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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-27328
DELTAPOINT, INC.
(Exact name of registrant as specified in its charter)
California 77-0216760
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
22 Lower Ragsdale, Monterey, CA 93940
(Address of principal executive offices)
408-648-4000
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of August 7, 1996: 2,222,243
Traditional Small Business Disclosure Format (check one) Yes No X
--- ---
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DELTAPOINT, INC.
INDEX
Page
----
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
June 30, 1996 (unaudited) and December 31, 1995 3
Condensed Statements of Operations (unaudited)
Three months and six months ended June 30, 1996 and 1995 4
Condensed Statements of Cash Flows (unaudited)
Six months ended June 30, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DELTAPOINT, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
JUNE 30, DEC. 31,
1996 1995
-------- -------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 2,802 $ 4,629
Accounts receivable, net of allowance for doubtful
accounts of $125 and $259 . . . . . . . . . . . . . 889 1,225
Inventories . . . . . . . . . . . . . . . . . . . . 117 182
Prepaid expenses and other current assets. . . . . . 195 194
-------- -------
Total current assets . . . . . . . . . . . . 4,003 6,230
Property and equipment, net. . . . . . . . . . . . . . 259 49
Purchased software, net . . . . . . . . . . . . . . . 398 438
Other assets . . . . . . . . . . . . . . . . . . . . . 29 47
-------- -------
$4,689 $6,764
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $ 1,075 $ 665
Accrued liabilities . . . . . . . . . . . . . . . . 1,919 2,202
Reserve for returns and exchanges. . . . . . . . . . 240 398
Current portion of capital lease obligations . . . . 5 50
-------- -------
Total current liabilities . . . . . . . . 3,239 3,315
Commitments and contingencies
Shareholders' equity :
Preferred stock, no par value, 4,000,000 shares
authorized, none issued or outstanding. . . . . --- ---
Common stock, no par value, 25,000,000 shares
authorized 2,222,243 and 2,025,243 shares
issued and outstanding . . . . . . . . . . . . . 13,057 12,267
Accumulated deficit. . . . . . . . . . . . . . . . . (11,607) (8,818)
-------- -------
Total shareholders' equity . . . . . . . . . 1,450 3,449
-------- -------
$ 4,689 $ 6,764
-------- -------
-------- -------
The accompanying notes are an integral part of these
condensed financial statements.
3
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DELTAPOINT, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------
1996 1995 1996 1995
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,133 $ 1,407 $ 1,893 $ 2,261
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . 283 365 621 714
--------- -------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 850 1,042 1,272 1,547
--------- -------- --------- ---------
Operating expenses:
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . 1,163 367 2,051 759
Research and development . . . . . . . . . . . . . . . . . . . 602 189 1,088 389
General and administrative . . . . . . . . . . . . . . . . . . 192 288 961 588
--------- -------- --------- --------
1,957 844 4,100 1,736
--------- -------- --------- ---------
Income (loss) from operations. . . . . . . . . . . . . . . . . . (1,107) 198 (2,828) (189)
Other income (expense) . . . . . . . . . . . . . . . . . . . . . 22 (37) 39 (61)
--------- -------- --------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ (1,085) $ 161 $ (2,789) $ (250)
--------- -------- --------- ---------
--------- -------- --------- ---------
Net income (loss) per share . . . . . . . . . . . . . . . . . . $ (0.49) $ 0.16 $ (1.27) $ (0.25)
--------- -------- --------- ---------
--------- -------- --------- ---------
Shares and share equivalents used in per share calculations. . . 2,217 1,001 2,193 1,001
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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DELTAPOINT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $(2,789) $(250)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . 102 77
Change in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 336 (440)
Inventories . . . . . . . . . . . . . . . . . . . . 65 35
Prepaid expenses and other current assets . . . . . (1) (89)
Accounts payable. . . . . . . . . . . . . . . . . . 410 (627)
Accrued liabilities . . . . . . . . . . . . . . . . (283) 228
Reserve for returns and exchanges . . . . . . . . . (158) 151
Deposits and other assets . . . . . . . . . . . . . 18 6
-------- --------
Net cash used in operating activities. . . . . . (2,300) (909)
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . (272) (16)
-------- --------
Net cash used in investing activities . . . . . (272) (16)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net . . . . . -- 1,050
Proceeds from issuance of common stock and warrants, net 790 6
Proceeds from line of credit . . . . . . . . . . . . . . -- 269
Repayment of note payable. . . . . . . . . . . . . . . . -- (299)
Repayment of capitalized lease obligations . . . . . . . (45) (99)
-------- --------
Net cash provided by financing activities. . . . 745 927
-------- --------
Increase (decrease) in cash and cash equivalents . . . . . (1,827) 2
Cash and cash equivalents at beginning of year . . . . . . 4,629 30
-------- --------
Cash and cash equivalents at end of period . . . . . . . . $ 2,802 $ 32
-------- --------
-------- --------
The accompanying notes are an integral part of these
condensed financial statements.
5
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DELTAPOINT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- THE COMPANY AND BASIS OF PRESENTATION:
Founded in 1989, DeltaPoint, Inc., has headquarters in Monterey, California.
