<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, 1997
[ ] 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)
380 El Pueblo Road
Suite 100
Scotts Valley, CA 95066
(Address of principal executive offices)
408-461-3017
(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 31, 1997: 8,131,380
Transitional 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, 1997 (unaudited) and December 31, 1996 3
Condensed Statements of Operations (unaudited)
Three months and nine months ended September 30,
1997 and 1996 4
Condensed Statements of Cash Flows (unaudited)
Nine months ended September 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
DELTAPOINT, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 85 $ 3,142
Accounts receivable, net of allowance for
doubtful accounts of $110 and $118 . . . . . . . . 364 1,904
Inventories. . . . . . . . . . . . . . . . . . . . . 146 133
Prepaid expenses and other current assets. . . . . . 440 557
-------- --------
Total current assets . . . . . . . . . . . . 1,035 5,736
Property and equipment, net. . . . . . . . . . . . . . 279 277
Purchased software, net. . . . . . . . . . . . . . . . 248 299
Deposits and other assets. . . . . . . . . . . . . . . 101 34
-------- --------
$ 1,663 $ 6,346
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $ 1,435 $ 1,238
Accrued liabilities. . . . . . . . . . . . . . . . . 590 1,146
Reserve for returns. . . . . . . . . . . . . . . . . 95 771
Notes payable. . . . . . . . . . . . . . . . . . . . -- 2,150
-------- --------
Total current liabilities. . . . . . . . . . 2,120 5,305
-------- --------
Commitments and contingencies
Shareholders' (deficit) equity:
Common stock, no par value, 25,000,000 shares
authorized 4,631,380 and 2,485,540 shares were
issued and outstanding . . . . . . . . . . . . . . 17,921 14,707
Accumulated deficit. . . . . . . . . . . . . . . . . (18,378) (13,666)
-------- --------
Total shareholders' (deficit) equity . . . . (457) 1,041
-------- --------
$ 1,663 $ 6,346
-------- --------
-------- --------
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
----------------------- -------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues . . . . . . . . . . . . . . . . . . . . . . . $ 182 $ 1,506 $ 1,677 $ 3,399
Cost of revenues . . . . . . . . . . . . . . . . . . . . . 84 335 553 956
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 98 1,171 1,124 2,443
-------- -------- -------- --------
Operating expenses:
Sales and marketing. . . . . . . . . . . . . . . . . . . 684 1,094 2,926 3,145
Research and development . . . . . . . . . . . . . . . . 1,245 789 2,592 1,877
General and administrative . . . . . . . . . . . . . . . 181 206 660 1,167
-------- -------- -------- --------
2,110 2,089 6,178 6,189
-------- -------- -------- --------
Loss from operations . . . . . . . . . . . . . . . . . . . (2,012) (918) (5,054) (3,746)
Interest income (expense), net. . . . . . . . . . . . . . 1 16 ( 816) 55
Other income . . . . . . . . . . . . . . . . . . . . . . . 400 1,171 --
-------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,611) $ (902) $ (4,699) $ (3,691)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share . . . . . . . . . . . . . . . . . . . . $ (0.46) $ (0.40) $ (1.58) $ (1.67)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in per share calculations. . . . . . . . . . . 3,489 2,230 2,966 2,206
-------- -------- -------- --------
-------- -------- -------- --------
</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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . $ (4,699) $ (3,691)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization . . . . . . . . . . . . 422 179
In process research and development . . . . . . . . . 500 --
Amortization of discounted conversion feature of
notes payable. . . . . . . . . . . . . . . . . . . . 537 --
Gain on DeltaGraph disposition. . . . . . . . . . . . (1,171) --
Change in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . 1,547 (590)
Inventories . . . . . . . . . . . . . . . . . . . . (13) 43
Prepaid expenses and other current assets . . . . . (81) (36)
Accounts payable. . . . . . . . . . . . . . . . . . 159 631
Accrued liabilities . . . . . . . . . . . . . . . . (591) (591)
Reserve for returns . . . . . . . . . . . . . . . . (676) 254
Deposits and other assets . . . . . . . . . . . . . (67) 13
--------- ---------
Net cash used in operating activities . . . . . . (4,133) (3,788)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment . . . . . . . . . . . (80) (308)
DeltaGraph disposition . . . . . . . . . . . . . . . . . 1,171 --
Site Tech Acquisition (net of cash acquired) . . . . . . (24)
--------- ---------
Net cash used in investing activities . . . . . . 1,067 (308)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, exercise of stock
options and warrants, net . . . . . . . . . . . . . . . 22 1,049
Dividend payable . . . . . . . . . . . . . . . . . . . . (13)
Repayment of capitalized lease obligations . . . . . . . -- (50)
--------- ---------
Net cash provided by financing activities. . . . 9 999
--------- ---------
Decrease in cash and cash equivalents. . . . . . . . . . . (3,057) (3,097)
Cash and cash equivalents at beginning of period . . . . . 3,142 4,629
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 85 $ 1,532
--------- ---------
--------- ---------
</TABLE>
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. (the Company), has headquarters in
Scotts Valley, California, and distribution partners in the United States,
Europe and Japan. DeltaPoint, Inc. provides developers of individual,
corporate and commercial Web sites with advanced Web site creation and
management tools based on database component technology. In addition, the
Company provided visualization software products that were designed to
facilitate the collection, interpretation and management of business and
technical information across multiple computing environments until May 1,
1997 at which time the Company sold its DeltaGraph product line.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
This statement is effective for the Company's year ending December 31, 1997.
The Statement redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share and fully diluted earnings per share is
replaced by diluted earnings per share. If the Company had adopted this
Statement for the nine month period ended September 30, 1996 and for the nine
month period ended September 30, 1997, the Company's loss per share would
have been as follows:
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1997
------------------ ------------------
Basic loss per share ($1.67) ($1.58)
Diluted loss per share ($1.67) ($1.58)
NOTE 2 -- NOTES PAYABLE / SERIES A PREFERRED STOCK:
On December 31, 1996, the Company issued $2,150,000 of convertible
promissory notes payable. The notes bear interest at 6% payable semiannually
over their two year term. The notes convert into Common Stock automatically
at the end of the two year term and are convertible at the option of the
holder with a total of 33%, 67% and 100% of the principal value of the notes
convertible on or after March 1, March 31, and April 30, 1997, respectively.
