
Total revenues .................... 13,448 11,327 14,205
-------- -------- --------
Cost of revenues:
Software licenses ......................... 737 1,027 1,083
Maintenance, installation and training .... 2,569 2,964 2,355
-------- -------- --------
Total cost of revenues ............ 3,306 3,991 3,438
-------- -------- --------
Gross profit ........................... 10,142 7,336 10,767
-------- -------- --------
Operating expenses:
Product development ....................... 3,934 4,294 3,563
Sales and marketing ....................... 7,477 7,378 6,751
General and administrative ................ 4,189 2,689 1,733
Purchased research and development ........ -- -- 4,500
-------- -------- --------
Total operating expenses .......... 15,600 14,361 16,547
-------- -------- --------
Operating loss .............................. (5,458) (7,025) (5,780)
Interest income, net ........................ 375 508 544
-------- -------- --------
Loss before income taxes .......... (5,083) (6,517) (5,236)
Income taxes ................................ 1 183 4
-------- -------- --------
Net loss .......................... $ (5,084) $ (6,700) $ (5,240)
======== ======== ========
Basic and diluted net loss per share ........ $ (0.48) $ (0.65) $ (0.68)
======== ======== ========
Shares used in computing basic and
diluted net loss per share ............. 10,584 10,355 7,669
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
23
<PAGE>
WORLDTALK CORPORATION AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1996, 1997 and 1998
(All amounts in thousands)
<CAPTION>
Common Stock
-------------------- Additional
Shares Amount Paid-in capital
-------- -------- ---------------
<S> <C> <C> <C>
Balances as of December 31, 1995 ............................ 1,505 $ 15 $ 670
Issuance of common stock in initial public offering, net .... 2,000 20 13,812
Conversion of redeemable preferred stock to common stock .... 6,025 60 12,756
Exercise of common stock options and warrants ............... 178 2 49
Purchases under the Employee Stock Purchase Plan ............ 35 -- 238
Issuance of shareholders' notes receivable .................. -- -- --
Issuance of common stock in acquisition ..................... 547 6 4,125
Amortization of deferred compensation ....................... -- -- --
Net loss .................................................... -- -- --
-------- -------- --------
Balances as of December 31, 1996 ............................ 10,290 $ 103 $ 31,650
Exercise of common stock options ............................ 148 2 202
Purchases under the Employee Stock Purchase Plan ............ 124 1 461
Repurchased common stock .................................... (75) (1) (12)
Repayment of shareholders' notes receivable ................. -- -- --
Amortization of deferred compensation ....................... -- -- --
Net loss .................................................... -- -- --
-------- -------- --------
Balances as of December 31, 1997 ............................ 10,487 $ 105 $ 32,301
Exercise of common stock options ............................ 90 1 129
Purchases under the Employee Stock Purchase Plan ............ 155 1 357
Repurchased common stock .................................... (46) -- (14)
Amortization of deferred compensation ....................... -- -- --
Net loss .................................................... -- -- --
-------- -------- --------
Balances as of December 31, 1998 ............................ 10,686 $ 107 $ 32,773
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
WORLDTALK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1996, 1997 and 1998
(All amounts in thousands)
<CAPTION>
Total
Stockholder Stockholders'
Note Deferred Accumulated Equity
Receivable Compensation Deficit (Deficit)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balances as of December 31, 1995 ........................ $ (194) $ (175) $(11,721) $(11,405)
Issuance of common stock in initial public offering, net -- -- -- 13,832
Conversion of redeemable preferred stock to common stock -- -- -- 12,816
Exercise of common stock options and warrants ........... -- -- -- 51
Purchases under the Employee Stock Purchase Plan ........ -- -- -- 238
Issuance of shareholders' notes receivable .............. (68) -- -- (68)
Issuance of common stock in acquisition ................. (3) -- -- 4,128
Amortization of deferred compensation ................... -- 44 -- 44
Net loss ................................................ -- -- (5,240) (5,240)
-------- -------- -------- --------
Balances as of December 31, 1996 ........................ $ (265) $ (131) $(16,961) $ 14,396
Exercise of common stock options ........................ -- -- -- 204
Purchases under the Employee Stock Purchase Plan ........ -- -- -- 462
Repurchased common stock ................................ -- -- -- (13)
Repayment of shareholders' notes receivable ............. 265 -- -- 265
Amortization of deferred compensation ................... -- 42 -- 42
Net loss ................................................ -- -- (6,700) (6,700)
-------- -------- -------- --------
Balances as of December 31, 1997 ........................ $ -- $ (89) $(23,661) $ 8,656
Exercise of common stock options ........................ -- -- -- 130
Purchases under the Employee Stock Purchase Plan ........ -- -- -- 358
Repurchased common stock ................................ -- -- -- (14)
Amortization of deferred compensation ................... -- 42 -- 42
Net loss ................................................ -- -- (5,084) (5,084)
-------- -------- -------- --------
Balances as of December 31, 1998 ........................ $ -- $ (47) $(28,745) $ 4,088
======== ======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
WORLDTALK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
<CAPTION>
Years ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (5,084) $ (6,700) $ (5,240)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization .................................. 783 703 452
Change in allowance for doubtful accounts ...................... 1,719 (28) (1)
Amortization of deferred compensation .......................... 42 42 44
Purchased research and development ............................. -- -- 4,500
Changes in operating assets and liabilities:
Accounts receivable .......................................... (1,640) 2,513 (3,956)
Prepaid expenses ............................................. 322 (313) (507)
Accounts payable ............................................. 27 (841) 647
Accrued expenses ............................................. 378 (53) 714
Deferred revenue ............................................. (1,620) 2,528 561
Other liabilities ............................................ -- (350) (280)
-------- -------- --------
Net cash used in operating activities ..................... (5,073) (2,499) (3,066)
-------- -------- --------
Cash flows from investing activities:
Restricted cash .................................................. -- -- 2,000
Purchase of property and equipment ............................... (233) (520) (1,413)
Purchase of short-term investments ............................... (56,383) (7,418) (9,469)
Sales and maturities of short-term investments ................... 60,632 7,030 3,442
Other assets ..................................................... 115 247 39
-------- -------- --------
Net cash provided by (used in) investing activities ....... 4,131 (661) (5,401)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock ....................... 474 653 14,053
Repayment of shareholder receivable .............................. -- 265 --
Principal payments under capital lease obligations ............... (343) (351) (256)
Proceeds from bank borrowings .................................... 7 243 698
-------- -------- --------
Net cash provided by financing activities ................. 138 810 14,495
-------- -------- --------
Change in cash and cash equivalents ................................ (804) (2,350) 6,028
Cash and cash equivalents at beginning of year ..................... 4,662 7,012 984
-------- -------- --------
Cash and cash equivalents at end of year ........................... $ 3,858 $ 4,662 $ 7,012
======== ======== ========
Supplemental disclosures:
Cash paid for interest: .......................................... $ 54 $ 92 $ 106
======== ======== ========
Noncash investing and financing activities:
Common stock issued in acquisition of Deming Software, Inc. .... $ -- $ -- $ 4,131
======== ======== ========
Conversion of convertible preferred stock to common stock ...... $ -- $ -- $ 12,816
======== ======== ========
Notes receivable from stockholders ............................. $ -- $ -- $ 68
======== ======== ========
Equipment acquired under capital lease agreements .............. $ -- $ 110 $ 506
======== ======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
26
<PAGE>
WORLDTALK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998, 1997 and 1996
(All amounts in thousands, except per share data)
(1) Summary of the Company and Significant Accounting Policies
The Company
Worldtalk Corporation (the "Company") is a leading provider of Internet
content security and policy management solutions. The Company's WorldSecure
policy management platform enables organizations to define and manage Internet
e-mail security and usage policies, reducing the risks and liabilities
associated with Internet communications. The Company's products include
WorldSecure Server (also known as WorldSecure/Mail), a Windows NT-based content
firewall and policy management solution, WorldSecure Client, a desktop e-mail
encryption product, NetTalk, a Windows NT-based e-mail and directory solution,
and NetJunction, a UNIX-based directory and messaging switch.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments and Concentration of Credit Risk
Cash equivalents consist of highly liquid investments, principally money
market accounts and marketable debt securities, with maturities of three months
or less at the time of purchase.
The Company has classified its short-term marketable investments as
"available-for-sale." Available-for-sale securities are carried at fair market
value, with material unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity. Gains and losses on securities sold
are based on the specific identification method.
Fair values of short-term marketable investments are based on quoted market
values as of December 31, 1998 and 1997. As of December 31, 1998 and 1997, the
difference between the fair value and amortized cost of short-term marketable
investments was not material. As of December 31, 1998, short-term marketable
investments consisted of commercial paper due within one year or less.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, are primarily cash equivalents, short-term
marketable investments and accounts receivable. The Company's cash equivalents
and short-term marketable investments consist primarily of commercial paper with
various maturities during 1999. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base and their dispersion across different industries and
geographic areas. Generally, the Company requires no collateral on trade
receivables. The Company believes that its credit evaluation process
substantially mitigates any credit risks.
27
<PAGE>
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
generally three to five years. Equipment recorded under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the respective useful lives of the assets or the lease term.
Other Assets
Other assets consist of long-term deposits and certain intangible assets
and goodwill acquired in the purchase of Deming Software, Inc. in November 1996.
The intangible assets and goodwill are being amortized using the straight-line
method over the expected life of the assets of four years.
Impairment of Long-lived Assets
The Company reviews property and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount, including the
unamortized portion of goodwill allocated to the property and equipment, of an
asset may not be recoverable. Recoverability of property and equipment is
measured by comparison of its carrying amount to future net cash flow the
property and equipment are expected to generate. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the property and equipment, including the allocated
goodwill, if any, exceeds its fair market value. To date, the Company has made
no adjustments to the carrying amount of its property and equipment.
Revenue Recognition
For software transactions entered into after January 1, 1998, the Company
adopted the American Institute of Certified Public Accountants' ("AICPA")
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition." SOP No.
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on its relative fair
value. The fair value of the element must be based on objective evidence that is
specific to the vendor. If the vendor does not have objective evidence of the
fair value of all elements in a multiple-element arrangement, all revenue from
the arrangement must be deferred until such evidence exists or until all
elements have been delivered. The revenue allocated to software products is
generally recognized upon shipment of the products provided there is persuasive
evidence that an agreement exists, the fee is fixed, determinable and
collectible and the arrangement does not involve significant customization,
modification or production. The revenue allocated to post contract customer
support is recognized ratably over the term of the support and revenue allocated
to service elements is recognized as the services are performed. The adoption of
SOP No. 97-2 did not have a material effect on the Company's operating results.
Research and Development
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility in the form of a working model has been
established. To date, the Company's software development has been completed
concurrent with the establishment of technological feasibility, and,
accordingly, no costs have been capitalized.
Stock-Based Compensation
The Company accounts for its stock option plans using the intrinsic value
method. As such, compensation expense is recorded if on the date of grant the
current market price of the underlying stock exceeds the exercise price.
28
<PAGE>
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. Deferred tax assets are reduced by an
allowance to an amount whose realization is more likely than not.