DeltaPoint, Inc. is committed to providing customers with easy-to-use,
streamlined Internet, multimedia and desktop visualization software products. An
innovator in World Wide Web technologies and graphics tools, DeltaPoint provides
software that bridges the gap between Internet technologies and the mass market.
DeltaPoint develops and markets products for creation and management of World
Wide Web sites.
The condensed financial statements should be read in conjunction with the
audited financial statements contained in the Company's Annual Report on Form
10-KSB. In the opinion of management, all adjustments, including normal
recurring accruals, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows for the interim
periods presented have been made. The interim results are not necessarily
indicative of the results to be expected for the entire year.
NOTE 2 -- COMMITMENTS AND CONTINGENCIES:
CONTINGENCIES
On March 21, 1995, Ameriquest/Kenfil Inc. ("Kenfil") filed a complaint in the
Superior Court of the State of California before the county of Monterey naming
the Company as defendant and alleging (i) breach of a distribution agreement
between Kenfil and the Company and (ii) indebtedness to Kenfil for the sum of
$233,000 together with interest thereon at the rate of 10% per annum. Kenfil was
seeking damages, cost of suit and other relief. In April 1996 the Company
entered into a settlement agreement with Kenfil whereby the Company paid Kenfil
$50,000. Kenfil has filed a dismissal of the complaint with prejudice on April
26, 1996 with the Superior Court of California.
NOTE 3 - SHAREHOLDERS' EQUITY:
COMMON STOCK
Common stock as of June 30, 1996 reflects the January 1996 sale of
165,000 shares of common stock issued in the overallotment of the Company's
initial public offering and the exercise of 7,000 stock options from the 1995
Stock Option Plan. Aggregate net proceeds to the Company were $867,000. In
addition the Company incurred expenses of approximately $77,000 related to the
registration of common stock and common stock warrants as contemplated in the
Company's Series E Preferred Stock Offering. Such costs were netted against
common stock.
NOTE 4 - NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted-average number
of shares of common stock and common equivalent shares, when dilutive, from
mandatorily redeemable convertible preferred stock (using the if-converted
method) and from stock options and warrants (using the treasury stock method).
Pursuant to Securities and Exchange Commission Requirements, common and
common stock equivalent shares, options and warrants issued by the Company
during the 12-month period prior to the Company's initial public offering
have been included in the calculation as if they were outstanding for all
periods presented. Due to the net loss for the quarter and six month period
ended June 30, 1996, the common stock equivalents were excluded from the net
loss per share calculation.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THIS REPORT ON FORM 10-QSB 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
MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "RISK FACTORS" IN PART I OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB AT AND
FOR THE YEAR ENDED DECEMBER 31, 1995. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
DeltaPoint was incorporated on February 1, 1989 to design, develop and market
visualization software products for personal computers. DeltaPoint commenced
shipments of its initial product, DeltaGraph, at the end of 1989. In December
1995, the Company acquired technology to develop QuickSite, a Web site creation
and management tool which was released in February 1996. In November 1995, the
Company acquired technology which was required to develop WebAnimator, a
multimedia authoring tool for the Web which was released in July, 1996. The
Company plans to incur additional expenditures to develop Internet products that
incorporate these acquired technology over the next several quarters. Although
the Company has historically derived substantially all of its revenues from
visualization software products for desktop applications, the Company's strategy
is to realize a significant and growing percentage of future revenues from the
sale of its newly released and anticipated Internet products, as is reflected in
the quarter ended June 30, 1996.
Software product sales are recognized upon shipment of the product, net of
appropriate allowances for estimated returns. Revenues from software royalty and
packaging agreements are recognized upon shipment of a master copy of the
software product and packaging if no significant vendor obligations remain under
the terms of the license agreements and any amounts to be paid are
nonrefundable. Payments received in advance of revenue recognition are recorded
as deferred revenue. The Company grants distributors and resellers certain
rights of return, price protection and stock rotation rights on unsold
merchandise. Accordingly, reserves for estimated future returns, exchanges and
credits for price protection and stock rotation rights are accrued at the time
of shipment.
The Company's gross profit has historically fluctuated from quarter to quarter
based on the mix of revenues derived from software product sales. The Company's
gross profit has also fluctuated based on the mix of product revenues derived
from sales of the Company's higher-margin DeltaGraph product and sales of
lower-margin graphics utilities and Internet products where the Company must pay
royalties to third parties. The Company believes that these factors will impact
its gross profit for the foreseeable future.
The Company's limited operating history makes the prediction of future
operating results difficult or impossible. Future operating results will depend
on many factors, including demand for the Company's products, the mix of
revenues from product sales and royalty and packaging fees, the level of product
and price competition, the Company's success in expanding its direct sales
efforts for its visualization software products and indirect distribution
channels for its new or anticipated Internet products. The ability to achieve
revenue growth and profitability in the future will be significantly dependent
on the timely introduction and market acceptance of products the Company has
recently introduced or is developing and the ability of the Company to
successfully develop products for new and existing markets.