The conversion price of the notes is the lower of (a) 80% of the average
closing bid price of the Company's Common Stock for the five days prior to
notice of conversion and (b) the average offer price of the Company's Common
Stock for the five business days prior to the notes' issuance, which is $6.70
per share. The Company recognized the value of the discounted conversion
feature, or $537,000, and deferred debt issuance costs, or $262,000, as
additional interest expense during the three months ended March 31, 1997.
The amortization of the discounted conversion feature resulted in an increase
to Common Stock of $537,000. During the nine months ended September 30,
1997, holders of notes payable converted $2,150,000 in principal value into
$1,530,000 of Series A Preferred Stock and 427,000 shares of Common Stock.
The
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holders of the Series A Preferred Stock subsequently converted the $1,530,000
of Series A Preferred Stock into 1,215,000 shares of Common Stock during the
three months ended September 30, 1997.
NOTE 3 -- NET LOSS PER SHARE:
Net loss per share is computed using the weighted-average number of
shares of common stock and common equivalent shares, when dilutive, from
convertible promissory notes payable (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 nine month periods ended September
30, 1997 and 1996, the common stock equivalents were excluded from the net
loss per share calculation because their effect was anti-dilutive.
NOTE 4 -- SALE OF DELTAGRAPH PRODUCT LINE (UNAUDITED):
On June 27, 1997, the Company completed the sale of its DeltaGraph
product line to SPSS, Inc. ("SPSS") with an effective date of May 1, 1997 for
aggregate proceeds of $1,310,000 in cash of which $910,000 was attributable
to the sale of the Delta Graph product line and $400,000 was attributable to
services to be rendered by the Company pursuant to a management agreement
(the "Management Agreement"). The Company received $910,000 on June 30,
1997. The Company recognized the $400,000 due under the Management Agreement
during the three months ended September 30, 1997, upon completion of all
obligations required under the agreement. Such amount is included in other
income.
In the quarter ended June 30, 1997, the Company recorded a non-operating
gain related to the sale of the DeltaGraph product line in other income as
follows:
Total sales price $ 910,000
Less:
Expenses related to the sale (105,000)
Net book value of assets transferred ( 34,000)
---------
Gain on sale of DeltaGraph product line $ 771,000
---------
---------
As a result of the Company's significant tax loss carry-forwards and
other tax benefits, the Company did not incur a tax expense related to this
gain.
Following the effective date of this transaction, the Company no longer
has revenues related to the sales of the DeltaGraph product line. DeltaGraph
revenues were $3,067,000 and $659,000 for the year ended December 31, 1996
and the nine months ended September 30, 1997, respectively. Such revenues
were 62.0% and 39.3% of total revenues for 1996 and the nine months ended
September 30, 1997, respectively. During 1996 and the nine months ended
September 30, 1997, cost of revenues and operating expenses directly
attributable to DeltaGraph totaled $1,800,000 and $530,000, respectively.
Such revenues and expenses have not continued subsequent to the disposition
of the product.
7
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The proforma net revenues, related net loss and net loss per share of the
Company for the year ended December 31, 1996 and nine months ended September
30, 1997 after giving effect to the DeltaGraph transaction as if it had been
consummated at January 1, 1996, are as follows:
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPT. 30,
1996 1997
(PRO FORMA) (PRO FORMA)
Net Revenues $1,883,000 $1,018,000
Net Loss (6,115,000) (5,999,000)
Net Loss per Share (2.74) (2.02)
NOTE 5 -- SITE/TECHNOLOGIES/INC. ACQUISITION:
On July 11, 1997 the Company completed the acquisition of
Site/technologies/inc. ("Site"), a privately held company. In connection
with this acquisition, the Company issued a total of 550,029 shares of its
Common Stock valued at $505,000, incurred net cash costs of $24,000 and
assumed liabilities of $73,000 (for a total purchase price of $602,000) in
exchange for all outstanding shares of Site. The acquisition of Site was
accounted for as a purchase. The purchase price was allocated as follows:
In process research and development $500,000
Property and equipment 68,000
Other 34,000
--------
$602,000
--------
--------
In addition, the Company agreed to pay royalties on sales of certain products.
NOTE 6 -- PENDING ACQUISITION:
On April 16, 1997, the Company entered into a Letter of Intent with Inlet
Divestiture Corp. ("IDC"), Inlet, Inc. ("Inlet") and certain individuals
pursuant to which the Company would purchase certain internet technologies
(including source code and related documentation). The purchase price would
be (i) $825,000 in cash, payable in installments, and (ii) the issuance of
360,000 shares of the Company's Common Stock. The Company would also pay
royalties on sales, licenses, sublicenses or other transactions pursuant to
which units of the software product are distributed. Half of the amount of
royalties would be paid in the Company's Common Stock. Pending the closing
of the purchase, the Company and IDC entered into an OEM agreement which
grants the Company the exclusive right to distribute the software product.
The Letter of Intent contemplates that if the closing of the purchase does
not occur, the OEM agreement would continue in effect. In addition, the
Company entered into a consulting agreement in which the Company is paying
$20,000 a month in consulting fees starting July 1, 1997. Consummation of the
transactions contemplated in the Letter of Intent is subject to certain
additional conditions, including negotiation of a definitive purchase
agreement and other agreements. There can be no assurance that the
transactions contemplated in the Letter of Intent will be consummated.
NOTE 7 -- FOLLOW-ON OFFERING (UNAUDITED):
The Company completed a follow-on offering on October 15, 1997. The
Company issued 3,450,000 shares of common stock at a per share price of
$2.25 and realized net proceeds of approximately $6,300,000.
8
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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 "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, 1996 AND "RISK FACTORS" IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM SB-2 (REGISTRATION NO. 333-34825) AS FILED
WITH THE COMMISSION ON OCTOBER 7, 1997. THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS REPORT.