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 years ending December 31, 1998, 1997
and 1996, common stock options totaling 2,143, 1,853, and 1,251, respectively,
were omitted from the computation, as their impact would be anti-dilutive.
Other Comprehensive Income (Loss)
The Company has no material components of other comprehensive income
(loss).
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company expects that the adoption of SOP No.
98-1 will have no material impact on its financial position, results of
operations or cash flows. The Company will be required to implement SOP No. 98-1
for the year ending December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. The Company expects that the adoption of SOP No. 98-5 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SOP No. 98-5 for the year ending
December 31, 1999.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SFAS No. 133 for the year ended
December 31, 2000.
In December 1998, the AICPA issued SOP No. 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions." SOP No.
98-9 establishes the method of recognizing revenue for certain multiple-element
software arrangements. The Company will be required to implement SOP No. 98-9
for the year ending December 31, 2000. SOP No. 98-9 also extends the deferral of
the application of SOP No. 97-2 to certain other multiple-element software
arrangements through the Company's year ending December 31, 1999. The Company
expects that the adoption of SOP No. 98-9 will have no material impact on its
financial position, results of operations or cash flows.
29
<PAGE>
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
(2) Business Combination
In November 1996, the Company acquired all of the outstanding stock of
Deming Software, Inc. ("Deming"), a privately held company specializing in the
development of electronic mail security software for the Internet, for a total
purchase price of $4,773, including 569 shares of the Company's common stock,
$225 in cash, and $418 of direct acquisition costs. The acquisition was
accounted for using the purchase method, and, accordingly, the operating results
of Deming have been included in the consolidated financial statements of the
Company from the date of the acquisition. The purchase price has been allocated
as follows:
Net liabilities assumed ................................... $ (226)
Goodwill, covenant not to compete and workforce in place .. 499
Purchased research and development ........................ 4,500
-------
$ 4,773
=======
The $4,500 allocated to purchased research and development was charged to
operations in the quarter ended December 31, 1996. The amount allocated to
goodwill, covenant not to compete and workforce in place will be amortized using
the straight-line method over 48 months.
The following pro forma combined results of operations for the year ended
December 31, 1996 is presented as if the acquisition had occurred at the
beginning of the period. The charge for in process research and development has
not been reflected in the following pro forma summary. The pro forma summary
does not necessarily reflect the results of operations as if the Company and
Deming had been consolidated during such periods:
Year ended
December 31,
1996
---------
Net revenues ......................... $ 14,734
Net loss ............................. $ (1,507)
Basic and diluted net loss per share . $ (0.18)
(3) Property and Equipment
Property and equipment consisted of the following:
As of December 31,
------------------
1998 1997
------- -------
Equipment .................................... $ 2,672 $ 2,515
Furniture and fixtures ....................... 657 655
Purchased software ........................... 268 224
Leasehold improvements ....................... 111 111
------- -------
3,708 3,505
Less accumulated depreciation and amortization (2,600) (1,847)
------- -------
$ 1,108 $ 1,658
======= =======
Equipment recorded under capital leases aggregated $1,533 and $1,533 with
related accumulated amortization of $1,461 and $997 for the years ended December
31, 1998 and 1997, respectively.
30
<PAGE>
(4) Accrued Expenses
Accrued expenses consisted of the following:
As of December 31,
-----------------
1998 1997
------- -------
Accrued employee compensation........... $ 935 $ 1,021
Accrued commissions..................... 236 177
Other accrued liabilities............... 2,248 1,843
------- -------
$ 3,419 $ 3,041
======= =======
(5) Income Taxes
<TABLE>
The Company's effective tax rate differs from the federal income tax rate of
34%, as follows:
<CAPTION>
Years ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income tax benefit at statutory rate ............. $ 1,728 $ 2,216 $ 1,780
Nondeductible purchased research and development . -- -- (1,652)
Losses for which no benefit is currently realized (1,728) (2,157) (101)
State income tax ................................. (1) (37) (4)
Foreign withholding tax .......................... -- (115) --
Other ............................................ -- (90) (27)
------- ------- -------
Actual tax expense ............................... $ (1) $ (183) $ (4)
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
As of December 31,
--------------------
1998 1997
-------- --------
Accruals and reserves .............................. $ 1,013 $ 923
Deferred research and development costs ............ 3,889 3,828
Net operating loss carryforward -- federal ......... 3,736 2,313
Net operating loss carryforward -- state ........... 226 131
Research and development credit carryforward ....... 1,481 1,090
Other .............................................. (78) 34
-------- --------
10,267 8,319
Less valuation allowance ........................... (10,267) (8,319)
-------- --------
Net deferred tax assets .................. $ -- $ --
======== ========
The net change in the valuation allowance for the year ended December 31,
1998 was an increase of $1,948.
For federal income tax purposes, the Company has net operating loss
carryforwards of approximately $10,989 expiring in the tax years 2008 through
2018. For California income tax purposes, the Company has net operating loss
carryforwards of approximately $3,870, expiring in the tax years 1998 through
2003. The Company has a taxable year ending March 31 but reports on the calendar
year for financial statement purposes. The difference between the net operating
loss carryforward for federal income tax purposes and for state income tax
purposes results primarily from a 50% limitation on the California loss
carryforwards.
The Company has research and development tax credit carryforwards for
federal and California tax purposes of approximately $835 and $646,
respectively. The federal credits expire in various years through 2018, and the
California credits may be carried forward indefinitely.
Internal Revenue Code Section 382 limits the utilization of net operating
losses incurred prior to an "ownership change," as defined. The Company believes
an ownership change resulted from the issuance of the Series B preferred stock
on December 31, 1993.
31
<PAGE>
The Company has not yet determined whether an ownership change occurred due
to an initial public offering in April 1996. If an ownership change has
occurred, utilization of the net operating loss carryforwards could be
significantly reduced.
(6) Bank Borrowings and Convertible Secured Promissory Notes
On December 30, 1998, the Company entered into a loan and security
agreement comprised of a $1,500 line of credit, which expires on December 29,
1999 and a $250 term facility, which expires on December 29, 2000, bearing
interest at the prime rate (7.75% as of December 1998) plus 0.25% and prime rate
plus 0.50%, respectively. The agreement is collateralized by the assets of the
Company, contains certain financial covenants and restricts the Company's
ability to incur other indebtedness and pay dividends. As of December 31, 1998,
there were no outstanding balances under the line of credit agreement. The
outstanding balance under the term facility was $250 as of December 31, 1998.
(7) Preferred Stock and Stockholders' Equity (Deficit)
Preferred Stock
As of December 31, 1998, there were 6,500 authorized shares of preferred
stock, none of which are designated or outstanding, with a $0.01 per share par
value.
Stock Option and Purchase Plans
In February 1996, the Company adopted the 1996 Equity Incentive Plan (the
"1996 Plan"), under which 1,000 shares of common stock were reserved for
issuance. The 1996 Plan became effective in April 1996 on the effective date of
the Company's initial public offering. The 1996 Plan provides for the grant of
options, stock bonuses and restricted stock purchase rights. The compensation
committee of the Board of Directors has the authority to set exercise dates (no
longer than 10 years from date of grant), payment terms and other provisions for
each grant. Options are subject to vesting as determined by the compensation
committee, generally over 48 months. Vesting and exercisability of certain
outstanding options and other stock awards under the 1996 Plan will accelerate
upon certain change of control transactions. In August 1997 and April 1998, an
additional 750 and 1,000 shares of common stock, respectively, were reserved for
issuance under the Company's 1996 Plan.
The Company's 1992 Stock Option Plan (the "1992 Plan") terminated at the
effective date of the Company's initial public offering, at which time the 1996
Plan became effective. As a result, no further options may be granted under the
1992 Plan. However, termination of the 1992 Plan does not affect outstanding
options, all of which remain outstanding until exercised or until they terminate
or expire. The terms of options granted under the 1992 Plan and the
administration of the 1992 Plan are substantially the same as the 1996 Plan,
except that vesting of options under the 1992 Plan does not accelerate upon an
acquisition.
32
<PAGE>
Activity under the option plans follows:
Weighted-
Shares average
Available Options exercise
For grant outstanding price
--------- ----------- -----
Balances as of December 31, 1995 .......... 133 827 $ 0.83
Additional shares reserved ................ 1,200 -- --
Options granted ........................... (722) 722 9.23
Options exercised ......................... -- (171) 0.33
Options canceled .......................... 127 (127) 3.62
----- ----- ------
Balances as of December 31, 1996 .......... 738 1,251 $ 5.46
Additional shares reserved ................ 750 -- --
Options granted ........................... (1,990) 1,990 4.74
Options exercised ......................... -- (148) 1.38
Options canceled .......................... 1,240 (1,240) 7.42
----- ----- ------
Balances as of December 31, 1997 .......... 738 1,853 $ 3.70
Additional shares reserved ................ 1,000 -- --
Options granted ........................... (1,138) 1,138 2.82
Options exercised ......................... -- (91) 1.05
Options canceled .......................... 658 (658) 4.98
----- ----- ------
Balances as of December 31, 1998 .......... 1,258 2,242 $ 2.99
===== ===== ======
<TABLE>
The following table summarizes information about options outstanding under
the plans as of December 31, 1998:
<CAPTION>
Outstanding Exercisable
---------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining average Number average
of shares Contractual exercise of shares exercise
Range of exercise prices outstanding Life price Exercisable price
- ------------------------ ------------ ----------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
$0.20........................ 150 6.2 years $ 0.20 139 $ 0.20
From $0.50 to $ 3.50.............. 1,316 9.0 2.84 263 2.99
From $3.75 to $ 5.00.............. 776 7.6 3.79 388 3.75
----- ---
2,242 790 2.88
===== ===
</TABLE>
Certain outstanding options under the stock option plan granted to officers
are immediately exercisable but subject to repurchase by the Company at a rate
equivalent to the current vesting schedule of each option. During 1998, the
Company repurchased 46 shares. As of December 31, 1998 and 1997, 36 and 82
shares were subject to repurchase, respectively.
The Company initially recorded deferred compensation of $175 for the
difference between the grant price and the deemed fair value of the common stock
underlying the options granted in November and December 1995. This amount is
being amortized over the vesting period of the individual options, generally
four years.
In February 1996, the Company adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 1,000 shares of common stock for
issuance thereunder. The Purchase Plan became effective in April 1996, on the
effective date of the Company's initial public offering and permitted eligible
employees to acquire shares of the Company's common stock through payroll
deductions at a price equal to 85% of the lower of the fair market value at the
beginning or end of each six-month offering period. As of December 31, 1998, a
cumulative total of 314 shares had been issued under the Purchase Plan.
In April 1997, the Company offered option holders under its stock option
plans the opportunity to have outstanding unvested options repriced to the then
current fair market value of the Company's common stock of $3.75 per share.
Employees electing to have options repriced were required to accept an extension
of their vesting schedule. The other terms of the options remained unchanged. On
April 28, 1997, the Company amended 852 options pursuant to this offer.