7
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
- -----------------------------------------
NET REVENUES. Net revenues for the three month period ended June 30, 1996
decreased by 19.5% to $1,133,000 from $1,407,000 for the corresponding period in
the prior year but increased by 49.1% from $760,000 for the three month period
ended March 31, 1996. The decrease in revenue for the corresponding period in
the prior year is primarily due to a new release of the Company's Japanese
version of DeltaGraph in the three month period ended June 30, 1995 and no
corresponding release of a Japanese version of DeltaGraph in the three month
period ended June 30, 1996. In addition, the decrease in revenue was due to the
refocus of the Company's business on the Internet market. For the three month
period ended June 30, 1996, international revenue decreased to 16.0% of net
revenues compared to 54.3% for the period ended June 30, 1995. The decrease in
international revenues was due to the above mentioned release of the Company's
Japanese version of DeltaGraph.
The increase in revenues from the first quarter to the second quarter of 1996
primarily reflects increased sales of the Company's QuickSite Web management and
creation tool which was released in the first quarter of 1996. The Company's
domestic and international sales are principally denominated in United States
dollars. Movements in currency exchange rates did not have a material impact on
the total revenue in the periods presented. However, there can be no assurance
that future movements in currency exchange rates will not have a material
adverse effect on the Company's future revenues and results of operations.
GROSS PROFIT. Gross profit for the three month period ended June 30, 1996
increased as a percentage of net revenues to 75.0% from 74.1% for the
corresponding period in the prior fiscal year and from 55.5% in the first
quarter of 1996. The increase in gross profit from the first three months of
1996 to the second three months of 1996 was due primarily to a write-off of
inventory in the first three months of 1996 due to the release of a new version
of DeltaGraph for Macintosh. The Company's gross profit has varied from quarter
to quarter as a result of changes in customer and product mix, inventory
write-offs due to new product releases, third party royalty obligations for
the Company's recently released Internet products and packaging revenues to the
Company's Japanese distributor.
SALES AND MARKETING. Sales and marketing expenses include sales commissions,
compensation of sales and marketing personnel and the cost of promotional
activities. Sales and marketing expenses for the three month period ended June
30, 1996 increased to $1,163,000 or 102.6% of net revenues compared to $367,000
or 26.1% of net revenues for the corresponding period in the prior year and
116.8% of net revenues in the first quarter of 1996. The increase in sales and
marketing expenses in absolute dollars and as a percentage of net revenues from
the second quarter of 1995 to the second quarter of 1996 was primarily due to
additional headcount and to an increase in the use of direct mail,
telemarketing, consultants, print advertising, tradeshows and channel promotions
used to promote QuickSite, WebAnimator and DeltaGraph. The Company expects that
sales and marketing expenses will increase in future periods because the Company
intends to add sales and marketing personnel to support the anticipated
introduction of new products and updated versions of the Company's existing
products.
RESEARCH AND DEVELOPMENT. Research and development expenses for the three
month period ended June 30, 1996 increased to $602,000 or 53.1% of net revenues
compared to $189,000 or 13.4% of net revenues for the corresponding period in
the prior year and $486,000 or 63.9% of net revenues for the first quarter of
1996. The increase in research and development expenses from the second quarter
of 1995 to the second quarter of 1996 was primarily due to a staffing increase
for the development of QuickSite, WebAnimator and DeltaGraph. In addition, the
Company retained several consultants to aid in the development process. The
Company expects that research and development expenses will increase in future
periods due to further development including the development of updated and
cross platform versions of the Company's existing products.
8
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GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
month period ended June 30, 1996 decreased to $192,000 or 16.9% of net revenues
compared to $288,000 or 20.5% of net revenues for the corresponding period in
the prior year and $769,000 or 101.2% of net revenues for the first quarter of
1996. The decrease in general and administrative expenses in absolute dollars
and as a percentage of net revenues from the second quarter of 1995 to the
second quarter of 1996 was primarily attributable to a bad debt write-off
during the three month period ended June 30, 1995 and no corresponding charge
in the three month period ended June 30, 1996. The Company expects that
general and administrative expenses will increase in future periods to the
extent that the Company expands its operations.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the three
month periods ended June 30, 1996 and 1995 due to net operating losses and the
availability of net operating loss carryforwards.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
---------------------------------------
NET REVENUES. Net revenues for the six month period ended June 30, 1996
decreased by 16.3% to $1,893,000 from $2,261,000 for the corresponding period in
the prior year. The decrease in revenue is primarily due to a new release of
the Company's Windows version of DeltaGraph for the U.S. and Japan in the six
month period ended June 30, 1995 and no corresponding releases of DeltaGraph for
Windows for the U.S. and Japan in the six month period ended June 30, 1996. In
addition, the decrease in revenue was due to the refocus of the Company's
business to the Internet market. For the six month period ended June 30, 1996,
international revenue decreased to 14.8% of net revenues compared to 42.5% for
the period ended June 30, 1995. The decrease in international revenue was due
to fewer Japanese license agreements and the timing of new product introductions
including DeltaGraph. The Company's domestic and international sales are
principally denominated in United States dollars. Movements in currency exchange
rates did not have a material impact on the total revenue in the periods
presented. However, there can be no assurance that future movements in currency
exchange rates will not have a material adverse effect on the Company's future
revenues and results of operations.