OVERVIEW
CORPORATE EVENTS. The Company was incorporated on February 1, 1989 to
design, develop and market visualization software products for personal
computers. The Company commenced shipments of its initial product,
DeltaGraph, at the end of 1989. The Company conducted its initial public
offering in December 1995 and completed a follow-on offering in October 1997.
Commencing with its acquisition of the technology required to develop
WebAnimator (a multimedia authoring tool for the Web) in November 1995, the
Company's strategy has been to realize a significant and growing percentage
of its revenues from the sale of Internet software products. Towards that
end, the Company acquired technology to develop QuickSite (a Web site
creation and management tool) in December 1995 (released version 1.0 in
February 1996) and introduced WebTools in March 1996, WebAnimator in July
1996, QuickSite Developer's Edition in September 1996 and QuickSite 2.5 in
May 1997. In July 1997 the Company acquired technology to develop Site
Sweeper 2.0 which was released in September 1997.
DELTAGRAPH DISPOSITION. On June 27, 1997, as part of the Company's
continuing strategy to focus its development, sales and marketing efforts on
Internet software products, the Company consummated the "DeltaGraph
Disposition" pursuant to which the Company sold those assets related to its
DeltaGraph software product line to SPSS, Inc. ("SPSS") for $910,000 in cash.
The DeltaGraph product line consisted of an advanced multi-platform charting
and graphics software product for desktop applications. The effective date
for the disposition was May 1, 1997 and as part of the DeltaGraph
Disposition, DeltaPoint also agreed to assist in the transition of DeltaGraph
to SPSS through July 31, 1997. In return, SPSS made an additional $400,000
cash payment to DeltaPoint on August 10, 1997. See Note 4 to the Notes to
Condensed Financial Statements.
In addition, to further focusing the Company on Internet software
products, the DeltaGraph disposition provided the Company with much needed
liquidity.
RECENT ACQUISITION. On July 11, 1997, the Company consummated the "Site
Tech Acquisition" pursuant to which the Company acquired, from
Site/technologies/inc. ("Site"), among other things, SiteSweeper 1.0, a Web
site quality control and maintenance product. The Company subsequently
developed SiteSweeper 2.0, which is designed to enable Web development and
management professionals to maintain the integrity of mission critical Web
based business environments. The Company introduced SiteSweeper 2.0 in the
third quarter of 1997. In connection with the Site Tech Acquisition, the
Company issued a total of 550,029 shares of Common Stock with a fair value of
$505,000, incurred net cash costs of $24,000 and assumed liabilities of
$73,000 (for a total purchase price of $602,000) in exchange for all
outstanding shares of Site. The Company recognized a charge to operations of
$500,000 in the quarter ended September 30, 1997 for the portion of the
purchase price determined to be in-process research and development. In
addition, the Company also agreed to pay the specified royalties on sales of
certain products developed from the technologies acquired from Site.
PENDING ACQUISITION. On April 16, 1997, DeltaPoint entered into the
Letter of Intent for the "Inlet
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Technology Acquisition" with, among others, Inlet, Inc. ("Inlet") pursuant
to which the Company agreed to acquire from Inlet certain Internet
technologies. As consideration for the Inlet Technology Acquisition, the
Company has agreed to pay to Inlet an aggregate of $825,000 in cash (payable
in installments) and 360,000 shares of the Company's Common Stock payable at
closing. There can be no assurance that the Inlet Technology Acquisition
will be consummated. Such transaction is contingent on a number of factors
including negotiation of definitive documentation. See Note 6 to the Notes
to Condensed Financial Statements.
The Company plans to incur additional expenditures to develop or acquire
Internet software products or develop new versions of existing products over
the next several quarters.
COMPANY NAME CHANGE TO SITE TECHNOLOGIES. In connection with the Site
Tech Acquisition, the Company obtained the rights to the name
Site/technologies/inc. Beginning on October 24, 1997 the Company began doing
business as Site Technologies. This name change will require an amendment to
the Company's Articles of Incorporation and, as a result, will require
shareholder approval. The Company has begun the legal steps necessary to
obtain such shareholder approval.
REVENUES. The Company's revenues consist of license revenues from sales
of software products to distributors, resellers and end users. In addition,
the Company derives license revenues from royalty agreements with certain
customers. Under these agreements, the Company typically receives a large
percentage of the aggregate revenues in the form of a nonrefundable royalty
paid upon shipping of the master copy of software, which allows the customer
to license a specified number of copies of the Company's software. In
addition, the Company currently plans to introduce products targeted at the
small to medium businesses ("SMBs") and corporate department user markets for
scalable Web site development and management solutions. In connection with
the planned introduction of these products, the Company plans to
significantly increase its use of non-retail distribution channels including
VARs, OEMs and Internet Service Providers ("ISPs").
Software product sales are recognized upon shipment of the product, net
of appropriate allowances for estimated returns. Revenues from software
royalty agreements are recognized upon shipment of a master copy of the
software product if no significant vendor obligations remain under the term
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.
IMPACT OF DELTAGRAPH DISPOSITION AND THE SITE TECH ACQUISITION. As a
result of the DeltaGraph Disposition and the Site Tech Acquisition, the
Company's future operating results will not be comparable to its historical
operating results and should not be relied upon as an indication of future
operating results. Moreover, the Company's future profitability will be
entirely dependent on the success of its Internet software products. Set
forth below on an actual and pro forma basis giving effect to the DeltaGraph
Disposition and the Site Tech Acquisition are the Company's net revenues,
operating losses and gross profit for the year ended December 31, 1996 and
the nine months ended September 30, 1997. For the year ended December 31,
1995, substantially all the Company's revenues were attributable to the
Company's DeltaGraph visualization software products. The sale of
DeltaGraph is not expected to result in a significant reduction in operating
expenses as the Company plans to continue its investment in developing new
and updated versions of its Internet software products.
