<PAGE>
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 September 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 October 25, 1996: 2,268,743
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
September 30, 1996 (unaudited) and December 31, 1995 3
Condensed Statements of Operations (unaudited)
Three months and nine months ended September 30, 1996
and 1995 4
Condensed Statements of Cash Flows (unaudited)
Nine months ended September 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 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)
SEPT. 30, DEC. 31,
1996 1995
--------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ 1,532 $ 4,629
Accounts receivable, net of allowance for doubtful
accounts of $155 and $259 . . . . . . . . . . . 1,815 1,225
Inventories . . . . . . . . . . . . . . . . . . 139 182
Prepaid expenses and other current assets. . . . 230 194
------- -------
Total current assets. . . . . . . . . . . . 3,716 6,230
Property and equipment, net. . . . . . . . . . . . 266 49
Purchased software, net . . . . . . . . . . . . . 350 438
Other assets . . . . . . . . . . . . . . . . . . . 34 47
------- -------
$ 4,366 $ 6,764
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 1,296 $ 665
Accrued liabilities . . . . . . . . . . . . . . 1,611 2,202
Reserve for returns. . . . . . . . . . . . . . . 652 398
Current portion of capital lease obligations . . -- 50
------- -------
Total current liabilities . . . . . . . . . 3,559 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, 2,254,243 and 2,025,243 shares
issued and outstanding . . . . . . . . . . . . 13,316 12,267
Accumulated deficit. . . . . . . . . . . . . . . (12,509) (8,818)
------- -------
Total shareholders' equity . . . . . . . . 807 3,449
------- -------
$ 4,366 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------
1996 1995 1996 1995
------ ----- ------- -------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . $ 1,506 $ 1,253 $ 3,399 $ 3,514
Cost of revenues . . . . . . . . . . . 335 267 956 981
------- ------- ------- -------
Gross profit . . . . . . . . . . . . 1,171 986 2,443 2,533
------- ------- ------- -------
Operating expenses:
Sales and marketing. . . . . . . . . 1,094 430 3,145 1,189
Research and development . . . . . . 789 150 1,877 539
General and administrative . . . . . 206 192 1,167 780
------- ------- ------- -------
2,089 772 6,189 2,508
------- ------- ------- -------
Income (loss) from operations. . . . . (918) 214 (3,746) 25
Other income (expense) . . . . . . . . 16 (40) 55 (101)
------- ------- ------- -------
Net income (loss) . . . . . . . . . . $ (902) $ 174 $ (3,691) $ (76)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share . . . . . $ (0.40) $0.17 $ (1.67) $ (0.08)
------- -------- ------- -------
------- ------- ------- -------
Shares and share equivalents used in per
share calculations . . . . . . . . . . 2,230 1,001 2,206 1,001
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
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DELTAPOINT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
---- ----
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . $ (3,691) $ (76)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . 179 104
Change in assets and liabilities:
Accounts receivable . . . . . . . . . . . . (590) (970)
Inventories . . . . . . . . . . . . . . . . 43 106
Prepaid expenses and other current assets . (36) (19)
Deferred offering costs . . . . . . . . . -- (235)
Accounts payable. . . . . . . . . . . . . . 631 (559)
Accrued liabilities . . . . . . . . . . . . (591) 629
Reserve for returns . . . . . . . . . . . . 254 201
Deposits and other assets . . . . . . . . . 13 6
------- -------
Net cash used in operating activities. . . (3,788) (813)
------- -------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . (308) (17)
------- -------
Net cash used in investing activities. . . (308) (17)
------- -------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net . -- 1,050
Proceeds from issuance of common stock and
warrants, net . . . . . . . . . . . . . . . . . 1,049 7
Proceeds from line of credit . . . . . . . . . . -- 269
Repayment of note payable. . . . . . . . . . . . -- (385)
Repayment of capitalized lease obligations . . . (50) (137)
------- -------
Net cash provided by financing activities. 999 804
------- -------
Decrease in cash and cash equivalents. . . . . . . (3,097) (26)
Cash and cash equivalents at beginning of year . . 4,629 30
------- -------
Cash and cash equivalents at end of period . . . . $ 1,532 $ 4
------- -------
------- -------
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, and distribution partners in the United States, Europe, Japan, and
Asia-Pacific. DeltaPoint, Inc. provides developers of individual, corporate and
commercial Web sites with advanced Web creation and management tools based on
database component technology. In addition, DeltaPoint, Inc. sells DeltaGraph,
a charting and graphing product.
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 September 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. Aggregate net proceeds to the Company were $831,000.
Common stock also reflects the exercise of 39,000 stock options from the 1995
Stock Option Plan for a net increase of $295,000. 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 nine month period ended
September 30, 1996, the common stock equivalents were excluded from the net loss
per share calculation.