GROSS PROFIT. Gross profit for the six month period ended June 30, 1996
decreased as a percentage of net revenues to 67.2% from 68.4% for the
corresponding period in the prior fiscal year. The Company's gross profit
has varied from quarter to quarter as a result of changes in customer and
product mix, inventory write-offs due to new product releases, third party
royalty obligations for the Company's recently released Internet products
and packaging revenues to the Company's Japanese distributor. To the extent
that the newly released QuickSite and WebAnimator products increase in the
future as a percentage of the Company's overall net revenues and to the
extent that the Company continues to release updated versions of the existing
product line, the Company's gross profit as a percentage of revenues will
continue to vary.
SALES AND MARKETING. Sales and marketing expenses include sales commissions,
compensation of sales and marketing personnel and cost of promotional activities
and tradeshows. Sales and marketing expenses for the six month period ended
June 30, 1996 increased to $2,051,000 or 108.3% of net revenues compared to
$759,000 or 33.6% of net revenues for the corresponding period in the prior
year. The increase in sales and marketing expenses in absolute dollars and as a
percentage of net revenues was primarily due to an increase in headcount and an
increase in the use of direct mail, telemarketing, consultants, print
advertising, tradeshows and channel promotions used to promote QuickSite,
WebAnimator and DeltaGraph. The Company expects that sales and marketing
expenses will increase in future periods because the Company intends to add
sales and marketing personnel to support the anticipated introduction of new
products and updated versions of the Company's existing products.
9
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RESEARCH AND DEVELOPMENT. Research and development expenses for the six month
period ended June 30, 1996 increased to $1,088,000 or 57.5% of net revenues
compared to $389,000 or 17.2% of net revenues for the corresponding period in
the prior year. The increase in research and development expenses was primarily
due to a staffing increase for the development of QuickSite, WebAnimator and
DeltaGraph. In addition, the Company retained several consultants to aid in
the development process. The Company expects that research and development
expenses will increase in future periods due to further development including
the development of updated and cross platform versions of the Company's
existing products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six
month period ended June 30, 1996 increased to $961,000 or 50.8% of net revenues
compared to $588,000 or 26.0% of net revenues for the corresponding period in
the prior year. The increase in general and administrative expenses was
primarily attributable to a severance charge of $505,000 relating to the
departure of the Company's former Chief Executive Officer. The Company
expects that general and administrative expenses will increase in future
periods to the extent that the Company expands its operations.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the six
month periods ended June 30, 1996 and 1995 due to net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had a working capital balance of $764,000 and
shareholders' equity of $1,450,000, compared to a working capital balance of
$2,915,000 and shareholders' equity of $3,449,000 as of December 31, 1995. The
Company has financed its operations primarily through private and public sales
of equity securities, borrowings under a term loan and the private sale of debt
securities. Since inception, the Company has received approximately $13 million
in proceeds from private sales of preferred stock and from the Company's initial
public offering and the related overallotment exercise of common stock in
December 1995 and January 1996, respectively.
The Company used net cash in operations of $2,300,000 in the six month period
ended June 30, 1996 compared to net cash of $909,000 used in the six month
period ended June 30, 1995. Net cash used in the six month period ended June
30, 1996 consisted primarily of a net loss of $2,789,000, a decrease in
accrued liabilities of $283,000 and a decrease in reserve for returns and
exchanges as of $158,000 offset by an increase in accounts payable of $410,000,
a decrease in accounts receivable of $336,000 and a decrease in inventories of
$65,000.
Net cash provided by financing activities totaled $745,000 in the six month
period ended June 30, 1996 compared to $927,000 for the six month period ended
June 30, 1995. Net cash from financing activities in the six month period ended
June 30, 1996 consisted primarily of $831,000 in net proceeds from the Company's
overallotment from the initial public offering of common stock completed in 1995
and $36,000 in net proceeds from the exercise of stock options. In addition the
Company incurred expenses of approximately $77,000 related to the registration
of common stock and common stock warrants as contemplated in the Company's
Series E Preferred Stock Offering. Such costs were netted against common stock.
The Company also repaid capital lease obligations of $45,000.
The Company's capital expenditures related primarily to purchases of personal
computers and computer workstations to support the Company's development work
and other property and equipment. For the six month period ended June 30, 1996
the Company's capital expenditures totaled approximately $272,000.
The Company believes that its existing and available cash resources should be
sufficient to meet its cash requirements through 1996. Although operating
activities may provide cash in certain periods, the
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Company expects to continue to incur losses for at least the next two quarters.
In addition, to the extent the Company grows in the future, its operating and
investing activities may use cash. Consequently, such losses or growth are
expected to require the Company to obtain additional sources of financing.
The Company's actual capital needs, however, will depend on numerous factors,
including marketing activities and the amount of revenues generated from
operations, none of which can be predicted with certainty. There can be no
assurance that the Company will not require additional capital sooner than
currently anticipated. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all.