10
<PAGE>
For the Year Ended For the Nine Months Ended
December 31, 1996 September 30, 1997
---------------------- -------------------------
Actual Pro Forma Actual Pro Forma
-------- ----------- ---------- ------------
Net Revenues $ 4,950 $ 1,911 $ 1,677 $ 1,047
Loss from Operations $(4,922) $(7,647) $(5,054) $(5,506)
Gross Profit Percentage 76.1% 72.5% 67.0% 65.0%
HISTORIC AND ANTICIPATED LOSSES. The Company incurred net losses of
$4,848,000 for the year ended December 31, 1996 and $4,699,000 for the nine
months ended September 30, 1997, and had an accumulated deficit of
$18,378,000 as of September 30, 1997. The Company expects to incur losses
for at least the next 12 months, and possibly longer. The Company's future
operating results will depend on many factors, including the successful
development, introduction and commercial acceptance of the Company's Internet
software products (including Internet software products targeted by the
Company at the small to medium businesses ("SMB's") and corporate department
user markets); continued emergence of the evolving Internet software product
market; the Company's success in expanding its use of non-retail distribution
channels for SMB and corporate department user Internet software solutions
including Value Added retailers ("VARs"), original equipment manufacturers
("OEMs") and Internet Service providers ("ISPs"); the mix of revenues derived
from product sales and royalty fees and the level of product and price
competition. In particular, there can be no assurance that the Company will
be successful in its efforts to introduce additional products targeted at the
SMB or the corporate department user market or to expand its distribution
channels in order to service these markets.
FLUCTUATIONS. 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 (the Company's revenues in the quarter ended
September 30, 1997 were particularly impacted by a competitor's new product
introduction), 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
such 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. 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 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, to the extent that the Company succeeds in its
strategy to target the SMB and corporate departmental user markets, among
other things, the Company's results of operations and financial condition may
be subject to greater or different fluctuations as a result of potentially
larger individual product sales, seasonality, a longer sales cycle and longer
payment terms. There can be no assurance the Company will be profitable on a
quarter to quarter or any other basis in the future.
SERIES A PREFERRED STOCK; CONVERTIBLE NOTES. In December 1996, the
Company issued $2,150,000 in principal amount of its 6% Convertible
Subordinated Debentures ("Convertible Notes"). In April through June 1997,
$582,000 in principal amount of Convertible Notes was converted into shares
of Common Stock, and on June 30, 1997 all but $37,500 of the remaining
principal value of the Convertible Notes was converted into shares of the
Company's Series A Preferred Stock ("Series A Preferred Stock").
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In July and August 1997 the remaining balance on the Convertible Notes of
$37,500 and the Series A Preferred Stock were converted into shares of Common
Stock. The Series A Preferred Stock and Convertible Notes were converted
into shares of Common Stock generally at a price equal to 80% of the five day
average closing price on the OTC Bulletin Board for the five business days
prior to conversion. During the quarter ended March 31, 1997, the Company
recognized the value of the discounted conversion feature and deferred debt
issuance costs aggregating $799,000 as additional interest expense. The
Company does not expect to record any similar charges related to these
securities in future quarters.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET REVENUES. Net revenues for the three month period ended September
30, 1997 decreased by 87.9% to $182,000 from $1,506,000 for the corresponding
period in the prior year. The decrease in revenue was primarily attributable
to the sale of the DeltaGraph product line which accounted for no revenues in
the three month period ended September 30, 1997 as compared to $881,000 in
the three month period ended September 30, 1996. In addition, sales of the
Company's Internet products were adversely affected by the Company's limited
promotional activities due to cash constraints during this period and the
introduction of competing products by a Company competitor. The Company
anticipates revenues will remain flat until the Company has successfully
expanded its use of non-retail distribution channels.
For the three month period ended September 30, 1997, international
revenue decreased to 0% of net revenues compared to 26.0% of net revenues for
the period ended September 30, 1996. The decrease in international revenue
was attributable to the sale of the DeltaGraph product as the Company's
Japanese and major international distributor principally sold DeltaGraph
products. The Company expects international revenue to remain flat until the
relationship with the Company's Japanese distributor is clarified or other
international distribution channels can be established. The Company's
international sales are principally denominated in U.S. dollars. Movements
in currency exchange rates did not have a material impact on net revenues 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 materials, labor,
overhead, post customer support, royalties and contract manufacturing costs
associated with the manufacturing of the Company's products. Gross profit
for the three month period ended September 30, 1997 decreased as a percentage
of net revenues to 53.8% from 77.8% for the corresponding period in the prior
fiscal year principally as a result of the Company's significantly reduced
level of sales. The Company's gross profit has varied quarter to quarter as a
result of a number of factors including changes in customer and product mix,
inventory write-offs due to new product releases and third party royalty
obligations for the Company's Internet products. Historically, the Company's
gross profit on the sale of DeltaGraph products was consistent with the
Company's overall gross profit. However, the Company anticipates gross profit
as a percentage of revenue will decline in future periods as Internet product
sales increase due to the third-party royalty obligations associated with
such sales.
SALES AND MARKETING. Sales and marketing expenses include sales
commissions, compensation of sales and marketing personnel and cost of
promotional activities. Sales and marketing expenses for the three month period
ended September 30, 1997 decreased in absolute dollars to $684,000 or 375.8% of
net revenues compared to $1,094,000 or 72.6% of revenues for the corresponding
period in the prior year. The decrease in sales and marketing expenses, in
absolute dollars, was primarily due to the Company's
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decrease in overall marketing activities due to cash flow constraints. The
Company expects that sales and marketing expenses will increase in absolute
dollars in future periods because the Company plans 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, 1997 increased in absolute dollars to
$1,245,000 or 684.1% of net revenues compared to $789,000 or 52.4% of
revenues for the corresponding period in the prior year. The increase in
research and development expenses was primarily due to a $500,000 write-off
for the portion of the Site Tech Acquisition technology determined to be
in-process research and development and a $89,000 severance charge relating
to the departure of one of the Company's founders. The Company expects that
research and development expenses would increase in absolute dollars in
future periods due to further development of the Company's new products and
updated and cross platform versions of the Company's existing products.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three month period ended September 30, 1997 decreased in absolute dollars to
$181,000 or 99.5% of net revenues compared to $206,000 or 13.7% of revenues
for the corresponding period in the prior year. The decrease in general and
administrative expenses was primarily attributable to the mix of general and
administrative employees. The Company expects that general and administrative
expenses will increase in absolute dollars in future periods to the extent
that the Company expands its operations.