33
<PAGE>
In December 1998, the Company granted option holders under its stock option
plans with options at a price over $5.00 per share to have those options
repriced to the then current fair market value of the Company's common stock of
$3.50 per share. The other terms of the options remained unchanged. In December
1998, the Company amended 162 options pursuant to this offer.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $1.54, $2.12, and $4.26, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: 1998 expected dividend yield 0%, risk-free interest rate of 4.98%,
expected volatility of 80% and expected life of 3.2 years; 1997 expected
dividend yield 0%, risk-free interest rate of 6.32%, expected volatility of 57%,
and expected life of 3.2 years; 1996 expected dividend yield 0%, risk-free
interest rate of 6.25%, expected volatility of 57% and expected life of 4 years.
The per share weighted-average fair value of employees' stock purchase
rights under the Purchase Plan included in the pro forma amounts was estimated
using the Black-Scholes model with the following assumptions: 1998 dividend
yield of 0%, expected life of 15 months, expected volatility of 80% and
risk-free interest rate of 4.97%; 1997 expected dividend yield of 0%, expected
life of 6 months, expected volatility of 57% and risk-free interest rate of
5.31%; 1996 expected dividend yield of 0%, expected life of 6 months, expected
volatility of 57% and risk free rate of 6.25%. The weighted-average fair value
of purchase rights granted in 1998, 1997 and 1996 was $1.28, $1.89 and $4.39,
respectively.
The Company uses the intrinsic value method in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for these plans in the financial statements. Had the Company
determined compensation cost for its stock-based compensation plans under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amounts indicated below:
Years ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
Net loss:
As reported........................... $5,084 $6,700 $5,240
Pro forma............................. 6,262 8,146 5,870
Basic and diluted net loss per share:
As reported........................... $ 0.48 $ 0.65 $ 0.68
Pro forma............................. 0.59 0.79 0.77
Pro forma net income reflects only options granted in 1998, 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options' vesting
period of three to four years and compensation cost for options granted prior to
January 1, 1995, is not considered.
Warrants
In conjunction with various financing arrangements in 1994, 1995 and 1998,
the Company issued warrants to purchase 53 shares of common stock at prices
ranging from $1.50 per share to $18.16 per share and 7 shares of Series B
redeemable preferred stock now exercisable for common stock in lieu of the
preferred stock at $2.24 per share. These warrants expire at various dates
through 2004.
34
<PAGE>
(8) Commitments and Contingencies
Leases
The Company leases its facilities and certain equipment under operating
lease agreements. The equipment operating leases expire in 1999 and the
facilities lease expires in 2005. Additionally, the Company leases certain
equipment under capital lease agreements. These leases expire at various dates
through 2000. Future minimum lease payments as of December 31, 1998 are as
follows:
Capital Operating
leases leases
------ ------
1999 ............................................. 121 511
2000 ............................................. 15 480
2001 ............................................. -- 499
2002 ............................................. -- 517
2003 ............................................. -- 535
Thereafter ....................................... -- 930
------ ------
Future minimum lease payments .................... 136 $3,472
======
Less amount representing interest ................ 8
------
Present value of future minimum lease payments ... 128
Less current portion ............................. 115
------
Long-term portion ................................ $ 13
======
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $664, $660 and $367, respectively.
Employee Benefit Plan
The Company has a 401(k) plan that allows eligible employees to contribute
up to 20% of their compensation to a statutory maximum amount. Employee
contributions and earnings thereon vest immediately. The Company may make
discretionary contributions to the 401(k) plan; none have been made to date.
Legal Actions
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.
As part of the financial results for the third quarter of 1998, the Company
announced that the distribution relationship with Ascii Something Good
Corporation (now known as I4 Corporation, a Japanese corporation) ("ASG") had
been terminated by Worldtalk for ASG's failure to make agreed payments for
software product fees and maintenance then totaling approximately $1.7 million
for the first and second quarters of 1998. On December 11, 1998, the Company
filed a lawsuit against ASG in the United States District Court for the Northern
District of California, which case was assigned Case Number C-98-21231. The
Complaint alleges the breach by ASG of the Distribution Agreement by ASG through
default of its payment obligations. The lawsuit seeks payment of unpaid
balances, currently in excess of $2.7 million, interest thereon, and reasonable
attorneys' fees and costs. ASG has until May 12, 1999 in which to respond to the
Complaint.
(9) International Sales and Major Customers
International license sales accounted for 28% and 37% of the Company's
total software license revenues in 1998 and 1997, respectively. In 1998 and
1997, sales to one customer, ASG, accounted for 18% and 14%, respectively, of
the Company's total software license revenue. In 1998, sales to one customer,
Securities Dynamics Technologies, Inc. ("SDTI"), accounted for 17% of the
Company's total software license revenue. No other single customer accounted for
greater than 10% of the Company's total software license revenue in 1998, 1997
or 1996.
35
<PAGE>
(10) Segment Information
The Company operates in the United States and internationally and derives
its revenue from software license sales and associated services of Internet
content security and policy management solutions and e-mail productivity
products. In 1998 and continuing into 1999, the Company's sales, marketing, and
development efforts will be almost entirely focused on the server based
WorldSecure product line.
Geographic Information
Years ended December 31,
------------------------
1998 1997
------ ------
Software license revenue:
United States .......................... $6,937 $4,326
All other countries .................... 2,694 2,534
------ ------
Total .................................. $9,631 $6,860
====== ======
Product Line Information
Years ended December 31,
------------------------
1998 1997
------ ------
Software license revenue:
WorldSecure Server ..................... $6,980 $1,119
All other products ..................... 2,651 5,741
------ ------
Total .................................. $9,631 $6,860
====== ======
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company, their ages and their
positions with the Company are provided in the table below. The other
information called for by Item 10 is incorporated by reference to the
Registrant's Proxy Statement being sent to stockholders in connection with the
1999 Annual Meeting of Stockholders to be held on June 11, 1999 (the "Proxy
Statement").
Name Age Position
---- --- --------
Bernard J. Harguindeguy 40 President, Chief Executive Officer and Director
Todd Hagen 39 Vice President, Finance and Administration,
Chief Financial Officer and Secretary
Robert D. Dickinson 33 Vice President, Engineering-- Bellevue
Simon Khalaf 33 Vice President, Marketing
Joseph Longo 45 Vice President, Consulting and Customer Services
Colin Crosby 55 Vice President, Sales
Eric Colard 39 Vice President, Business Development
Max D. Hopper 64 Director
David J. Cowan 33 Director
Anthony Sun 46 Director
Wade Woodson 40 Director
Executive officers serve at the pleasure of the Board of Directors of the
Company.
Mr. Harguindeguy has served as Worldtalk's President since April 1997 and
as Worldtalk's Chief Executive Officer and a director since July 1997. From
April 1997 to July 1997, Mr. Harguindeguy also served as the Company's Chief
Operating Officer. From December 1996 to March 1997, he served as Vice
President, Marketing
36
<PAGE>
and Business Development for Worldtalk. From August 1994 to December 1996, Mr.
Harguindeguy served as Vice President, Marketing of emotion Inc., a company
focused on the delivery of digital video and graphics over public and private
networks. From February 1989 to August 1994, he served at Novell, Inc. in
various management positions, including acting general manager and Vice
President of marketing for the Enterprise Division. Mr. Harguindeguy holds a
Masters in Engineering Management from Stanford University and a Bachelor of
Science in Electrical Engineering from University of California, Irvine.
Mr. Hagen has served as Vice President, Finance and Administration, Chief
Financial Officer and Secretary of Worldtalk from May 1998 to present. From
November 1994 to May 1998, Mr. Hagen served as Vice President, Finance and
Administration, and Chief Financial Officer of HyperMedia Communications, Inc.,
an Internet publisher. Previous to that position, Mr. Hagen was Vice President
of Finance and Chief Financial Officer at Coactive Computing Corporation, a
computer networking company, and Resumix, Inc., a human resources software
company. Mr. Hagen holds a Masters in Business Administration in Finance and
Accounting from the Anderson Graduate School of Management at UCLA and a
Bachelor in Science in Finance and Marketing from the Wharton School at the
University of Pennsylvania.
Mr. Dickinson has served as Vice President, Engineering -- Bellevue for
Worldtalk since December 1997. From November 1996 to December 1997, he served as
Director, Research and Development for the Deming Internet Security division of
the Company. In December 1995, Mr. Dickinson founded Deming Software, Inc., a
developer of electronic mail security solutions. He served as President, CEO and
Chairman of Deming Software, Inc. from December 1995 until its merger with
Worldtalk in November 1996. From June 1991 to November 1995, he served in
various executive positions and was a member of the board of directors of
ConnectSoft, Inc., a communications software development and consulting firm.
From June 1988 to May 1991, he held various product development positions at
Boeing Company. Mr. Dickinson received a Bachelor of Arts in Business
Administration from Washington State University.
Mr. Longo has served as Vice President, Consulting and Customer Services of
Worldtalk from April 1997 to current. Previously, he served as Director of
Professional Services for the Company from January 1995 to April 1997. From May
1989 to January 1995, Mr. Longo held various positions including his last
position as the Director of Custom Engineering at The Santa Cruz Operation,
Inc., a supplier of UNIX operating systems for Intel PC's. Mr. Longo has a
Bachelor of Science degree in Applied Sciences and Computer Science from RMIT
(Melbourne, Australia).
Mr. Khalaf has served as Worldtalk's Vice President, Marketing from
November 1996 to current. Previously, he served as Director of Product Marketing
for the Company, from January 1996 to October 1996. From August 1994 to December
1995, Mr. Khalaf was a Product Line Manager for Worldtalk. Prior to that, he was
an Engineering Team Lead for the Company from October 1993 to July 1994. From
March 1992 to September 1993, he was a Senior Software Engineer for Worldtalk.
Before joining Worldtalk, Mr. Khalaf was a Senior Engineer at Touch
Communications Inc., a software company specializing in OSI Protocol
Development. Mr. Khalaf has received a Bachelor of Science degree in Engineering
from the American University of Beirut.
Mr. Crosby has served as the Vice President of Worldwide sales since
November of 1998 joining Worldtalk after working for the previous year as a
consultant in various privately held startup companies. Mr. Crosby was with
Oracle from August 1994 to March of 1997, his last position being Vice President
of Sales Operations for the North American Channel program. Prior to Oracle Mr.
Crosby was employed by Tandem Computers for 7 years holding a number of
positions including Vice President of Commercial sales for Tandem Canada. Mr.
Crosby began his career with Univac after his honorable discharge from the
Marine Corps. Mr. Crosby did his undergraduate studies in Business
Administration at New York University and post graduate level studies in the
Executive MBA program at the University of Western Ontario.
Mr. Colard has served as Vice President, Business Development for Worldtalk
since October 1998. From July 1997 to October 1998, he served as Director of
Business Development. From July 1991 to June 1997, Mr. Colard
37
<PAGE>
held various positions including his last position as acting Director of
Business Development for the Internet Infrastructure Division at Novell, Inc., a
supplier of networking and directory-based software. From September 1984 to July
1991, Mr. Colard held various marketing and software development positions at
Alcatel, Cap Gemini Telecom and Societe Generale in the USA, France and Italy.