In particular, although the Company has borrowed funds in the past, there can
be no assurance that it can borrow funds in the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RECENT LOSSES; ACCUMULATED DEFICIT
The Company incurred a net loss of $2,789,000 for the six month period ended
June 30, 1996 and had an accumulated deficit of $11,607,000 as of June 30, 1996.
The Company expects to incur losses over at least the next two quarters, and
there can be no assurance that the Company will not incur additional losses
beyond such period until it successfully develops or acquires new products or
enhancements to existing products that generate significant revenues.
The Company's results of operations have historically varied substantially
from quarter to quarter and the Company expects this trend to continue. In the
past, the Company's operating results have varied significantly as a result of a
number of factors, including the size and timing of customer orders or license
agreements, product mix, revenues derived from product sales and license
fees, the existence of terms of royalty and packaging arrangements, seasonality,
the timing of the introduction and customer acceptance of new products or
product enhancements by the Company's competitors, new product or version
releases by the Company, changes in pricing policies by the Company or its
competitors, marketing and promotional expenditures, research and development
expenditures and changes in general economic conditions. Furthermore, the
Company has often recognized a substantial portion of its revenues in the last
month of the quarter, with these revenues frequently concentrated in the last
week or weeks of the quarter.
The Company's operating and other expenses are relatively fixed in the short
term. As a result, variations in timing of revenues can cause significant
variations in quarterly results of operations. For example, the Company plans on
continuing to make significant expenditures to enhance its sales and marketing
and research and development activities. The Company may be unable to reduce
these expenditures quickly if revenue is less than expected. The Company
generally does not operate with a significant order backlog and a substantial
portion of its revenue in any quarter is derived from orders booked in that
quarter, which are difficult to forecast and which are typically concentrated at
the end of the quarter. Accordingly, the Company's sales expectations are based
almost entirely on its internal estimates of future demand and not on firm
customer orders. Due to the foregoing factors, the Company believes that quarter
to quarter comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
In addition, there can be no assurance the Company will be profitable on a
quarter to quarter or any other basis in the future.
FUTURE CAPITAL NEEDS; NO ASSURANCE OF FUTURE FINANCING
The Company completed its initial public offering in December 1995 and the
overallotment in January 1996. The net proceeds to the Company were $5,978,000.
Although the Company expects such proceeds together with its existing capital to
be adequate through 1996, there can be no assurance that such capital will be
sufficient to satisfy the Company's operating requirements. The Company's
actual capital needs, however, will depend upon numerous factors, including the
progress of the Company's software
11
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development activities, the cost of increasing the Company's sales and marketing
activities and the amount of revenues generated from operations, none of which
can be predicted with certainty. There can be no assurance that the Company will
not require additional capital sooner than currently anticipated. There can be
no assurance that any additional financing will be available to the Company on
acceptable terms, or at all. The inability to obtain required financing would
have a material adverse effect on the Company's business, financial condition
and results of operation.
SUBSTANTIAL DEPENDENCE ON RECENT AND ANTICIPATED PRODUCT INTRODUCTIONS
Prior to the quarter ended June 30, 1996, DeltaPoint has historically derived
substantially all of its product revenues from licenses of DeltaGraph, its
advanced charting and graphics software product. However, DeltaPoint's future
revenue growth will depend substantially on the success of its recently
introduced and planned products, including QuickSite, its web page creation and
site management product introduced in February 1996; and WebAnimator, its
multimedia authoring tool for the Web introduced in July 1996. Commercial
acceptance of the Company's QuickSite and WebAnimator products will require the
Company to establish additional distribution channels and sales and marketing
methods, of which there can also be no assurance, because these anticipated
products will be targeted to existing customers as well as to a significantly
different potential end user population. There can be no assurance that the
Company can successfully manage the introduction of QuickSite or WebAnimator, or
that any of its existing or anticipated products will achieve significant market
acceptance. Failure of any of the Company's existing or anticipated products to
achieve significant market acceptance will have a material adverse effect on the
Company's business, financial condition and results of operation.
DEPENDENCE ON ANTICIPATED INTERNET PRODUCTS
Although the Company has historically derived substantially all of its
revenues from visualization software products for desktop applications, the
Company's strategy is to realize a significant and growing percentage of future
revenues from the sale of its anticipated Internet products. Sales of QuickSite
and WebAnimator will depend in part upon a robust industry and infrastructure
for providing Internet access and carrying Internet traffic. The Internet is at
an early stage of development. There can be no assurance that the
infrastructure or complementary products necessary to make the Internet a viable
commercial marketplace will be developed, or, if developed, that the Internet
will become a viable commercial marketplace. If the Internet does not become a
viable commercial marketplace, the commercial benefits derived from the
Company's QuickSite and WebAnimator products, if any, would be materially
adversely affected. Moreover, the sale, marketing and distribution of the
Company's recently introduced Internet products may be significantly different
than for the Company's existing products. Failure of the Company to successfully
sell, market and distribute its recently introduced Internet products
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH RETAIL DISTRIBUTION; SUBSTANTIAL CUSTOMER
CONCENTRATION
DeltaPoint sells its products to distributors for resale as well as directly
to certain retailers, including computer superstores and mass merchandisers.