OTHER INCOME. Other income for the three month period ended September
30, 1997 consists of the $400,000 management fee relating to the Deltagraph
Disposition.
INTEREST INCOME, NET. Interest income, net includes interest income
earned on cash and cash equivalents. Interest income decreased to $1,000
during the third quarter of fiscal 1997 from $16,000 during the comparable
1996 period. This decrease was primarily attributable to the Company's
decreased cash balance during the third quarter of fiscal 1997.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the
three month periods ended September 30, 1997 and 1996 due to net operating
losses and the availability of net operating loss carryforwards.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET REVENUES. Net revenues for the nine month period ended September 30,
1997 decreased by 50.7% to $1,677,000 from $3,399,000 for the corresponding
period in the prior year. The decrease in revenue was primarily attributable
to the sale of the DeltaGraph product line which accounted for $658,000 of
net revenue in the nine month period ended September 30, 1997 as compared to
$2,021,000 in the nine month period ended September 30,1996. In addition,
sales of the Company's Internet products were adversely affected by the
Company's limited promotional activities due to cash contraints during the
period and the introduction of competing products by a Company competitor.
Included in the September 30, 1997 revenues is a one-time license fee of
$150,000 received from an OEM.
For the nine month period ended September 30, 1997, international
revenues increased to 23.7% of net revenues from 22.0% of net revenue in the
corresponding period in the prior year. The increase in international
revenues was primarily due to the overall decrease in revenue due to the
disposition of the DeltaGraph product line. In light of the DeltaGraph
Disposition, the Company expects that in the near-term international revenues
attributable to Internet products will decline until the relationship with
its Japanese distributor (who principally sold DeltaGraph products) is
clarified or other international distribution channels can be established.
GROSS PROFIT. Gross profit for the nine month period ended September 30,
1997 decreased as a percentage of net revenues to 67.0% from 71.9% for the
corresponding period in the prior year principally as a result of the
Company's significantly reduced level of sales. The Company's gross profit
on an actual basis and as a percentage of net revenue has varied quarter to
quarter as a result of a number of factors including changes in customer and
product mix, inventory write-offs due to new product releases and third party
royalty obligations for the Company's Internet products. Historically, gross
profit on the sale of DeltaGraph products was consistent with the Company's
overall
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gross profit.
SALES AND MARKETING. Sales and marketing expenses for the nine month
period ended September 30, 1997 decreased to $2,926,000 or 174.5% of net
revenues from $3,145,000 or 92.5% of net revenues for the corresponding
period in the prior year. The decrease in sales and marketing expenses, in
absolute dollars, was primarily due to the Company's decrease in overall
marketing activities due to cash flow constraints.
RESEARCH AND DEVELOPMENT. Research and development expenses for the nine
month period ended September 30, 1997 increased to $2,592,000 or 154.6% of
net revenues compared to $1,877,000 or 55.2% of net revenues for the
corresponding period in the prior year. The increase in research and
development expenses was primarily due to a $500,000 write-off for the
portion of the Site Tech Acquisition technology determined to be in-process
research and development and a $89,000 severance charge relating to the
departure of one of the Company's founders.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
nine month period ended September 30, 1997 decreased to $660,000 or 39.4%
of net revenues compared to $1,167,000 or 34.3% of net revenues for the
corresponding period in the prior year. The decrease in general and
administrative expenses was primarily attributable to a severance charge in
the first quarter of 1996 of $505,000 relating to the departure of the
Company's Chief Executive Officer.
INTEREST (EXPENSE) INCOME, NET. Interest (expense) income, net includes
interest payable on the Company's Convertible Notes during the nine months
ended September 30, 1997, the recognition of the discounted conversion
feature on the Convertible Notes and amortization of the related deferred
debt issuance costs, offset by interest income earned on cash and cash
equivalents. Interest expense during the first nine months of 1997 increased
to $852,000 from $26,000 during the first nine months of 1996. This increase
was primarily attributable to the recognition of the discounted conversion
feature of the Convertible Notes and the related deferred debt issuance costs
which totaled $799,000.
OTHER INCOME. Other income for the nine months ended September 30,
consists of the one-time gain resulting from the DeltaGraph Disposition
consummated on June 27, 1997 and the related management fee.
PROVISION FOR INCOME TAXES. There was no provision for taxes during the
nine month periods ended September 30, 1997 and 1996 due to the Company's net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had a working deficit balance of
$1,085,000 and shareholders' deficit of $457,000. The Company has financed
its operations primarily through private and public sales of equity
securities, borrowings under a term loan (no longer in place), the private
sale of debt
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securities and, recently, the sale of the DeltaGraph product line. Since
inception, the Company has received approximately $15 million in proceeds
from private sales of preferred stock, convertible debt and from the
Company's initial public offering of Common Stock.
The Company used net cash in operations of $4,133,000 in the nine month
period ended September 30, 1997 and $3,788,000 for the corresponding period
of the prior year. Net cash used in the first nine months of 1997 consisted
primarily of a net loss of $4,699,000 offset by non-cash items and other
working capital changes. Net cash used in operations during the nine months
ended September 30, 1996 consisted primarily of a net loss of $3,691,000.
Net cash provided by financing activities were insignificant during the
nine month period ended September 30, 1997 and totaled $999,000 for the
corresponding period of the prior year. Net cash from financing activities
in 1996 consisted primarily of $831,000 in net proceeds from the exercise of
the overallotment option from the Company's initial public offering offset by
approximately $77,000 for related registration expenses. The Company also
repaid capital lease obligations of $45,000.