Mr. Colard has a Masters of Science degree in Computer Science and
Telecommunications from Ecole Nationale Superieure des Telecommunications (ENST)
Paris, France.
Mr. Hopper has served as a director of the Company since September 1995. He
has been Principal and Chief Executive Officer of Max D. Hopper & Associates, a
consulting and information management firm since January 1995. From November
1985 to January 1995, Mr. Hopper served AMR Corporation as Chairman of the SABRE
Group and Senior Vice President, Information Systems. Mr. Hopper is a director
of Gartner Group, VTEL Corporation, USDATA Corporation, Payless Cashways, Inc.,
United Stationers, Inc., Metrocall, Inc., and Exodus Communications, Inc. Mr.
Hopper holds a Bachelor of Science in Mathematics from the University of
Houston.
Mr. Cowan has served as a director of the Company since March 1993. He is a
general partner of Deer II & Co., a venture capital investment firm that is the
general partner of Bessemer Venture Partners III, L.P., with which he has been
affiliated since August 1992. Mr. Cowan is a director of Finjan, Inc., a
provider of Java security software, VeriSign, Inc., an Internet security
company, and Flycast, an Internet advertising exchange. Mr. Cowan received his
A.B. degree in Math and Computer Science and his Master of Business
Administration degree from Harvard University.
Mr. Sun has served as a director of the Company since March 1995. He has
been a general partner of Venrock Associates, a venture capital firm, since
1979. He is a director of Cognex Corporation, a computer systems company,
Phoenix Technologies Ltd., a computer systems software company, Komag Inc., a
computer storage component company and 3Dfx Interactive, Inc., a real-time 3D
semiconductor company. He is also a director of several private companies. Mr.
Sun received S.B.E.E, S.M.E.E. and Engineer degrees from the Massachusetts
Institute of Technology and a Master of Business Administration degree from
Harvard University.
Mr. Woodson has served as a director of the Company since March 1993. He is
a general partner with Sigma Partners, a venture capital organization, with
which he has been affiliated since 1987. He is also a director of several
private companies. Mr. Woodson received his B.S. in Electrical Engineering from
Stanford University, his J.D. degree from Harvard University and his Masters in
Business Administration degree from the University of California, Berkeley.
ITEM 11. Executive Compensation
Incorporated by reference from the information under the caption "Executive
Compensation" in the Company's Proxy Statement to be filed in connection with
the 1999 Annual Meeting of Stockholders.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the information under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with the 1999 Annual Meeting of
Stockholders.
ITEM 13. Certain Relationships and Related Transactions
Incorporated by reference from the information under the caption "Certain
Transactions" in the Company's Proxy Statement to be filed in connection with
the 1999 Annual Meeting of Stockholders.
38
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a)(1) Financial Statements and Financial Statement Schedules. The following
financial statements are filed as part of this report on Form 10-K
beginning on page 18 under the caption, "Item 8. Financial Statements
and Supplementary Data."
Independent Auditors' Report
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statements of Operation for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31
1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Schedule II -- Valuation and Qualifying Accounts
(b) Report on Form 8-K
None
39
<PAGE>
(c) Exhibits:
Exhibit No. Description
----------- -----------
2.01 Agreement and Plan of Reorganization between Registrant and
Worldtalk Corporation, a California corporation, and material
exhibits thereto (A)
2.02 Agreement and Plan of Merger dated as of November 12, 1996 by
and between Worldtalk Merger corporation and Deming Software,,
Inc. (B)
2.03 Escrow Agreement dated November 12, 1996 among Registrant, the
Deming Shareholders, Robert D. Dickinson, as Representative,
and Harris Trust and Savings Bank, as Escrow Agent. (B)
3.01 Registrant's Certificate of Incorporation. (A)
3.02 Registrant's Certificate of Designation. (A)
3.03 Registrant's Certificate of Elimination. (A)
3.04 Registrant's Bylaws. (A)
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(A)
4.02 Third Amended and Restated Registration Rights Agreements
between Registrant and certain investors dated March 3, 1996,
as amended. (A)
4.03 Shareholders' Agreement dated November 12, 1996 among
Registrant, Deming and the Deming Shareholders. (B)(1)
10.01 Registrant's 1992 Stock Option Plan and related documents.
(A)(3)
10.02 Registrant's 1996 Equity Incentive Plan and related documents.
(A)(3)
10.03 Registrant's 1996 Directors Stock Option Plan and related
documents (A)(3)
10.04 Registrant's 1996 Employee Stock Purchase Plan and related
documents (A)(3)
10.05 Form of Identification Agreement to be entered into by
Registrant with each of its directors and executive officer.
(A)(3)
10.06 Lease Agreement, dated June 15, 1995, between Registrant and
John Arrillaga. (A)
10.07 Consulting and Development Services Agreement and Copyright
Assignment between Microsoft Corporation and Registrant dated
September 7, 1995. (A)(1)
10.08 Restricted Stock Purchase Agreement, dated December 15, 1995,
between Registrant and Max Hopper. (A)(3)
10.09 Secured Full Recourse Promissory Note and related Security
Agreement, dated October 24, 1996, between Registrant and
Christopher J. Andrews. (C)(3)
10.10 Agreement and Plan of Reorganization dated as of November 9,
1996 by and among Registrant, Deming Software, Inc. and the
Deming Shareholders. (B)(1)
10.11 Form of Employment Agreement entered into by Deming with each
of the Deming Shareholders on November 12, 1996. (B)
10.12 Amendment to Loan and Security Agreement, dated January 9,
1997, between Registrant and General Bank (D)
10.13 Form of Employment Agreement, dated January 23, 1997, between
Registrant and Christopher J. Andrews, Simon A. Khalaf and
Sathvik Krishnamurthy (D)(3)
10.14 Form of Employment Agreement, dated January 23, 1997, between
Registrant and Stephen R. Bennion, Steve M. Goldner and Mark
A. Jung (D)(3)
10.15 Separation, Consulting and Release Agreement dated July 23,
1997 between Mark A. Jung and the Registrant (E)(1)(3)
10.16 Settlement, Consulting and Release Agreement dated July 15,
1997 between Christopher Andrews and the Registrant (E)(1)(3)
10.17 Settlement, Consulting and Release Agreement dated July 15,
1997 between Steven Goldner and the Registrant (E)(1)(3)
10.18 Secure Messaging Distribution Agreement between Registrant and
Security Dynamics Technologies, Inc., dated September 8, 1997
(F)(1)
10.19 License and Distribution Agreement between Registrant and
ASCII Something Good Corporation, dated September 8, 1997
(F)(1)
10.20 Employment Termination Agreement dated April 10, 1998 with
Stephen R. Bennion (G)(1)(2)
10.21 Employment Termination Agreement dated June 29, 1998 with
Sathvik Krisnamurthy (G)(1)(2)
40
<PAGE>
Exhibit No. Description
----------- -----------
10.22 Form of Employment Agreement entered into with each of its
executive officers (H)(2)
10.23 Loan and Security Agreement, dated December 30, 1998, between
Registrant and Silicon Valley Bank (I)
23.01 Consent of Independent Auditors (I)
27.01 Financial Data Schedule (I)
- ----------
(1) Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions have been filed separately with the
Securities and Exchange Commission.
(2) Management contract or compensatory plan.
(A) Incorporated by reference to the Exhibits to the Company's Registration
Statement on form S-1, as amended (File No. 333-1482) as declared effective
by the Securities and Exchange Commission.
(B) Incorporated by reference to the Exhibits to the Company's report on Form
8K, as amended (File No. 0-27886) filed with the Securities and Exchange
Commission on November 12, 1996.
(C) Incorporated by reference to the Exhibits to the Company's report on Form
10K (File No. 0-27886) filed with the Securities and Exchange Commission on
March 31, 1997.
(D) Incorporated by reference to the Exhibits to the Company's report on Form
10Q (File No. 0-27886) filed with the Securities and Exchange Commission on
May 14, 1997.
(E) Incorporated by reference to the Exhibits to the Company's report on Form
10Q (File No. 0-27886) filed with the Securities and Exchange Commission on
November 14, 1997.
(F) Incorporated by reference to the Exhibits to the Company's report on Form
10K (File No. 0-27886) filed with the Securities and Exchange Commission on
March 31, 1998.
(G) Incorporated by reference to the Exhibits to the Company's report on Form
10Q/A (File No. 0-27886) filed with the Securities and Exchange Commission
on September 4, 1998.
(H) Incorporated by reference to the Exhibits to the Company's report on Form
10Q/A (File No. 0-27886) filed with the Securities and Exchange Commission
on November 13, 1998.
(I) Filed herewith.
41
<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: March 31, 1999
WORLDTALK COMMUNICATIONS
CORPORATION
By: /s/ TODD HAGEN
--------------------------------------
Todd Hagen
Vice President, Finance and
Administration,
Chief Financial Officer and Secretary
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of registrant and in
the capacities and on the dates indicated.
<CAPTION>
<S> <C> <C>
/s/ BERNARD HARGUINDEGUY President and Chief Executive Officer March 31, 1999
- ---------------------------
/s/ TODD HAGEN Vice President, Finance and Administration, Chief March 31, 1999
- --------------------------- Financial Officer and Secretary (Principal
Accounting Officer)
/s/ WADE WOODSON Director March 31, 1999
- ---------------------------
/s/ MAX HOPPER Director March 31, 1999
- ---------------------------
/s/ DAVID COWAN Director March 31, 1999
- ---------------------------
/s/ ANTHONY SUN Director March 31, 1999
- ---------------------------
</TABLE>
42
<PAGE>
SCHEDULE II
<TABLE>
WORLDTALK COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
Deductions:
Balance at Write-offs
Beginning of of Balance at
Classification Year Additions Accounts End of year
- -------------- ---- --------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1998.............. $ 121 $1,720 (1) $ (1) $1,840
===== ========= ==== ======
Year ended December 31, 1997.............. $ 149 $ 41 $(69) $ 121
===== ==== ==== ======
Year ended December 31, 1996.............. $ 150 $ 10 $(11) $ 149
===== ==== ==== ======
<FN>
(1) As a result of the termination and associated non-payments, Worldtalk
established an allowance for doubtful accounts for the full amount of
approximately $1,700,000 owed by ASG.