Sales to a limited number of distributors and retailers have constituted, and
are anticipated to continue to constitute, a significant portion of DeltaPoint's
retail software sales. In particular, revenues from licenses sold to Nippon
Polaroid, the Company's Japanese distributor, constituted approximately 38%,
35% and 8% of the Company's net revenues for the years ended December 31, 1994,
1995 and the six months ended June 30, 1996, respectively. Sales to a U.S.
distributor constituted approximately 17%, 13% and 18% of the Company's net
revenues for the years ended December 31, 1994, 1995 and the six months ended
June 30, 1996, respectively. Any termination or significant disruption of
DeltaPoint's relationship with any major distributor or retailer, or a
significant reduction in sales volume attributable to any of such entities,
could, unless or until replaced, materially adversely affect the Company's
business, financial condition and results of operations. A deterioration in
financial condition or other business difficulties of a distributor or retailer
could render the Company's
12
<PAGE>
accounts receivable from such entity uncollectible, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that DeltaPoint's existing distributors
and retailers will continue to provide DeltaPoint's products with adequate
levels of shelf space or promotional support. In addition, personal computer
hardware and software companies have generally reported declines in gross
margins and greater product returns as they have increased sales through the
mass merchandise distribution channel. The Company expects that its margins will
be similarly affected as it increases sales through this channel.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's revenues from international operations accounted for
approximately 42% , 40% and 15% of the Company's net revenues in 1994, 1995 and
the six month period ended June 30, 1996, respectively, of which approximately
90%, 87% and 52% , respectively, were derived from sales in Japan. The Company
expects that revenues from these international operations will continue to
represent a large percentage of its net revenues. International revenues are
subject to a number of risks, including greater difficulties in accounts
receivable collection, longer payment cycles, exposure to currency fluctuations,
political and economic instability and the burden of complying with a wide
variety of foreign laws and regulatory requirements. The Company also believes
that it is exposed to greater levels of software piracy in international markets
because of the weaker protection afforded to intellectual property in some
foreign jurisdictions.
RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT DELAYS; RISK OF PRODUCT DEFECTS
The markets in which the Company competes are characterized by ongoing
technological developments, frequent new product announcements and
introductions, evolving industry standards and changing customer requirements.
The introduction of products embodying new technologies and the emergence of new
industry standards and practices can render existing products obsolete and
unmarketable. The Company's future success depends upon its ability on a timely
basis to enhance its existing products, introduce new products that address the
changing requirements of its customers and anticipate or respond to
technological advances, emerging industry standards and practices in a timely,
cost-effective manner. There can be no assurance that the Company will be
successful in developing, introducing and marketing new products or enhancements
to existing products or will not experience difficulties that could delay or
prevent the successful development, introduction or marketing of these products,
or that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve any significant degree of commercial
acceptance. Software products such as those offered by the Company often
contain errors or "bugs" that can adversely affect the performance of the
product or damage a user's data. The Company has in the past discovered software
defects in its products that have adversely affected its business and operating
results. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner or if new versions of existing products contain unacceptable
levels of product defects or do not achieve a significant degree of market
acceptance, or any of the above situations occur there could be a material
adverse effect on the Company's business, financial condition and results
of operations.
COMPETITION
The Company competes on the basis of certain factors, including product
quality, first-to-market product capabilities, product performance, ease of
use, customer support and price. The Company believes it currently competes
favorably overall with respect to these factors. However, the markets in
which the Company competes are highly competitive and characterized by rapid
technological change, frequent new product introductions, short product
lives, evolving industry standards and significant price erosion over the
life of a product. The Company anticipates increased competition in these
markets from both existing vendors and new market entrants. In the charting
market, the Company has,
13
<PAGE>
to date, encountered competition primarily from larger vendors such as Adobe
Systems Incorporated, Microsoft, Software Publishing Corporation, Lotus, Corel,
and Computer Associates International, Inc. In the structured drawing market,
the Company has, to date, encountered competition primarily from larger vendors
such as Corel, Visio and Micrografx Incorporated. In the Internet add-in market,
the Company anticipates competition primarily from Netscape Communications
Corporation, Macromedia, Inc., Adobe Systems Incorporated, Microsoft and
Quarterdeck, Inc. In addition, the Company expects that existing vendors and new
market entrants will develop products that will compete directly with the
Company's products and that competition will increase significantly to the
extent that markets for the Company's products grow. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Most of the Company's
current and potential competitors have substantially greater financial,
technical, marketing, sales and customer support resources, greater name
recognition and larger installed customer bases than the Company. Because there
are minimal barriers to entry into the software market, the Company believes
sources of competition will continue to proliferate. The market for the
Company's products is characterized by significant price competition, and the
Company expects it will face increasing pricing pressures. There can be no
assurance the Company will be able to maintain its historic pricing structure,
and an inability to do so would adversely affect the Company's business,
financial condition and results of operations. If the Company is unable to
compete effectively against current and future competitors, the Company's
business, financial condition and results of operations will be materially
adversely affected.