Net cash provided by investing activities during the nine months ended
September 30, 1997 totaled $1,067,000 and primarily resulted from the
DeltaGraph Disposition offset by property and equipment purchases. For the
nine month period ended September 30, 1997 the Company's capital expenditures
totaled approximately $80,000 and were attributable to acquisitions of
personal computer and computer workstation equipment used to support the
Company's development efforts.
At September 30, 1997 the Company's cash and cash equivalents was
$85,000. In October 1997 the Company closed a follow-on offering of 3,450,000
shares of common stock at $2.25 which provided net proceeds of approximately
$6,300,000. To the extent the Company continues to incur losses or grows in
the future, its operating and investing activities will use cash and,
consequently, such losses or growth may require the Company to obtain
additional sources of financing in the future. In addition, the Company's
actual capital needs will depend upon numerous factors, including the
progress of the Company's software development activities and the amount of
cash generated from operations, none of which can be predicted with
certainty.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT; GOING CONCERN ASSUMPTIONS;
FUTURE CAPITAL NEEDS; NO ASSURANCE OF FUTURE FINANCING.
The Company incurred net losses of $4,848,000 for the year ended December
31, 1996 and $4,699,000 for the nine months ended September 30, 1997, and had
an accumulated deficit of $18,378,000 as of September 30, 1997. The Company
expects to incur losses for at least the next 12 months, and possibly longer.
There can be no assurance that the Company will not incur significant
additional losses, will generate positive cash flow from its operations, or
that the Company will attain or thereafter sustain profitability in any
future period.
The Company's independent accountants' report on its financial statements
as of and for the years ended December 31, 1995 and 1996 contains an
explanatory paragraph indicating that the Company's accumulated deficit and
historical operating losses raise substantial doubts about its ability to
continue as a going concern. The Company may require substantial additional
funds in the future, and there can be no assurance that any independent
accountants' report on the Company's future financial statements will not
include a similar explanatory paragraph if the Company is unable to raise
sufficient funds or generate sufficient cash from operations to cover the
cost of its operations. The existence of the explanatory paragraph may have a
material adverse effect on, among other things, the Company's relationships
with prospective customers and suppliers, and therefore could have a material
adverse effect on the Company's business, financial condition and results of
operations. See Note 1 of Notes to Financial Statements contained in the
Company's Annual Report on Form 10-KSB.
DEPENDENCE ON INTERNET SOFTWARE PRODUCTS AND RELATED STRATEGY; DEPENDENCE ON
CONTINUED EMERGENCE OF INTERNET SOFTWARE MARKET
Prior to 1996, the Company derived substantially all of its product
revenues from licenses of its DeltaGraph charting and graphics software
products. With the DeltaGraph Disposition, the Company's future operating
results will depend on the successful development, introduction and
commercial acceptance of the Company's Internet software products. The
Company's current Internet software products consist of: QuickSite 1.0, 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; QuickSite Developer's Edition, its enhanced version of QuickSite for
Web site developers and corporate Intranet developers introduced in September
1996; QuickSite 2.5, its updated version of QuickSite 1.0, introduced in May
1997; and Site Sweeper 2.0, its quality control product for the Web
professional. In addition, the Company currently plans to develop and market
a family of products targeted at the SMB and enterprise department user
markets for scalable Web site development and management solutions,
client/server, multi-authoring, dynamic site development and management
product based on the technology to be acquired in the Inlet Technology
Acquisition (planned for release in the fourth quarter of 1997, at the
earliest). The Company's future operating results are dependent on the
commercial acceptance of the products targeted at the SMB and enterprise
department user markets and the size of these targeted markets. There can be
no assurance that the Company's strategy of targeting the SMB and enterprise
department user markets will be successful, that the Inlet Technology
Acquisition will be consummated, that the Company can successfully manage the
introduction and distribution of new versions of its existing Internet
software products or any other potential Internet software products, 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
(particularly those targeted at the SMB and enterprise department user
markets) to achieve significant market acceptance would have a material
adverse effect on the Company's business, financial condition and results of
operation. See "--Risks Associated with Inlet Technology Acquisition and
Site Tech Acquisition; General Acquisition Risks" and "--Distribution Risks;
Substantial Reseller Customer Concentration."
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RISKS ASSOCIATED WITH INLET TECHNOLOGY ACQUISITION AND SITE TECH ACQUISITION;
GENERAL ACQUISITION RISKS
In an effort to capitalize on the emerging opportunities in the SMB and
enterprise department user markets for scalable Web site development and
management solutions, the Company consummated the Site Tech Acquisition in
July 1997 and has entered into the pending Inlet Technology Acquisition. The
Company has introduced SiteSweeper 2.0, an updated version of the SiteSweeper
1.0 product acquired in the Site Tech Acquisition and plans to introduce a
client/server, multi-authoring site, dynamic development and management
product based on the technology to be acquired in the Inlet Technology
Acquisition (planned for release in the fourth quarter of 1997, at the
earliest). There can be no assurance that the Inlet Technology Acquisition,
which is contingent on certain closing conditions, including the negotiation
of a definitive purchase agreement and other agreements, will be consummated.
Although the Company will continue to have a license to the technology to be
acquired in the Inlet Technology Acquisition if the transaction is not
consummated, the Company may be required to pay greater royalties and the
license may be non-exclusive. Furthermore, there can be no assurance that
any technology acquired in the Site Tech Acquisition or the Inlet Technology
Acquisition can be successfully developed or integrated into the Company's
current technology on a timely basis or at all, or that any products based on
this technology will receive market acceptance. In order to market products
to the SMB and enterprise departmental user markets, the Company must
significantly increase its non-retail distribution channels. See
"--Distribution Risks; Substantial Reseller Customer Concentration". The
failure to successfully develop and integrate the acquired technologies into
the Company's Web site development and management technology or to
successfully market products based upon the acquired technologies would
adversely impact the Company's strategy of marketing to the SMB and
enterprise department user markets (in addition to individuals and small
office/home office ("SOHO") professionals) and would have a material adverse
effect on the Company's business, operating results and financial condition.