</FN>
</TABLE>
43
<PAGE>
Exhibit No. Description
----------- -----------
2.01 Agreement and Plan of Reorganization between Registrant and
Worldtalk Corporation, a California corporation, and material
exhibits thereto (A)
2.02 Agreement and Plan of Merger dated as of November 12, 1996 by
and between Worldtalk Merger corporation and Deming Software,,
Inc. (B)
2.03 Escrow Agreement dated November 12, 1996 among Registrant, the
Deming Shareholders, Robert D. Dickinson, as Representative,
and Harris Trust and Savings Bank, as Escrow Agent. (B)
3.01 Registrant's Certificate of Incorporation. (A)
3.02 Registrant's Certificate of Designation. (A)
3.03 Registrant's Certificate of Elimination. (A)
3.04 Registrant's Bylaws. (A)
4.01 Form of Specimen Certificate for Registrant's Common Stock.
(A)
4.02 Third Amended and Restated Registration Rights Agreements
between Registrant and certain investors dated March 3, 1996,
as amended. (A)
4.03 Shareholders' Agreement dated November 12, 1996 among
Registrant, Deming and the Deming Shareholders. (B)(1)
10.01 Registrant's 1992 Stock Option Plan and related documents.
(A)(3)
10.02 Registrant's 1996 Equity Incentive Plan and related documents.
(A)(3)
10.03 Registrant's 1996 Directors Stock Option Plan and related
documents (A)(3)
10.04 Registrant's 1996 Employee Stock Purchase Plan and related
documents (A)(3)
10.05 Form of Identification Agreement to be entered into by
Registrant with each of its directors and executive officer.
(A)(3)
10.06 Lease Agreement, dated June 15, 1995, between Registrant and
John Arrillaga. (A)
10.07 Consulting and Development Services Agreement and Copyright
Assignment between Microsoft Corporation and Registrant dated
September 7, 1995. (A)(1)
10.08 Restricted Stock Purchase Agreement, dated December 15, 1995,
between Registrant and Max Hopper. (A)(3)
10.09 Secured Full Recourse Promissory Note and related Security
Agreement, dated October 24, 1996, between Registrant and
Christopher J. Andrews. (C)(3)
10.10 Agreement and Plan of Reorganization dated as of November 9,
1996 by and among Registrant, Deming Software, Inc. and the
Deming Shareholders. (B)(1)
10.11 Form of Employment Agreement entered into by Deming with each
of the Deming Shareholders on November 12, 1996. (B)
10.12 Amendment to Loan and Security Agreement, dated January 9,
1997, between Registrant and General Bank (D)
10.13 Form of Employment Agreement, dated January 23, 1997, between
Registrant and Christopher J. Andrews, Simon A. Khalaf and
Sathvik Krishnamurthy (D)(3)
10.14 Form of Employment Agreement, dated January 23, 1997, between
Registrant and Stephen R. Bennion, Steve M. Goldner and Mark
A. Jung (D)(3)
10.15 Separation, Consulting and Release Agreement dated July 23,
1997 between Mark A. Jung and the Registrant (E)(1)(3)
10.16 Settlement, Consulting and Release Agreement dated July 15,
1997 between Christopher Andrews and the Registrant (E)(1)(3)
10.17 Settlement, Consulting and Release Agreement dated July 15,
1997 between Steven Goldner and the Registrant (E)(1)(3)
10.18 Secure Messaging Distribution Agreement between Registrant and
Security Dynamics Technologies, Inc., dated September 8, 1997
(F)(1)
10.19 License and Distribution Agreement between Registrant and
ASCII Something Good Corporation, dated September 8, 1997
(F)(1)
10.20 Employment Termination Agreement dated April 10, 1998 with
Stephen R. Bennion (G)(1)(2)
10.21 Employment Termination Agreement dated June 29, 1998 with
Sathvik Krisnamurthy (G)(1)(2)
10.22 Form of Employment Agreement entered into with each of its
executive officers (H)(2)
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Exhibit No. Description
----------- -----------
10.23 Loan and Security Agreement, dated December 30, 1998, between
Registrant and Silicon Valley Bank (I)
23.01 Consent of Independent Auditors (I)
27.01 Financial Data Schedule (I)
- ----------
(1) Confidential treatment has been granted with respect to certain portions of
this agreement. Such portions have been filed separately with the
Securities and Exchange Commission.
(2) Management contract or compensatory plan.
(A) Incorporated by reference to the Exhibits to the Company's Registration
Statement on form S-1, as amended (File No. 333-1482) as declared effective
by the Securities and Exchange Commission.
(B) Incorporated by reference to the Exhibits to the Company's report on Form
8K, as amended (File No. 0-27886) filed with the Securities and Exchange
Commission on November 12, 1996.
(C) Incorporated by reference to the Exhibits to the Company's report on Form
10K (File No. 0-27886) filed with the Securities and Exchange Commission on
March 31, 1997.
(D) Incorporated by reference to the Exhibits to the Company's report on Form
10Q (File No. 0-27886) filed with the Securities and Exchange Commission on
May 14, 1997.
(E) Incorporated by reference to the Exhibits to the Company's report on Form
10Q (File No. 0-27886) filed with the Securities and Exchange Commission on
November 14, 1997.
(F) Incorporated by reference to the Exhibits to the Company's report on Form
10K (File No. 0-27886) filed with the Securities and Exchange Commission on
March 31, 1998.
(G) Incorporated by reference to the Exhibits to the Company's report on Form
10Q/A (File No. 0-27886) filed with the Securities and Exchange Commission
on September 4, 1998.
(H) Incorporated by reference to the Exhibits to the Company's report on Form
10Q/A (File No. 0-27886) filed with the Securities and Exchange Commission
on November 13, 1998.
(I) Filed herewith.
45
- --------------------------------------------------------------------------------
WORLDTALK COMMUNICATIONS CORPORATION EXHIBIT 10.01
- --------------------------------------------------------------------------------
This LOAN AND SECURITY AGREEMENT, dated as of December 30, 1998, is between
SILICON VALLEY BANK ("Bank") and WORLDTALK COMMUNICATIONS CORPORATION, a
Delaware corporation ("Borrower").
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1. Definitions. As used in this Agreement, the following terms shall
have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, (including fees and expenses of
appeal or review, or those incurred in any Insolvency Proceeding) whether or not
suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such
information.
"Borrowing Base" means an amount equal to 80% of Eligible
Accounts, as determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Collateral" means the property described on Exhibit A attached
hereto.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or
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indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Revolving Loan, Letter of Credit,
Term Loan, Exchange Contract or any other extension of credit by Bank for the
benefit of Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Credit
Extensions made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Default" means any condition or event which constitutes an Event
of Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon 10 days prior notification thereof to
Borrower in accordance with the provisions hereof. Unless otherwise agreed to by
Bank in writing, Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within 90
days of invoice date;
(b) Accounts with respect to an account debtor, 50% of whose
Accounts the account debtor has failed to pay within 90 days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed 25% of all Accounts to
the extent such obligations exceed the aforementioned percentage, except as
approved in writing by Bank;
(d) Accounts with respect to which the account debtor does not
have its principal place of business in the United States;
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(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof;
(f) Accounts with respect to which Borrower is liable to the
account debtor, but only to the extent of any amounts owing to the account
debtor (sometimes referred to as "contra" accounts, e.g. accounts payable,
customer deposits, credit accounts etc.);
(g) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(j) Accounts the collection of which Borrower or Bank reasonably
determines to be doubtful.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning set forth in Section 8.
"Exchange Contract" has the meaning set forth in Section 2.1.3.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means all right, title, and
interest of Borrower in any of the following, whether now existing or hereafter
acquired or created:
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products;
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(c) Any and all design rights;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents, Trademarks, or Mask Works, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Letter of Credit" means a letter of credit or similar
undertaking issued by Bank pursuant to Section 2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance (or any agreement to grant any of the
foregoing, whether or not contingent on the happening of any future event).
"Loan" means a Revolving Loan or a Term Loan.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated from time to time.
"Mask Works" means all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired;
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents, (iii)
the value or priority of Bank's security interests in the Collateral.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper held by Borrower.
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"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Patents means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Payment Date" means the first day of each calendar month.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) Loans to employees not at any time exceeding $200,000 in
aggregate amount; and
(c) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of
deposit maturing no more than one (1) year from the date of investment therein
issued by Bank, and (iv) any money market account maintained with a major mutual
fund investing in the foregoing or other liquid investments of equivalent credit
quality.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
over any of Bank's security interests;
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(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such Equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such Equipment;
(d) Leases or subleases and licenses or sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as a
whole, and any interest or title of a lessor, licensor or under any lease or
license provided that such leases, subleases, licenses and sublicenses do not
prohibit the grant of the security interest granted hereunder; and
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Quick Assets" means, as of any applicable date, the consolidated
cash, cash equivalents, and accounts receivable, all as determined in accordance
with GAAP; provided that no asset shall be a "Quick Asset" if it is subject to
any Lien or restriction on use other than liens or restrictions in favor of
Bank.
"Responsible Officer" means each of the President and the Chief
Financial Officer of Borrower.
"Revolving Commitment" means a credit extension of up to
$1,500,000.
"Revolving Loan" means a loan advance under the Revolving
Commitment.
"Revolving Maturity Date" means the last Business Day preceding
the first anniversary of the Closing Date.
"Schedule" means the schedule of exceptions delivered to the Bank
in connection herewith, if any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
"Subsidiary" means with respect to any Person, corporation,
partnership, company association, joint venture, or any other business entity of
which more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by such Person or one or more Affiliates of
such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses
except prepaid expenses, and (c) all reserves not already deducted from assets,
and (ii) Total Liabilities.
"Term Loan" means a credit extension of $250,000.
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"Term Loan Payment" has the meaning set forth in Section 2.1.5.
"Total Liabilities" means as of any applicable date, any date as
of which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks.
"UCC" means the California Uniform Commercial Code.
"Year 2000 Problem" means the inability of computers, as well as
embedded microchips in non-computing devices, to properly perform date-sensitive
functions with respect to certain dates prior to and after December 31, 1999.
1.2. Accounting and Other Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
and determinations made hereunder shall be made in accordance with GAAP. When
used herein, the term "financial statements" shall include the notes and
schedules thereto. In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including" and the
words "to" and "until" each mean "to but excluding." Periods of days referred to
in this Agreement shall be counted in calendar days unless otherwise stated.
References to the plural include the singular and to the singular include the
plural, references to any gender include any other gender, the part includes the
whole, the term "including" is not limiting, and the term "or" has, except where
otherwise indicated, the inclusive meaning represented by the phrase "and/or."
The words "hereof," "herein," "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Article, section, subsection, clause, exhibit and schedule
references are to this Agreement, unless otherwise specified. All of the
exhibits and schedules attached hereto shall be deemed incorporated herein by
reference. All terms contained in this Agreement which are not otherwise
specifically defined herein (including the term "good faith") shall have the
meanings provided by the UCC to the extent the same are used or defined therein.
1.3. No Presumption Against Any Party. Neither this Agreement nor any
other Loan Document nor any uncertainty or ambiguity herein or therein shall be
construed or resolved using any presumption against any party hereto or thereto,
whether under any rule of construction or otherwise. On the contrary, this
Agreement and the other Loan Documents have been reviewed by each of the parties
and their counsel and, in the case of any ambiguity or uncertainty, shall be
construed and interpreted according to the ordinary meaning of the words used so
as to fairly accomplish the purposes and intentions of all parties hereto.
2. LOAN AND TERMS OF PAYMENT
2.1. Credit Extensions. Borrower promises to pay to the order of Bank,
in lawful money of the United States of America, the aggregate unpaid principal
amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower
shall also pay interest on the unpaid principal amount of such Loans at rates in
accordance with the terms hereof.