RELIANCE ON MICROSOFT
Microsoft Windows has gained widespread market acceptance as the dominant
computer operating system. Accordingly, the Company has developed and/or is
developing advanced charting and structured drawing and diagramming software
products that function in the Microsoft Windows, Windows '95 or Windows NT
environments and anticipates future products will also be designed for use in
these Microsoft environments. Because the Company expects that its
Microsoft-based applications will account for a significant portion of new
license revenue for the foreseeable future, sales of the Company's new products
would be materially and adversely affected by market developments adverse to
Microsoft Windows, Windows '95 and Windows NT. The Company's ability to
develop products using the Microsoft Windows, Windows '95 and NT environments
is substantially dependent on its ability to gain timely access to, and to
develop expertise in, current and future developments by Microsoft, of which
there can be no assurance. Moreover, the abandonment by Microsoft of its
current operating system, product line or strategy, or the decision by
Microsoft to develop and market products that directly or indirectly
compete with the Company's products would have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL
The Company's success depends to a significant extent upon the contributions
of several key personnel, some of whom were only recently hired by the Company.
The failure to attract and retain key personnel could have a material adverse
affect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH MANAGING GROWTH
In recent years, the growth of the Company's customer base and expansion of
its product line has challenged, and is expected to continue to challenge, the
Company's management and operations, including its sales, marketing, customer
support, research and development and finance and administrative operations. The
Company's future performance will depend in part on its ability to manage
growth, should it occur, both in its domestic and international operations and
to adapt its operational and financial control systems, if necessary, to respond
to changes resulting from such growth. The Company
14
<PAGE>
intends to continue to invest in improving its financial systems and controls in
connection with anticipated increases in the level of its operations. Although
the Company believes that its systems and controls are adequate for its current
level of operations, the Company anticipates that it may need to add additional
personnel and expand and upgrade its financial systems to manage any future
growth. The failure of the Company's management to respond to and manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
RELIANCE ON SOLE PRODUCT ASSEMBLER
All of the Company's software products are currently assembled by a related
third party assembler that beneficially owns approximately 1.7% of the Company's
common stock as of August 7, 1996. Although reliance on third party assemblers
is common in the software industry and DeltaPoint believes that other assemblers
are available, the Company has no formal contract with the assembler and the
termination or interruption of this assembly arrangement could have a material
adverse effect on the Company's business, financial condition and results of
operations until an alternate assembler is secured.
RISKS ASSOCIATED WITH PRODUCT RETURNS; PRICE PROTECTION
Consistent with industry practice, the Company allows distributors, retailers
and end users to return products for credits towards the purchase of additional
products. In addition, DeltaPoint's promotional activities, including free trial
and satisfaction guaranteed offers, and competitors' promotional or other
activities could cause returns to increase sharply at any time. Further, the
Company expects that the rate of product returns could increase to the extent
that the Company introduces new versions of its existing products. For example,
product returns may increase above historical levels as a result of new product
introductions. In addition, if the Company reduces its prices, the Company
credits its distributors for the difference between the purchase price of
products remaining in their inventory and the Company's reduced price for such
products. Although the Company provides allowances for anticipated returns,
exchanges and price protection obligations, and believes its existing policies
have resulted in the establishment of allowances that are adequate and have been
adequate in the past, there can be no assurance that such product returns and
price protection obligations will not exceed such allowances in the future and
as a result will not have a material adverse effect on future operating results,
particularly since the Company seeks to continually introduce new and enhanced
products and is likely to face increasing price competition.
LIMITED INTELLECTUAL PROPERTY PROTECTION; TRADEMARK DISPUTE
The Company's ability to compete effectively depends in large part on its
ability to develop and maintain proprietary aspects of its technology. Despite
precautions taken by the Company, it may be possible for unauthorized third
parties to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. Moreover, the laws of some
foreign countries do not protect the Company's proprietary rights in its
products to the same extent as do the laws of the United States. The Company
licenses its products primarily under "shrink wrap" license agreements that are
included in products shipped by the Company and are not signed by licensees,
therefore they may be unenforceable under the laws of certain jurisdictions. In
addition, some aspects of the Company's products are not subject to intellectual
property protection.
The Company cannot be certain that others will not independently develop
substantially equivalent or superseding proprietary technology, or that an
equivalent product will not be marketed in competition with the Company's
products, thereby substantially reducing the value of the Company's proprietary
rights. There can be no assurance that any confidentiality agreements between
the Company and its employees will provide adequate protection for the Company's
proprietary information in the event of any unauthorized use or disclosure of
such proprietary information.
15
<PAGE>
Since July 1995, the Company has received correspondence from Visio contesting
the Company's right to use the product name Drag 'n Draw and asserting that it
is confusingly similar to a registered trademark owned by Visio. Although the
Company believes that this assertion lacks merit, there can be no assurance that
the ultimate resolution of the matter will not have a material adverse impact on
the Company's business, financial condition or results of operations. Although
the Company is not currently engaged in any intellectual property litigation or
proceedings regarding this matter or any other similar matters, there can be no
assurance that the Company will not become involved in such proceedings. An
adverse outcome in litigation or similar adversarial proceedings could subject
the Company to significant liabilities to third parties, require disputed rights
to be licensed from others or require the Company to cease the marketing or use
of certain products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may be required to obtain licenses to patents or proprietary rights of others,
and there can be no assurance that any licenses required under any patents or
proprietary rights would be made available on terms acceptable to the Company,
if at all.