The Company frequently evaluates potential acquisitions of complementary
businesses, products and technologies. As part of the Company's expansion
plans, the Company may acquire companies that have an installed base of
products not yet offered by the Company, have strategic distribution channels
or customer relationships, or otherwise present opportunities which
management believes may enhance the Company's competitive position. The
success of any acquisition could depend not only upon the ability of the
Company to acquire such businesses, products and technologies on a
cost-effective basis, but also upon the ability of the Company to integrate
the acquired operations or technologies effectively into its organization, to
retain and motivate key personnel of the acquired businesses, and to retain
the significant customers of the acquired businesses. Any acquisition,
depending upon its size, could result in the use of a significant portion of
the Company's cash, or if such acquisition is made utilizing the Company's
securities, could result in significant dilution to the Company's
shareholders. Moreover, such transactions involve the diversion of
substantial management resources and evaluation of such opportunities
requires substantial diversion of administrative, marketing and sales and
engineering and technological resources. In addition, such transactions
could result in large one-time write-offs or the creation of goodwill or
other intangible assets that would result in amortization expense. For
example, in the quarter ended September 30, 1997, the Company expensed a
significant portion of the Site Tech purchase price as in-process technology
because the acquired technology had not reached technological feasibility and
has no alternative future use. A similar charge is expected in connection
with the pending Inlet Technology Acquisition. The failure to successfully
evaluate, negotiate, effect and integrate acquisition transactions could have
a material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON LIMITED NUMBER OF KEY PERSONNEL; KEY MANAGEMENT OPENINGS;
PERSONNEL LIMITATIONS; ABILITY TO MANAGE GROWTH
The Company's success depends substantially upon the contributions of
several key personnel, some of whom, such as the Company's Chief Executive
Officer, Jeffrey Ait, were only recently hired by the Company. The Company
is currently seeking to hire a Chief Financial Officer and a Vice President
of Sales. The failure to attract and retain key personnel could have a
material adverse effect on the
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Company's business, financial condition and results of operations.
As a result of its cash constraints, and in connection with its reduced
level of operations and its focus on Internet software products, the Company
has significantly rationalized its workforce, including administrative and
engineering resources. While the Company endeavors to identify and develop,
license or acquire technologies or products to extend product functionality
and market position in the areas of Web site development and management, its
ability to successfully undertake these activities could be limited by, among
other things, existing administrative, engineering and other resource
limitations. The failure to attract and retain adequate levels of
engineering, sales and marketing and other resources needed to timely respond
to customer needs or market conditions or to develop products to address
targeted markets would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Distribution
Risks; Substantial Reseller Customer Concentration" and "--Rapid
Technological Change; Risk of Product Delays; Risk of Product Defects."
The Company's rationalization of its workforce has challenged, and is
expected to continue to challenge, the Company's management and operations,
including its marketing and sales, 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. The Company
anticipates that it will need to add additional personnel beyond its present
needs 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.
DISTRIBUTION RISKS; SUBSTANTIAL RESELLER CUSTOMER CONCENTRATION
The Company currently sells its software products targeted at the
individual and Small Office Home Office ("SOHO") professional market to
distributors for resale to certain retailers, including computer superstores
and mass merchandisers. The Company plans to expand distribution of its
Internet software products in this retail distribution channel by increasing
distribution relationships both domestically and internationally. The
Company also intends to increase the number of products available for sale
through the retail channel, which the Company believes is essential in
securing adequate retail shelf space and retailer promotional support. The
retail distribution channel is highly competitive and there can be no
assurance as to the Company's ability to expand its distribution in this
channel. In addition, there can be no assurance that the Company will be
able to successfully develop additional products for distribution through
this channel. See "--Competition."
The Company intends to introduce products targeted at the SMB and
enterprise department user markets. Successful development of products
targeted at the SMB and enterprise department user markets will depend in
part on the Company's ability to successfully integrate the technology
acquired in the Site Tech Acquisition and the Inlet Technology Acquisition.
See "--Risks Associated with Inlet Technology Acquisition and Site Tech
Acquisition; General Acquisition Risks." In addition, the Company has not
historically sold products targeted at these markets and, in order to do so,
must develop a sales and marketing department with specialized expertise in
the development of value added reseller ("VAR"s), original equipment
manufacturer ("OEM") and Internet Service Provider ("ISP") relationships to
provide SMB and enterprise department users Internet software solutions.
There can be no assurance that the Company will be able to develop such a
sales and marketing team on a timely basis or at all. In addition, this
market is competitive and there can be no assurance that the Company will be
successful in establishing significant relationships with VARs, OEMs or ISPs
or, if developed, there can be no assurance as to amount of support that the
Company's products will receive from these VARs, OEMs or ISPs who may offer
products that compete with the Company's products. See "--Competition." To
the extent that the Company succeeds in its strategy to target the SMB and
enterprise department user markets, among
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other things, the Company's results of operations may be subject to greater
or different fluctuations as a result of potentially larger individual
product sales, a longer sales cycle and longer payment terms.
Sales to a limited number of distributors and retailers in the retail
distribution channel have constituted, and are anticipated to continue to
constitute in the near term, a significant portion of the Company's retail
software sales. In particular, revenues from licenses sold to Nippon
Polaroid Kabushiki Kaisha, the Company's Japanese distributor, constituted
approximately 11% of the Company's revenues from the sale of Internet
products for the year ended December 31, 1996 and 10% for the nine months
ended September 30, 1997. See "--Risks Associated with International
Operations." Sales to Ingram Micro Inc. constituted approximately 45% and
30% of the Company's revenues from the sale of Internet products for the year
ended December 31, 1996 and for the nine months ended September 30, 1997,
respectively. Any termination or significant disruption of the Company's
relationship with any major distributor or retailer, or any significant
reduction in sales volume attributable to any of such entities, would, 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 the Company's existing distributors and retailers will continue to
provide the Company's products with adequate levels of shelf space or
promotional support.
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 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 or plans to compete 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
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anticipates increased competition in these markets from both existing vendors
and new market entrants.