2.1.1. (a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Revolving Loans to Borrower in an aggregate
outstanding amount not to exceed (i) the Revolving Commitment or the Borrowing
Base, whichever is less, minus (ii) the face amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit amounts) and minus
(iii) the Foreign Exchange Reserve. Subject to the
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terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time during the term of this
Agreement.
(b) Whenever Borrower desires an Revolving Loan, Borrower
will notify Bank by facsimile transmission or telephone no later than 3:00 p.m.
Pacific time, on the Business Day that such Revolving Loan is to be made. Each
such notification shall be promptly confirmed by a Payment/Loan Form in
substantially the form of Exhibit B hereto. Bank is authorized to make Loans
under this Agreement, based upon instructions received from a Responsible
Officer or a designee so designated by a Responsible Officer in writing, or
without instructions if in Bank's reasonable discretion such Loans are necessary
to meet Obligations which have become due and remain unpaid. Bank shall be
entitled to rely on any telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a written designee thereof, and Borrower
shall indemnify and hold Bank harmless for any damages or loss suffered by Bank
as a result of such reliance. Bank will credit the amount of Loans made under
this Section 2.1 to Borrower's deposit account.
(c) Interest Rate. Except as set forth in Section 2.3(b),
the outstanding principal amount of the Revolving Loans shall bear interest, on
the average daily balance thereof, at a per annum rate equal to 0.25 percentage
points above the Prime Rate.
(d) The Revolving Commitment shall terminate on the
Revolving Maturity Date, at which time all Revolving Loans and accrued interest
thereon shall be immediately due and payable.
2.1.2. Letters of Credit.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the
account of Borrower in an aggregate outstanding face amount not to exceed (i)
the lesser of the Revolving Commitment or the Borrowing Base, whichever is less,
minus (ii) the then outstanding principal balance of the Revolving Loans and
minus (iii) the Foreign Exchange Reserve. Each Letter of Credit shall have an
expiry date no later than the Revolving Maturity Date. All Letters of Credit
shall be, in form and substance, acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank's form of standard
Application and Letter of Credit Agreement.
(b) The obligation of Borrower to immediately reimburse
Bank for drawings made under Letters of Credit shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and such Letters of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any Letters of Credit other than
those proximately caused by Bank's own gross negligence or wilful misconduct.
(c) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such Letter of Credit, Bank shall treat such demand as
a Revolving Loan to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(d) Upon the issuance of any letter of credit payable in
a currency other than United States Dollars, Bank shall create a reserve under
the Revolving Commitment for letters of credit against fluctuations in currency
exchange rates, in an amount equal to ten percent (10%) of the face amount of
such letter of credit. The amount of such reserve may be amended by Bank from
time to time to account for fluctuations in the exchange rate. The availability
of funds under the Revolving Commitment shall be reduced by the amount of such
reserve for so long as such letter of credit remains outstanding.
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2.1.3. Foreign Exchange Contract; Foreign Exchange Settlements.
(a) Subject to the terms of this Agreement, Borrower may
enter into foreign exchange contracts (the "Exchange Contracts") not to exceed
in total amount (the "Contract Limit") (i) the lesser of the Revolving
Commitment or the Borrowing Base, minus (ii) the then outstanding principal
balance of the Revolving Loans and minus (iii) the outstanding amount under all
Letters of Credit (including drawn, but unpaid amounts), pursuant to which Bank
shall sell to or purchase from Borrower foreign currency on a spot or future
basis. Borrower shall not request any Exchange Contracts at any time it is out
of compliance with any of the provisions of this Agreement. All Exchange
Contracts must provide for delivery of settlement on or before 90 days after
issuance or in any case by the Revolving Maturity Date. The amount available
under the Revolving Commitment at any time shall be reduced by the following
amounts (the "Foreign Exchange Reserve") on any given day (the "Determination
Date"): (i) on all outstanding Exchange Contracts on which delivery is to be
effected or settlement allowed more than two business days after the
Determination Date, 10% of the gross amount of the Exchange Contracts; plus (ii)
on all outstanding Exchange Contracts on which delivery is to be effected or
settlement allowed within two business days after the Determination Date, 100%
of the gross amount of the Exchange Contracts.
(b) Bank may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs and is continuing or
(b) that there is no sufficient availability under the Revolving Commitment and
Borrower does not have available funds in its bank account to satisfy the
Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, and without
limitation of any applicable indemnities, Borrower agrees to reimburse Bank for
any and all fees, costs and expenses relating thereto or arising in connection
therewith.
(c) Borrower shall not permit the total gross amount of
all Exchange Contracts on which delivery is to be effected and settlement
allowed in any two business day period to be more than $100,000 (the "Settlement
Limit") nor shall Borrower permit the total gross amount of all Exchange
Contracts to which Borrower is a party, outstanding at any one time, to exceed
the Contract Limit. Notwithstanding the above, however, the amount which may be
settled in any 2 business day period may be increased above the Settlement Limit
up to, but in no event to exceed, the amount of the Contract Limit under either
of the following circumstances:
(i) if there is sufficient availability under
the Revolving Commitment in the amount of the Foreign Exchange Reserve as of
each Determination Date, provided that Bank in advance shall reserve the full
amount of the Foreign Exchange Reserve against the Revolving Commitment; or
(ii) if there is insufficient availability under
the Revolving Commitment, as to settlements within any two (2) business day
period, provided that Bank, in its sole discretion, may: (A) verify good funds
overseas prior to crediting Borrower's deposit account with Bank (in the case of
Borrower's sale of foreign currency); or (B) debit Borrower's deposit account
with Bank prior to delivering foreign currency overseas (in the case of
Borrower's purchase of foreign currency).
(d) In the case of Borrower's purchase of foreign
currency, Borrower in advance shall instruct Bank upon settlement either to
treat the settlement amount as an advance under the Revolving Commitment, or to
debit Borrower's account for the amount settled.
(e) Borrower shall execute all standard form applications
and agreements of Bank in connection with the Exchange Contracts and, without
limiting any of the terms of such applications and agreements, Borrower will pay
all standard fees and charges of Bank in connection with the Exchange Contracts.
(f) Without limiting any of the other terms of this
Agreement or any such standard form applications and agreement of Bank, Borrower
agrees to indemnify Bank and hold it harmless, from and
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against any and all claims, debts, liabilities, demands, obligations, actions,
costs and expenses (including, without limitation, attorneys' fees of counsel of
Bank's choice), of every nature and description which it may sustain or incur,
based upon, arising out of, or in any way relating to any of the Exchange
Contracts or any transactions relating thereto or contemplated thereby other
than those proximately caused by Bank's own gross negligence or wilful
misconduct.
2.1.4. Term Loan.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank shall make a Term Loan available to Borrower.
(b) Borrower shall pay 24 equal monthly installments of
principal in the amount of $10,416.67 each (the "Term Loan Payment"). Each Term
Loan Payment shall be due and payable on the first day of each calendar month
during the term hereof, commencing on February 1, 1999. Borrower's final Term
Loan Payment, due on January 1, 2001, shall include all outstanding Term Loan
principal plus all accrued interest not yet paid.
(c) The Term Loan shall bear interest at a rate equal to
0.50 percentage points above the Prime Rate.
2.2. Overadvances. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Bank pursuant to Section 2.1.1, 2.1.2 and 2.1.3
of this Agreement is greater than the lesser of (i) the Revolving Commitment or
(ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the
amount of such excess.
2.3. Default Rates, Payments, and Calculations.
(a) Default Rate. All Obligations shall bear interest,
from and after the occurrence and during the continuance of an Event of Default,
at a rate equal to five percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(b) Payments. Interest hereunder shall be due and payable
on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with
Bank, including, without limitation, Account Number 330104910 for payments of
principal and interest due on the Obligations and any other amounts owing by
Borrower to Bank. Bank will promptly notify Borrower of all debits which Bank
has made against Borrower's accounts. Any such debits against Borrower's
accounts in no way shall be deemed a set-off. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder.
(c) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a 360-day
year for the actual number of days elapsed.
2.4. Crediting Payments. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
and during the continuance of an Event of Default, the receipt by Bank of any
wire transfer of funds, check, or other item of payment, whether directed to
Borrower's deposit account with Bank or to the Obligations or otherwise, shall
be immediately applied to conditionally reduce Obligations, but shall not be
considered a payment in respect of the Obligations unless such payment is of
immediately available federal funds or unless and until such check or other item
of payment is honored when presented for payment. Notwithstanding
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anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.
2.5. Fees. Borrower shall pay to Bank the following:
(a) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(b) Bank Expenses. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses , not in excess
of $5,000, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6. Term. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect until the Loans and all interest thereon have
been fully and finally paid. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make Loans under this Agreement immediately
and without notice upon the occurrence and during the continuance of an Event of
Default.
3. CONDITIONS OF LOANS
3.1. Conditions Precedent to Initial Credit Extension. The obligation of
Bank to make the initial Credit Extension is subject to the condition precedent
that Bank shall have received, in form and substance satisfactory to Bank, the
following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) an intellectual property security agreement;
(d) financing statements (Forms UCC-1);
(f) a warrant to purchase 25,000 shares of Borrower's
common stock in the form and upon the terms previously agreed by Bank and
Borrower;
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(g) completion by the Bank of an audit of Borrower's
accounts on a basis satisfactory to Bank, except that the condition set forth in
this subsection (g) shall apply only to the first Revolving Loan and not to the
Term Loan;
(h) a completed report and survey with respect to the
vulnerability of Borrower to the Year 2000 Problem any remedial steps undertaken
by Borrower in connection with the Year 2000 Problem;
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(i) Certificate of Good Standing and of Foreign
Qualification (if applicable), together with evidence of an appropriate
fictitious name filing for each county, if any, in which Borrower does business
using any d/b/a or other fictitious name; and
(j) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2. Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Loan Form as
provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Loan Form and on the effective date of each Credit
Extension as though made at and as of each such date, and no Default shall have
occurred and be continuing, or would result from such Credit Extension. The
making of each Credit Extension shall be deemed to be a representation and
warranty by Borrower on the date of such Credit Extension as to the accuracy of
the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1. Grant of Security Interest. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt payment of any and all Obligations
and in order to secure prompt performance by Borrower of each of its covenants
and duties under the Loan Documents. Except as set forth in the Schedule, such
security interest constitutes a valid, first priority security interest in the
presently existing Collateral, and will constitute a valid, first priority
security interest in Collateral acquired after the date hereof. Borrower
acknowledges that Bank may place a "hold" on any Deposit Account pledged as
Collateral to secure the Obligations. Notwithstanding termination of this
Agreement, Bank's Lien on the Collateral shall remain in effect for so long as
any Obligations are outstanding.
4.2. Delivery of Additional Documentation Required. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3. Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1. Due Organization and Qualification. Borrower and each Subsidiary is
a corporation duly existing and in good standing under the laws of its state of
incorporation and is qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified and where the failure to be so
qualified would have a Material Adverse Effect.