VOLATILITY OF STOCK PRICE; POSSIBLE ILLIQUIDITY OF TRADING MARKET
The Company's stock price has exhibited volatility since the Company's initial
public offering in December 1995. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, changes in analysts' estimates, announcements of
technological innovations by the Company or its competitors, general conditions
in the data and process visualization software industry and other factors. In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies in general, and small capitalization,
high technology companies in particular, and are often unrelated to
operating performance.
The shares of common stock are quoted on the Nasdaq SmallCap Market which
may be a significantly less liquid market than the Nasdaq National Market.
Moreover, if the Company should continue to experience losses from
operations, it may be unable to maintain the standards for continued
quotation on the Nasdaq SmallCap Market, and the shares of common stock could
be subject to removal from the Nasdaq SmallCap Market. Trading, if any, in
the common stock would therefore be conducted in the over-the-counter market
on an electronic bulletin board established for securities that do not meet
the Nasdaq Small Cap Market listing requirements, or in what are commonly
referred to as the "pink sheets." As a result, an investor would find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's common stock. In addition, if the Company's common stock were
removed from the Nasdaq SmallCap Market, they would be subject to so-called
"penny stock" rules that impose additional sales practice and market making
requirements on broker-dealers who sell and/or make a market in such
securities. Consequently, removal from the Nasdaq SmallCap Market, if it were
to occur, could affect the ability or willingness of broker-dealers to sell
and/or make a market in the Company's common stock and the ability of
purchasers of the Company's common stock to sell their securities in the
secondary market. In addition, if the market price of the Company's common
stock is less than $5.00 per share, the Company may become subject to certain
penny stock rules even if still quoted on the Nasdaq SmallCap Market. While
such penny stock rules should not affect the quotation of the Company's
common stock on the Nasdaq SmallCap Market, such rules may further limit the
market liquidity of the common stock and warrants and the ability of
shareholders to sell such securities in secondary market.
The Company has not previously paid any dividends on its common stock and for
the foreseeable future intends to continue its policy of retaining any earnings
to finance the development and expansion of its business.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 21, 1995, Ameriquest/Kenfil Inc. ("Kenfil") filed a complaint in the
Superior Court of the State of California before the county of Monterey naming
the Company as defendant and alleging (i) breach of a distribution agreement
between Kenfil and the Company (ii) and indebtedness to Kenfil for the sum of
$233,000 together with interest thereon at the rate of 10% per annum. Kenfil is
seeking damages, cost of suit and other relief. In April 1996, the Company
entered into a settlement agreement with Kenfil whereby the Company paid
$50,000. A dismissal of the complaint was filed with the Superior Court of
the state of California on April 26, 1996.
With the exception of the foregoing, there are no other material pending
legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on June 14, 1996, the
following individuals were elected to the Board of Directors:
Votes For Votes Withheld
--------- --------------
John A. Ambrose 1,839,350 19,360
Donald B.Witmer 1,839,350 19,360
William G. Pryor 1,787,558 71,152
John Hummer 1,839,350 19,360
Christopher Schember 1,839,350 19,360
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes Broker
Votes Votes Withheld Non-Votes
----------- -------- -------- ---------
1. Amendment to the 1995 Stock Option
Plan, increasing the reserved
shares by 200,000. 971,033 33,130 4,300 850,277
1. Ratify the appointment of Price
Waterhouse LLP as independent
auditors for the fiscal year
ended December 31, 1996. 1,850,510 5,900 2,300 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits
27-1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
June 30, 1996
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTAPOINT, INC.
By: /s/DONALD B.WITMER
--------------------
Donald B. Witmer
Chief Operating Officer and
Chief Financial Officer and
(Principal Accounting Officer)
Date: August 14, 1996
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND CONDENSED STATEMENTS OF OPERATIONS FOUND ON PAGES 3
AND 4 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR-TO-DATE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,802
<SECURITIES> 0
<RECEIVABLES> 1,014
<ALLOWANCES> 125
<INVENTORY> 117
<CURRENT-ASSETS> 4,003
<PP&E> 1,253
<DEPRECIATION> 994
<TOTAL-ASSETS> 4,689
<CURRENT-LIABILITIES> 3,239
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0
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<COMMON> 13,057
<OTHER-SE> (11,607)
<TOTAL-LIABILITY-AND-EQUITY> 4,689
<SALES> 1,893
<TOTAL-REVENUES> 1,893
<CGS> 621
<TOTAL-COSTS> 621
<OTHER-EXPENSES> 4,100
<LOSS-PROVISION> 54
<INTEREST-EXPENSE> (39)
<INCOME-PRETAX> (2,789)
<INCOME-TAX> 0
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<NET-INCOME> (2,789)
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