6
<PAGE>
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 "FACTORS THAT MAY AFFECT FUTURE RESULTS" BELOW, 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 AND "RISK FACTORS" IN THE COMPANY'S POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2 (REGISTRATION NO. 333-3784) AS FILED WITH THE COMMISSION ON OCTOBER
15, 1996. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT.
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 World Wide Web (the "Web") which was released
in July 1996. The Company introduced WebTools in March 1996 and QuickSite
Developer's Edition in September 1996. The Company plans to incur additional
expenditures to develop Internet software tools or new versions of existing
software tools over the next several quarters. Although the Company has
historically derived substantially all of its revenues from charting and
graphics software products for desktop applications, the Company's strategy is
to realize a significant and growing percentage of future revenues from the sale
of Internet software tools.
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 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 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 software products and indirect distribution channels for its new
or anticipated Internet products and the ability of the Company to successfully
develop and market new products and control costs. In particular, the Company's
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
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET REVENUES. Net revenues for the three month period ended September 30,
1996 increased by 20.2% to $1,506,000 from $1,253,000 for the corresponding
period in the prior year and increased by 32.9% from $1,133,000 for the three
month period ended June 30, 1996. The increase in revenues from the
corresponding period in the prior year is primarily due to an increase in
revenues from the Company's Internet software tools released in 1996 which were
offset by a decrease in the Company's charting and graphics revenues. The
increase in revenues from the second quarter to the third quarter of 1996 was
primarily due to the release of DeltaGraph 4.0 Macintosh for Japan, QuickSite
for Japan and WebAnimator. For the three month period ended September 30, 1996,
international revenue decreased to 26.0% of net revenues compared to 50.6% for
the period ended September 30, 1995. The decrease in international revenue was
primarily due to fewer Japanese license agreements offset by the release of
QuickSite for the Japanese market.
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. Cost of revenues consists of direct material, labor, overhead,
freight, post contract customer support, royalties and contract manufacturing
costs associated with the manufacturing of the Company's products. The Company
believes that these and other factors will contribute to the fluctuations of
gross profit as a percentage of revenue. Gross profit for the three month
period ended September 30, 1996 decreased as a percentage of net revenues to
77.8% from 78.7% for the corresponding period in the prior fiscal year and
increased from 75.0% in the second quarter of 1996. 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
royalties 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
September 30, 1996 increased to $1,094,000 or 72.6% of net revenues compared to
$430,000 or 34.3% of net revenues for the corresponding period in the prior year
and $1,163,000 or 102.6% of net revenues in the second quarter of 1996. The
increase in sales and marketing expenses in absolute dollars and as a percentage
of net revenues from the third quarter of 1995 to the third quarter of 1996 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 the Company's new Internet software tools. 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 September 30, 1996 increased to $789,000 or 52.4% of net
revenues compared to $150,000 or 12.0% of net revenues for the corresponding
period in the prior year and $602,000 or 53.1% of net revenues for the second
quarter of 1996. The increase in research and development expenses from the
third quarter of 1995 to the third quarter of 1996 was primarily due to a
staffing increase for the development of DeltaGraph, QuickSite, QuickSite
Developer's Edition and WebAnimator. 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
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the three
month period ended September 30, 1996 increased to $206,000 or 13.7% of net
revenues compared to $192,000 or 15.3% of net revenues for the corresponding
period in the prior year and $192,000 or 16.9% of net revenues for the second
quarter of 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 September 30, 1996 and 1995 due to net operating losses and
the availability of net operating loss carryforwards.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET REVENUES. Net revenues for the nine month period ended September 30,
1996 decreased by 3.3% to $3,399,000 from $3,514,000 for the corresponding
period in the prior year. The decrease in revenue is primarily due to a
decrease in the Company's charting and graphics software revenue partially
offset by an increase in the revenues from the Company's new Internet software
tools. For the nine month period ended September 30, 1996, international
revenue decreased to 22.0% of net revenues compared to 43.0% for the period
ended September 30, 1995. The decrease in international revenue was due to
fewer Japanese license agreements offset partially by the release of QuickSite
for the Japanese market.
GROSS PROFIT. Gross profit for the nine month period ended September 30,
1996 decreased as a percentage of net revenues to 71.9% from 72.1% for the
corresponding period in the prior fiscal year. The Company's gross profit has
varied for quarter to quarter as a result of changes in the mix of revenues
derived from license fees from sales to the Company's Japanese distributor and
other customers.