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5.2. Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's corporate powers, have
been duly authorized, and are not in conflict with nor constitute a breach of
any provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound except to
the extent that certain intellectual property agreements prohibit the assignment
of the rights thereunder to a third party without the Borrower's or other
party's consent and the Loan Documents constitute an assignment. Borrower is not
in default under any agreement to which it is a party or by which it is bound,
which default could have a Material Adverse Effect.
5.3. No Prior Encumbrances. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4. Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor whose accounts are included in any
Borrowing Base Certificate as an Eligible Account.
5.5. Merchantable Inventory. All Inventory is in all material respects
of good and marketable quality, free from all material defects.
5.6. Intellectual Property. Except as set forth in the Schedule,
Borrower is the sole owner of the Intellectual Property Collateral, except for
non-exclusive licenses granted by Borrower to its customers in the ordinary
course of business. Each of the Patents of Borrower is valid and enforceable,
and no part of the Intellectual Property Collateral has been judged by any court
of competent jurisdiction to be invalid or unenforceable, in whole or in part,
and no claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party. Except for and upon the filing with the
United States Patent and Trademark Office with respect to the Patents and
Trademarks of Borrower and the Register of Copyrights with respect to the
Copyrights and Mask Works of Borrower necessary to perfect the security
interests created hereunder, and except as has been already made or obtained, no
authorization, approval or other action by, and no notice to or filing with, any
United States governmental authority or United States regulatory body is
required either (i) for the grant by Borrower of the security interest granted
hereby or for the execution, delivery or performance of Loan Documents by
Borrower in the United States or (ii) for the perfection in the United States or
the exercise by Bank of its rights and remedies hereunder.
5.7. Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business and will not without at least 30
days prior written notice to Bank do business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.8. Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could have a Material Adverse Effect.
5.9. No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
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5.10. Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulation U of the Board of Governors of the Federal Reserve
System). Borrower has complied with all the provisions of the Federal Fair Labor
Standards Act. Borrower has not violated any statutes, laws, ordinances or rules
applicable to it, violation of which could have a Material Adverse Effect.
5.11. Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to
Borrower's knowledge, by previous owners or operators, in the disposal of, or to
produce, store, handle, treat, release, or transport, any hazardous waste or
hazardous substance other than in accordance with applicable law; to Borrower's
knowledge, none of Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
hazardous waste or hazardous substance disposal site, or a candidate for closure
pursuant to any environmental protection statute; no lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned by Borrower or any Subsidiary; and neither Borrower nor
any Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the release, or other disposition of hazardous waste or
hazardous substances into the environment that has not been settled or
determined without a Material Adverse Effect.
5.12. Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed on a timely basis, and has paid, or
has made adequate provision for the payment of, all taxes reflected therein,
except those being contested in good faith by proper proceedings with adequate
reserves under GAAP.
5.13. Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14. Government Consents. Borrower and each Subsidiary has obtained all
material consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
5.15. Year 2000 Compliance. Borrower has conducted a comprehensive
review and assessment of Borrower's systems and equipment applications and made
inquiry of Borrower's key suppliers, vendors and customers with respect to the
Year 2000 Problem. Based on that review and inquiry, Borrower does not believe
the Year 2000 Problem, including costs of remediation, will have a Material
Adverse Effect. Borrower has developed adequate contingency plans to ensure
uninterrupted and unimpaired business operation in the event of a failure of its
own or a third party's systems or equipment due to the Year 2000 Problem,
including those of vendors, customers, and suppliers, as well as a general
failure of or interruption in its communications and delivery infrastructure.
5.16. Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
60 AFFIRMATIVE COVENANTS
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Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1. Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2. Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA and to comply, with all statutes,
laws, ordinances and government rules and regulations to which it is subject,
the failure to meet or noncompliance with which could have a Material Adverse
Effect.
6.3. Financial Statements, Reports, Certificates. Borrower shall deliver
to Bank: (a) as soon as available, but in any event within 90 days after the end
of Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (b) within five days after
filing, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission; (c) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of $250,000.00 or
more; (d) prompt notice of any material change in the composition of the
Intellectual Property Collateral, including, but not limited to, any subsequent
ownership right of Borrower in or to any Copyright, Patent or Trademark not
specified in any intellectual property security agreement between Borrower and
Bank or knowledge of an event that materially adversely effects the value of the
Intellectual Property Collateral; and (e) such budgets, sales projections,
operating plans or other financial information as Bank may reasonably request
from time to time.
Within 20 days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable.
At the time Borrower delivers each of its 10-K and 10-Q to Bank,
Borrower shall deliver to Bank a Compliance Certificate signed by a Responsible
Officer in substantially the form of Exhibit D hereto and calculated for the
relevant fiscal period and period end.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six months unless an Event of Default has
occurred and is continuing.
6.4. Inventory; Returns. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than
$50,000.00.
6.5. Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax
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payments and withholding taxes required of it by applicable laws, including, but
not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Bank
with proof reasonably satisfactory to Bank indicating that Borrower or a
Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment if the amount or validity of such payment
is (i) contested in good faith by appropriate proceedings , (ii) is reserved
against (to the extent required by GAAP) by Borrower and (iii) no lien other
than a Permitted Lien results.
6.6. Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as are reasonably satisfactory to Bank.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least 20
days notice to Bank before canceling its policy for any reason. At Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7. Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8. Quick Ratio. Borrower shall maintain as of the end of each fiscal
quarter, a ratio of Quick Assets to Current Liabilities minus deferred revenue
of at least 1.50 to 1.00.
6.9. Tangible Net Worth. Borrower shall maintain, as of the end of each
fiscal quarter, a Tangible Net Worth of not less than $2,000,000 plus the
cumulative positive net income (if any -- and without deduction for any net
loss) for each fiscal quarter ending on or after September 30, 1998.
6.10. Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be registered (to
the extent not already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those intellectual
property rights listed on Exhibits A, B and C to the Intellectual Property
Security Agreement delivered to Bank by Borrower in connection with this
Agreement within 30 days after the date of this Agreement. Borrower shall
register or cause to be registered with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those additional
intellectual property rights developed or acquired by Borrower from time to time
in connection with any product prior to the sale or licensing of such product to
any third party, including without limitation revisions or additions to the
intellectual property rights listed on such Exhibits A, B and C.
(b) Borrower shall execute and deliver such additional
instruments and documents from time to time as Bank shall reasonably request to
perfect Bank's security interest in the Intellectual Property Collateral.
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(c) Borrower shall (i) protect, defend and maintain the
validity and enforceability of Borrower's Patents, Copyrights, and Mask Works,
(ii) use reasonable, diligent efforts to detect infringements of the Trademarks,
Patents, Copyrights and Mask Works and promptly advise Bank in writing of
material infringements detected and (iii) not allow any Borrower's Trademarks,
Patents, Copyrights, or Mask Works to be abandoned, forfeited or dedicated to
the public without the written consent of Bank, which shall not be unreasonably
withheld or delayed, unless Bank determines that reasonable business practices
suggest that abandonment is appropriate.
(d) Bank shall have the right, but not the obligation, to
take, at Borrower's sole expense, any actions that Borrower is required under
this Section 6.10 to take but which Borrower fails to take, after 15 days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.10.
6.11. Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
70 NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Loans,
Borrower will not do any of the following:
7.1. Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than Transfers: (i) of inventory
in the ordinary course of business, (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; (iii) that constitute payment of normal and usual
operating expenses in the ordinary course of business;; or (iv) of worn-out or
obsolete Equipment.
7.2. Changes in Business, Ownership, or Management, Business Locations.
Engage in any business, or permit any of its Subsidiaries to engage in any
business, other than the businesses currently engaged in by Borrower and any
business substantially similar or related thereto (or incidental thereto), or
suffer a change in Borrower's ownership of greater than 50%. Borrower will not,
without at least 30 days prior written notification to Bank, relocate its chief
executive office or add any new offices or business locations.
7.3. Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person except, so
long as no Event of Default has occurred and is continuing or would exist after
giving effect to such action, (i) transactions as to which Borrower is the
surviving corporation and as to which Bank has consented (which consent shall
not unreasonable be withheld), and (ii) merger or consolidation of one
Subsidiary into another Subsidiary or into Borrower.
7.4. Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5. Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6. Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock other than repurchases at cost of stock held by any
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employee, director, or consultant of Borrower upon the termination of such
Person's employment or relationship with Borrower.
7.7. Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8. Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for (a) transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person and (b)
Permitted Investments.
7.9. Intellectual Property Agreements. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any provisions
that would in any way prevent the creation of a security interest in Borrower's
rights and interests in any property included within the definition of the
Intellectual Property Collateral acquired under such contracts, except to the
extent that such provisions are necessary in Borrower's exercise of its
reasonable business judgement upon notice to Bank.
7.10. Subordinated Debt. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.11. Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and software media and documentation maintained at Borrower's sales
offices in the ordinary course of business and except for such other locations
as Bank may approve in writing, Borrower shall keep the Inventory only at the
locations set forth in Section 10 hereof and such other locations of which
Borrower gives Bank prior written notice and as to which Borrower signs and
files a financing statement where needed to perfect Bank's security interest.
7.12. Compliance. Become an "investment company" or a company controlled
by an "investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Loan for such purpose; fail to
meet the minimum funding requirements of ERISA; permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, which
violation could have a Material Adverse Effect; or permit any of its
Subsidiaries to do any of the foregoing.
80 EVENTS OF DEFAULT
Any one or more of the following events shall constitute an "Event of
Default" by Borrower under this Agreement:
8.1. Payment Default. If Borrower fails to pay, when due, any of the
Obligations.
8.2. Covenant Default.
(a) If Borrower fails to perform any obligation under
Sections 6.3, 6.6, 6.7, 6.8, or 6.9 or violates any of the covenants contained
in Article 7 of this Agreement, or
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(b) If Borrower fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten days after the occurrence
thereof; provided that if the default cannot by its nature be cured within the
ten day period or cannot after diligent attempts by Borrower be cured within
such 10 day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed 30 days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Loans will be required to be made
during such cure period);
8.3. Material Adverse Effect. If there any Material Adverse Effect;
8.4. Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.5. Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 60 days (provided that no
Loans will be made prior to the dismissal of such Insolvency Proceeding);
8.6. Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of $100,000.00 or that could have a
Material Adverse Effect;
8.7. Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8. Judgments. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least $100,000.00 (in excess
of any applicable insurance coverage) shall be rendered against Borrower and
shall remain unsatisfied and unstayed for a period of ten days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment); or
8.9. Misrepresentations. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate or writing delivered to Bank by Borrower or any
Person acting on Borrower's behalf pursuant to this Agreement or to induce Bank
to enter into this Agreement or any other Loan Document.
90 BANK'S RIGHTS AND REMEDIES
9.1. Rights and Remedies. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
64
<PAGE>
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Liquidate any Exchange Contracts not yet settled and
demand that Borrower immediately deposit cash with Bank in an amount sufficient
to cover any losses incurred by Bank due to liquidation of the Exchange
Contracts at the then prevailing market price;
(e) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(f) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(g) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(h) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section 9.1,
to use, without charge, Borrower's labels, patents, copyrights, mask works,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and, in connection with Bank's exercise of its rights
under this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(i) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order it deems appropriate;
(j) Bank may credit bid and purchase at any public sale,
or at any private sale as permitted by law; and
65
<PAGE>
(k) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
(l) Bank shall have a non-exclusive, royalty-free license
to use the Intellectual Property Collateral to the extent reasonably necessary
to permit Bank to exercise its rights and remedies upon the occurrence of an
Event of Default.