In the market for Internet software tools targeted at individual and SOHO
professional users, the Company has encountered competition primarily from
Microsoft, Adobe Systems Incorporated, SoftQuad, Inc. Systems and NetObjects,
Incorporated (majority owned by IBM). In the market for Internet software
solutions targeted at the SMB and corporate departmental user markets, in
addition to these competitors, the Company expects competition from HAHT
Software Incorporated, Wallop Software Incorporated, Aziza, a division of
Objectivity Incorporated, Eventus Software Incorporated, Interwoven
Corporation and Vignette Corporation. In addition, some existing vendors in
the enterprise wide Internet software solution market (such as IBM/Lotus,
Oracle Corporation, Informix Software Inc. and Sybase Incorporated, Inc.) may
enter into the Company's existing and planned markets. 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 that it will face
increasing pricing pressures. There can be no assurance the Company will be
able to maintain its historic pricing structure for its existing products or
will be able to obtain its desired pricing structure for planned products.
If the Company is unable to do so or 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.
In the future, vendors of operating system software or other software
(such as office or back office software suites) may continue to enhance their
products (including separate products that are bundled together) to include
functionality that is provided by the Company's current and planned products.
This enhancement could be achieved through the addition of functionality to
operating system software or other software or the bundling of Internet
software tools with operating system software or other products. For
example, Microsoft incorporates into its BackOffice product its Web page
creation software product, FrontPage. The inclusion of the functionality of
Internet software tool products as standard features of operating system
software or other software could render the Company's products obsolete and
unmarketable, particularly if the quality of such functionality were
comparable, or perceived to be comparable, to that of the Company's products.
Furthermore, even if the Internet software tool functionality provided as
standard features by operating systems or other software is more limited than
that of the Company's products, there can be no assurance that a significant
number of customers would not elect to accept such functionality in lieu of
purchasing additional software. If the Company were unable to develop new
Internet software tool products to further enhance operating systems or other
software and to replace successfully any obsolete products, the Company's
business, financial condition and results of operations would be materially
adversely affected.
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
20
<PAGE>
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
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.
Although the Company is not currently engaged in any intellectual
property litigation or proceedings, 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
The Company's stock price has exhibited substantial 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 operating performance.
RECENT DE-LISTING FROM NASDAQ SMALLCAP MARKET; POTENTIAL DELISTING FROM
PACIFIC EXCHANGE; POSSIBLE INABILITY OF PRINCIPAL MARKET MAKER TO MAKE A
MARKET IN THE COMPANY'S COMMON STOCK
The Company's Common Stock was quoted on the Nasdaq SmallCap Market from
December 1995 until March 18, 1997 and is traded on the Pacific Exchange
(formerly the Pacific Stock Exchange) and quoted on the OTC Bulletin Board
and the "pink sheets." The Common Stock was delisted from the Nasdaq SmallCap
Market effective March 19, 1997 because of Nasdaq's determination that the
Company
21
<PAGE>
failed to maintain certain requirements for continued listing. The shares of
Common Stock are currently quoted on the Pacific Exchange. The Company has
been notified by the Pacific Exchange that it may take action to delist the
shares of Common Stock as a result of, among other things, the Company's
failure to maintain certain requirements for continued listing. As a result
of the foregoing, it is more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's Common Stock. In addition,
because the Company's Common Stock was removed from the Nasdaq SmallCap
Market and its market price is less than $5.00 per share, it is 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 and
the applicability of such "penny stock" rules could adversely 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. While the Company
intends to apply for relisting on the Nasdaq SmallCap Market should it ever
satisfy the conditions of listing and intends to take actions to prevent
delisting from the Pacific Exchange, there can be no assurance that relisting
will occur or that delisting will not occur in the future. Even if the
Company achieves relisting for the Common Stock on the Nasdaq SmallCap
Market, the liquidity of the Common Stock will remain limited as the Nasdaq
SmallCap Market and the Pacific Exchange are a significantly less liquid
markets then the Nasdaq National Market. 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 (if relisted) and the
Pacific Exchange, and the shares of Common Stock could be subject to removal
from the Nasdaq SmallCap Market and the Pacific Exchange.
Any limitation on the ability of H.J. Meyers & Co., Inc. ("H.J. Meyer"),
the principal market maker in the Company's Common Stock, to make a market in
the Company's Common Stock could adversely impact the liquidity or trading
price of the Company's Common Stock, which could have a material adverse
impact on the market price of the Company's Common Stock. The Chicago office
of the Securities and Exchange Commission is conducting a private, nonpublic
investigation of H.J. Meyers pursuant to a Formal Order of Investigation
issued by the Commission. The investigation is focused on whether H.J.
Meyers may have violated applicable securities laws and the rules and
regulations thereunder, with respect to sales of certain securities. The
Company is currently unable to assess the potential impact of the outcome of
the Staff's investigation on the H.J. Meyer's ability to make a market in the
Company's Common Stock or trading in the Company's securities.
22
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no 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
(b) Reports on Form 8-K
On September 22, 1997, the Company filed an amended 8-K related to the
acquisition of Site/technologies/inc.
23
<PAGE>
SIGNATURES
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/ Jeffrey F. Ait
------------------------------
Jeffrey F. Ait
Chief Executive Officer
(Principal Accounting Officer)
Date: November 14, 1997
24
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 85
<SECURITIES> 0
<RECEIVABLES> 474
<ALLOWANCES> 110
<INVENTORY> 146
<CURRENT-ASSETS> 1,035
<PP&E> 1,438
<DEPRECIATION> 1,159
<TOTAL-ASSETS> 1,663
<CURRENT-LIABILITIES> 2,120
<BONDS> 0
0
0
<COMMON> 17,921
<OTHER-SE> (18,378)
<TOTAL-LIABILITY-AND-EQUITY> 1,663
<SALES> 182
<TOTAL-REVENUES> 182
<CGS> 84
<TOTAL-COSTS> 84
<OTHER-EXPENSES> 6,178
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> (816)
<INCOME-PRETAX> (5,054)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,699)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,699)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