SALES AND MARKETING. Sales and marketing expenses for the nine month period
ended September 30, 1996 increased to $3,145,000 or 92.5% of net revenues
compared to $1,189,000 or 33.8% 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 the
Company's new Internet software tools
RESEARCH AND DEVELOPMENT. Research and development expenses for the nine
month period ended September 30, 1996 increased to $1,877,000 or 55.2% of net
revenues compared to $539,000 or 15.3% 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 DeltaGraph,
QuickSite, QuickSite Developer's Edition and WebAnimator. In addition, the
Company retained several consultants to aid in the development process.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the nine
month period ended September 30, 1996 increased to $1,167,000 or 34.3% of net
revenues compared to $780,000 or 22.2% of net revenues for the corresponding
period in the prior year. The increase in general and administrative expenses
in absolute dollars and as a percentage of net revenues was primarily
attributable to a severance expense charge of $505,000 relating to the departure
of the Company's former Chief Executive Officer partially offset by a decrease
in allowance for bad debt expense of $154,000.
PROVISION FOR INCOME TAXES. There was no provision for taxes during nine
month periods ended September 30, 1996 and 1995 due to net operating losses.
9
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had a working capital balance of
$157,000 and shareholders' equity of $807,000, 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 of Common Stock and the exercise of the
related overallotment option in December 1995 and January 1996, respectively.
The Company used net cash in operations of $3,788,000 in the nine month
period ended September 30, 1996 compared to net cash of $813,000 used in the
nine month period ended September 30, 1995. Net cash used in the nine month
period ended September 30, 1996 consisted primarily of a net loss of $3,691,000,
a decrease in accrued liabilities of $591,000 and an increase in accounts
receivable of $590,000 offset by an increase in accounts payable of $631,000, an
increase in reserve for returns of $254,000 and a decrease in inventories of
$43,000.
Net cash provided by financing activities totaled $999,000 in the nine
month period ended September 30, 1996 compared to $804,000 for the nine month
period ended September 30, 1995. Net cash from financing activities in the nine
month period ended September 30, 1996 consisted primarily of $831,000 in net
proceeds from the exercise of the Underwriter's overallotment option resulting
from the initial public offering of common stock completed in 1995 and $295,000
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 $50,000.
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 nine month period ended September 30,
1996 the Company's capital expenditures totaled approximately $308,000.
The Company's existing and available cash resources are not sufficient to
fund its operations at desired levels without obtaining additional outside
financing. The Company plans to seek up to approximately $5,500,000 in net
proceeds from a proposed convertible debt financing. Although the Company
believes that its existing and available cash resources, together with the
anticipated net proceeds from the convertible debt financing, should be
sufficient to sustain operations at desired levels for at least the next 12
months, there can be no assurance that such cash resources will be sufficient to
satisfy the Company's operating requirements. To the extent that the Company
continues to incur losses or grows in the future, its operations and investing
activities may use cash and, consequently, such losses or growth may require the
Company to obtain additional sources of financing. In addition, the Company's
actual capital needs will depend upon numerous factors, including the progress
of the Company's sales and marketing activities and the amount of cash 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 the Debt Financing or any
additional required financing will be available to the Company on acceptable
terms, or at all. The inability to successfully consummate the Debt Financing
or to obtain required financing would have a material adverse effect on the
Company's business, financial condition and results of operation. For example,
if the Company is unable to successfully complete the Debt Financing, it may be
required to significantly curtail its planned operations or seek alternative
financing on highly dilutive terms.
10
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT
The Company incurred a net loss of $3,691,000 for the nine month period ended
September 30, 1996 and had an accumulated deficit of $12,509,000 as of September
30, 1996. The Company expects to incur losses over at least the next several
quarters, and there can be no assurance that the Company will not incur
significant additional losses until it successfully markets and sells existing
Internet software tools or develops or acquires new Internet software tools or
enhancements to existing Internet software tools that generate significant
revenues.
The Company's results of operations have historically varied substantially
from quarter to quarter and the Company expects they will continue to do so. 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, the revenues derived from product sales and
license fees, the existence and 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 intends
to make significant expenditures to enhance its sales and marketing activities
and to continue to make significant expenditures for research and development
activities. As such expenditures occur, 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.
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING
The Company completed its initial public offering in December 1995. The net
proceeds to the Company were $5,979,000 (including proceeds from the exercise of
the overallotment option in January 1996). The Company's existing and available
cash resources are not sufficient to fund its operations at desired levels
without obtaining additional outside financing. The Company presently plans to
seek up to approximately $5,500,000 in net proceeds from a convertible debt
financing (the "Debt Financing). As presently contemplated, the Company would
issue 6% convertible subordinated notes (the "Notes") that would be convertible
at the option of the holder(s) thereof, into shares of Common Stock of the
Company in three (3) separate tranches beginning 60, 90 and 120 days after the
latest date of initial issuance (the "Debt Financing Closing"), at a conversion
price equal to 80% of the Common Stock Price (as defined), subject to certain
adjustments and limitations. All unconverted Notes would convert automatically
into shares of Common Stock of the Company upon the earlier to occur of certain
events, including the first anniversary of the Debt Financing Closing. Although
the Company believes that its existing and available cash resources, together
with the anticipated net proceeds from the Debt Financing, should be sufficient
to meet its needs for at least the next 12 months, there can be no assurance
that such cash resources will be
11
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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 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 the Debt Financing or any additional financing will be available to the
Company on acceptable terms, or at all. The inability to successfully consummate
the Debt Financing or to obtain required financing would have a material adverse
effect on the Company's business, financial condition and results of operation.