9.2. Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; (f) to modify, in its
sole discretion, any intellectual property security agreement entered into
between Borrower and Bank without first obtaining Borrower's approval of or
signature to such modification by amending Exhibit A, Exhibit B, Exhibit C, and
Exhibit D, thereof, as appropriate, to include reference to any right, title or
interest in any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower
after the execution hereof or to delete any reference to any right, title or
interest in any Copyrights, Patents, Trademarks, or Mask Works in which Borrower
no longer has or claims any right, title or interest; (g) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (h) to transfer the Intellectual Property Collateral
into the name of Bank or a third party to the extent permitted under the UCC
provided Bank may exercise such power of attorney to sign the name of Borrower
on any of the documents described in Section 4.2 regardless of whether an Event
of Default has occurred. The appointment of Bank as Borrower's attorney in fact,
and each and every one of Bank's rights and powers, being coupled with an
interest, is irrevocable until all of the Obligations have been fully repaid and
performed and Bank's obligation to provide Loans hereunder is terminated.
9.3. Accounts Collection. Upon the occurrence and during the continuance
of an Event of Default, Bank may notify any Person owing funds to Borrower of
Bank's security interest in such funds and verify the amount of such Account.
Borrower shall collect all amounts owing to Borrower for Bank, receive in trust
all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4. Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then, as so long as such failure continues, Bank
may do any or all of the following: (a) make payment of the same or any part
thereof; (b) set up such reserves under the Revolving Commitment as Bank deems
necessary to protect Bank from the exposure created by such failure; or (c)
obtain and maintain insurance policies of the type discussed in Section 6.6 of
this Agreement, and take any action with respect to such policies as Bank deems
prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5. Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value
66
<PAGE>
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other person whomsoever. All such risk of loss, damage or
destruction of the Collateral shall be borne by Borrower.
9.6. Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the UCC, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7. Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
100 NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile (with receipt confirmed by telephone) to Borrower or to
Bank, as the case may be, at its addresses set forth below for such party on the
signature pages hereof. The parties hereto may change the address at which they
are to receive notices hereunder, by notice in writing in the foregoing manner
given to the other.
110 CHOICE OF LAW AND VENUE
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
120 GENERAL PROVISIONS
12.1. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided that neither this Agreement nor any rights hereunder may be
assigned by Borrower without Bank's prior written consent, which consent may be
granted or withheld in Bank's sole discretion. Bank shall have the right without
the consent of or notice to Borrower to sell, transfer, negotiate, or grant
participation in all or any part of, or any interest in, Bank's obligations,
rights and benefits hereunder.
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<PAGE>
12.2. Indemnification. Borrower shall , indemnify ,defend, protect and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3. Time of Essence. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4. Severability of Provisions. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5. Amendments in Writing, Integration. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged into this Agreement and the Loan Documents.
12.6. Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7. Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run ;
provided that so long as the Obligations referred to in the first sentence of
this Section 12.7 have been satisfied, and Bank has no commitment to make any
Credit Extensions or to make any other loans to Borrower, Bank shall release all
security interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8. Confidentiality. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or any time after such information becomes part of the public
domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to
Bank by a third party, provided Bank does not have actual knowledge that such
third party is prohibited from disclosing such information.
68
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
WORLDTALK COMMUNICATIONS CORPORATION
doing business as WORLDTALK CORPORATION
By /s/ Todd Hagen
------------------------------------------
Title: CFO
---------------------------------------
Address for Notices:
Attn: Chief Financial Officer or President
5155 Old Ironsides Drive
Santa Clara, CA 95054
SILICON VALLEY BANK
By: /s/ John China
------------------------------------------
Title: Vice President
---------------------------------------
Address for Notices:
Attn: John China
3003 Tasman Drive
Santa Clara, CA 95054
69
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower, whether now existing or hereafter acquired or created and wherever
located, in and to the following:
(a) All goods, equipment, machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing;
(b) All inventory, merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights, general intangibles, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications, leases,
license agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All accounts, contract rights, royalties, license rights and all
other forms of obligations owing to Borrower, whether or not arising out of the
sale or lease of goods, the licensing of technology or the rendering of services
by Borrower, and whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and chattel
paper and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished; all trade secret rights,
including all rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information; all mask work or
similar rights available for the protection of semiconductor chips; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
-1-
<PAGE>
EXHIBIT B
LOAN PAYMENT/LOAN ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ____________________
FAX#: (408) ____________________ TIME: ____________________
FROM: WORLDTALK COMMUNICATIONS CORPORATION
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE
PHONE: ____________________________
FROM ACCOUNT #________________________ TO ACCOUNT#__________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (Loan) $
--------
PRINCIPAL PAYMENT (ONLY) $
--------
INTEREST PAYMENT (ONLY) $
--------
PRINCIPAL AND INTEREST (PAYMENT) $
--------
OTHER INSTRUCTIONS: ___________________________________________________________
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Loan confirmed by this Loan Request;
provided that those representations and warranties expressly referring to
another date shall be true, correct and complete in all material respects as of
such date.
BANK USE ONLY:
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Authorized Requester: ________________________________________
Authorized Signature (Bank)
Phone # _______________________________________________
-1-
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: WORLDTALK COMMUNICATIONS CORPORATION
Commitment Amount: $
ACCOUNTS RECEIVABLE
10 Accounts Receivable Book Value as of $
-------- -------------------
20 Additions (please explain on reverse) $
-------------------
30 TOTAL ACCOUNTS RECEIVABLE $
-------------------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
40 Amounts over 90 days due $
-------------------
5. Balance of 50% over 90 day accounts $
-------------------
6. Concentration Limits $
-------------------
7. Foreign Accounts $
-------------------
8. Governmental Accounts $
-------------------
9. Contra Accounts $
-------------------
10. Promotion or Demo Accounts $
-------------------
11. Intercompany/Employee Accounts $
-------------------
12. Other (please explain on reverse) $
-------------------
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
-------------------
CALCULATION OF LOAN VALUE
14. Eligible Accounts (#3 minus #13) $
-------------------
15. LOAN VALUE OF ACCOUNTS (____% of #14) $
-------------------
BALANCES
16. Maximum Loan Amount $
-------------------
17. Total Funds Available [Lesser of #16 or #15] $
-------------------
18. Present balance owing on Line of Credit $
-------------------
19. Outstanding under Sublimits ( ) $
-------------------
20. RESERVE POSITION (#17 minus #18 and #19) $
-------------------
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
BORROWER: WORLDTALK COMMUNICATIONS CORPORATION
By: _______________________
Authorized Signer
-1-
<PAGE>
COMMENTS (FOR BANK USE ONLY):
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No___________________________
-2-
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: WORLDTALK COMMUNICATIONS CORPORATION ("Borrower")
The undersigned authorized officer of the above Borrower hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending with all required covenants except
as noted below and (ii) all representations and warranties of Borrower stated in
the Agreement are true and correct in all material respects as of the date
hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by Borrower at any time or date of determination
that Borrower is not in compliance with any specified terms of the Agreement,
and that such compliance is determined not just at the date this certificate is
delivered.
<TABLE>
Please indicate compliance status by circling Yes/No under "Complies"
column.
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C>
Quarterly financial statements Upon filing of 10-Q Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
Minimum Quick Ratio 1.50:1.00 _____:1.00 Yes No
Minimum Tangible Net Worth $__________* $__________ Yes No
<FN>
* $2,000,000 plus positive net income in each FQ ending on or after 9/30/98.
</FN>
</TABLE>
Sincerely,
_______________________ Date:_______________
SIGNATURE
_______________________
TITLE
BANK USE ONLY
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No
-1-
<PAGE>
<TABLE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<CAPTION>
<S> <C>
TO: SILICON VALLEY BANK
FROM: WORLDTALK COMMUNICATIONS CORPORATION ("Borrower")
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal amount up to $ .
--------------
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: _______________.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving Line
--------------
Amount paid to Borrower directly: $
--------
Undisbursed Funds $
--------
Principal $
--------
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the following charges:
Prepaid Finance Charges Paid in Cash: $
--------
$ Loan Fee
--------------
$ Accounts Receivables Audit
--------------
Other Charges Paid in Cash: $
-------
$ UCC Search Fees
---------------
$ UCC Filing Fees
---------------
$ Patent Filing Fees
---------------
$ Trademark Filing Fees
---------------
$ Copyright Filing Fees
---------------
$ Outside Counsel Fees and Expenses
--------------- [ESTIMATE, DO NOT LEAVE BLANK]
Total Charges Paid in Cash $
--------
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered _____________ the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF __________________ , 19___.
BORROWER:
By:____________________________________
Authorized Officer
-2-
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
TO: SILICON VALLEY BANK
FROM: WORLDTALK COMMUNICATIONS CORPORATION ("Borrower")
INSURANCE REQUIREMENTS. Borrower understands that insurance coverage is
required in connection with the extending of a loan or the providing of other
financial accommodations to Borrower by Bank. These requirements are set forth
in the Loan Documents. The following minimum insurance coverages must be
provided on the following described collateral (the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished without a
minimum of 20 days prior written notice to Bank.
INSURANCE COMPANY. Borrower may obtain insurance from any insurance
company Borrower may choose that is reasonably acceptable to Bank. Borrower
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Borrower agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of , 19___, or earlier. Borrower acknowledges and agrees that if
Borrower fails to provide any required insurance or fails to continue such
insurance in force, Bank may do so at Borrower's expense as provided in the Loan
and Security Agreement (the "Agreement"). The cost of such insurance, at the
option of Bank, shall be payable on demand or shall be added to the indebtedness
as provided in the Agreement. BORROWER ACKNOWLEDGES THAT IF BANK SO PURCHASES
ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST
PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER,
BORROWER'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE
INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral in
accordance with the Agreement, Borrower authorizes Bank to provide to any person
(including any insurance agent or company) all information Bank deems
appropriate, whether regarding the Collateral, the loan or other financial
accommodations, or both.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
_______________________ , 19___.
BORROWER: WORLDTALK COMMUNICATIONS CORPORATION
By:______________________________
Authorized Officer
-3-
<PAGE>
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
EXHIBIT 23.01
WORLDTALK COMMUNICATIONS CORPORATION
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Worldtalk Corporation:
We consent to incorporation by reference in the registration statements
(Nos. 333-62411, 333-3510 and 333-32925) on Form S-8 of Worldtalk Corporation of
our report dated January 28, 1999, relating to the consolidated balance sheets
of Worldtalk Corporation and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1998, and the related schedule, which report appears in the
December 31, 1998, annual report on Form 10-K of Worldtalk Corporation.
KPMG LLP
Mountain View, California
March 29, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,858
<SECURITIES> 2,166
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0
0
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<SALES> 13,448
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<CGS> 3,306
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<OTHER-EXPENSES> 15,600
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