For example, if the Company is unable to successfully complete the Debt
Financing, it may be required to significantly curtail its planned operations or
seek alternative financing on highly dilutive terms.
SUBSTANTIAL DEPENDENCE ON RECENTLY INTRODUCED INTERNET SOFTWARE TOOLS
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 largely on the successful development, introduction
and commercial acceptance of its recently introduced Internet software tools.
These consist of: Quicksite, its Web page creation and site management product
introduced in February 1996; WebTools, its Web publishing capability tool
introduced in March 1996; WebAnimator, its multimedia authoring tool for the Web
introduced in July 1996; and QuickSite Developer's Edition, its enhanced version
of QuickSite for Web site developers and corporate Intranet developers
introduced in September 1996. Commercial acceptance of the Company's Internet
software tools 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 its existing Internet software tools or any other potential
Internet software tools or that any of its existing or potential products will
achieve significant market acceptance. Failure of any of the Company's existing
or potential 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 INTERNET
Sales of the Company's Internet software tools 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 Internet software tools would be materially
adversely affected.
RISKS ASSOCIATED WITH RETAIL DISTRIBUTION; SUBSTANTIAL CUSTOMER CONCENTRATION
DeltaPoint sells its products to distributors for resale 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 15% of the Company's net revenues for the years ended December 31, 1994,
1995 and the nine months ended September 30, 1996, respectively. Sales to a
distributor constituted approximately 17% , 13% and 24% of the Company's net
revenues for the years ended December 31, 1994, 1995 and the nine months ended
September 30, 1996, respectively. Any termination or significant disruption of
DeltaPoint's relationship with any major distributor or retailer, or
12
<PAGE>
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 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 22% of the Company's net revenues in 1994, 1995 and
the nine month period ended September 30, 1996, respectively, of which
approximately 90%, 87% and 69% , 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.
13
<PAGE>
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.
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, to date, encountered competition primarily
from larger vendors such as Adobe Systems Incorporated, Microsoft Corporation,
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 software tools market, the Company
anticipates competition primarily from Netscape Communications Corporation,
Macromedia, Inc., Adobe Systems Incorporated, Microsoft Corporation, NetObjects
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 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's products have been and it
is intended that they will continue to be designed to 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 of these products will
account for a significant portion of new license revenue for the foreseeable
future, sales of these 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
14
<PAGE>
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 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 September 30, 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 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 some of its products under "shrink wrap" license agreements that are
15
<PAGE>
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.
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 Internet tools and 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 their operating performance.
The shares of Common Stock are quoted on the Nasdaq Small Cap Market, which
is a significantly less liquid market than the Nasdaq National Market, and the
Pacific Stock Exchange. Moreover, if the Company should continue to experience
losses from operations, it may be unable to maintain the standards for continued
trading on the Nasdaq Small Cap Market or the Pacific Stock Exchange, and the
shares of Common Stock could be subject to removal from the Nasdaq Small Cap
Market or the Pacific Stock Exchange, as the case may be. 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 securities. In addition, if the Company's Common Stock were removed
from the Nasdaq Small Cap 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 Small Cap 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
16
<PAGE>
per share, the Company may become subject to certain penny stock rules even if
still quoted on the Nasdaq Small Cap Market. While such penny stock rules
should not affect the quotation of the Company's Common Stock on the Nasdaq
Small Cap Market, such rules may further limit the market liquidity of the
Common Stock and the ability of shareholders to sell such securities in the
secondary market.
NO DIVIDENDS
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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits
27.1 Financial Data Schedule
(a) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 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: November 4, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,532
<SECURITIES> 0
<RECEIVABLES> 1,970
<ALLOWANCES> 155
<INVENTORY> 139
<CURRENT-ASSETS> 3,716
<PP&E> 1,288
<DEPRECIATION> 1,022
<TOTAL-ASSETS> 4,366
<CURRENT-LIABILITIES> 3,559
<BONDS> 0
0
0
<COMMON> 13,316
<OTHER-SE> (12,509)
<TOTAL-LIABILITY-AND-EQUITY> 4,366
<SALES> 3,399
<TOTAL-REVENUES> 3,399
<CGS> 956
<TOTAL-COSTS> 956
<OTHER-EXPENSES> 6,189
<LOSS-PROVISION> 87
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,691)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,691)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (3,691)
<EPS-PRIMARY> (1.67)
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