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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X]15, ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ]15, TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27328
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DELTAPOINT, INC.
(Exact Name of Registrant as specified in its charter)
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CALIFORNIA 7372 77-0216760
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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22 LOWER RAGSDALE, MONTEREY, CA 93940
(Address of principal executive offices)
408-648-4000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, no par value
(Title of each class).
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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
____
Check if there is no disclosure of delinquent filers in the response to Item
405 of Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this for 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $4,950,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 25, 1997 was approximately $5,172,718. Shares of Common
Stock held by each officer and director have been excluded in that such persons
may be deemed to be affiliates. This determination of a affiliate status is not
necessarily a conclusive determination for other purposes. The number of shares
outstanding of the registrant's Common Stock as of March 25, 1997 was 2,489,873.
Transitional Small Business Disclosure Format (check one) Yes ____ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
PART III--Portions of the registrant's definitive Proxy Statement are to be used
in conjunction with the registrant's Annual Meeting of Shareholders to be held
on June 20, 1997.
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DELTAPOINT, INC.
FORM 10-KSB ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
TABLE OF CONTENTS
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PART I
Item 1. Description of Business...................................................... 3
Item 2. Property..................................................................... 19
Item 3. Legal Proceedings............................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.......................... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 20
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 20
Item 7. Financial Statements......................................................... 25
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 25
PART III
Item 9. Directors and Executive Officers, Promoters, and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.................................... 41
Item 10. Executive Compensation....................................................... 41
Item 11. Security Ownership of Certain Beneficial Owners and Management............... 41
Item 12. Certain Relationships and Related Transactions............................... 41
Item 13. Exhibits and Reports on Form 8-K............................................. 41
SIGNATURES.............................................................................. 44
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THIS REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS."
DeltaPoint, Inc. (the "Company") was incorporated in California in 1989. The
Company develops and markets Internet software tools designed to allow users to
effectively and easily create, manage and enhance sites on the Internet's World
Wide Web. The Company introduced QuickSite in February 1996 to enable novice and
experienced site publishers to rapidly create, maintain and enhance robust Web
sites. Since its introduction, the Company believes that QuickSite has received
more awards than any other Web site creation and management tool, winning the PC
WEEK Analyst's Choice Award in March 1996, WINDOWS MAGAZINE recommended seal and
the PC WEEK LABS IT Excellence Award in April 1996, and the PC COMPUTING 5-Star
rating in June 1996. The Company introduced WebTools in March 1996 to allow
developers, value-added resellers ("VARs") and corporate MIS directors to add
Web publishing capabilities to existing applications and introduced WebAnimator
in July 1996 to allow a broad range of Web users to easily add multimedia and
interactive animation to a Web site. In addition, in September 1996 the Company
introduced QuickSite Developer's Edition, a new high end version of QuickSite
designed for professional Web developers and corporate Intranet developers.
QuickSite Developer's Edition earned the PC COMPUTING 5-Star rating in February
1997.
A key element of the Company's objective of becoming a leading Internet
software tools provider is to increase its strategic alliances with key
partners. In September 1996, the Company entered into an agreement with IBM to
develop and license a customized version of QuickSite for inclusion in IBM's
recently announced World Distributor, an on-line interactive electronic commerce
service. The Company has also entered into agreements with Borland
International, Sony, McGraw-Hill, Earthlink, Compaq and Netcom Interactive to
distribute existing or planned versions of QuickSite with their products or
services.
In the past, the Company has derived most of its revenues from the sale of
charting and graphics software products such as DeltaGraph, an advanced
multi-platform charting and graphics product. The Company has de-emphasized its
charting and graphing products and expects that they will represent a declining
percentage of its business.
BACKGROUND
The rapid growth of the Internet, combined with the emergence of the World
Wide Web, the graphical multimedia-rich portion of the Internet, has resulted in
the development of the Internet as a new mass communications medium. The demand
to access the World Wide Web has fueled the rapid growth and proliferation of
"Web browsers," such as the Netscape Navigator and Microsoft Internet Explorer,
which allow users to passively view information on the World Wide Web. In
addition, search engines such as those provided by Yahoo! And InfoSeek simplify
the process of locating information on the Web.
Increasingly, however, Web users are no longer satisfied simply to browse
and search the Web. The worldwide, cost-effective communication benefits of the
Web are leading many individuals and organizations to actively "publish"
information on the Web by creating a Web "site," a collection of individual Web
pages, each hand-crafted using a relatively new and quickly evolving tagging
language called HTML.
Many large corporations, having already established sophisticated Web sites
for external communications, are now encouraging smaller internal groups and
departments to build private "Intranet" Web sites. Small businesses, home-based
businesses, individuals and others are also creating Web sites to reach target
audiences.
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For many individuals and organizations, establishing a robust Web site
remains a time-consuming and expensive proposition. The free-form nature of HTML
has inhibited the emergence to date of a standard for HTML page creation.
Further, an increasing number of competing extensions and modifications to the
HTML language continue to be proposed, making it difficult for Web site
publishers to support the latest technical advances.
A first generation of third-party Web "page creation" tools has emerged.
These limited-function tools focus on the creation of a single page at a time.
Content within the pages and between pages must be manually linked and manually
maintained. Further, the content of the site has no inherent structural
intelligence, making global changes, consistency of design and reorganization of
sections difficult and time-consuming. A second generation of Web page creation
tools, such as Microsoft's Front Page and NetObjects' Fusion, has also been
introduced. Although this generation offers some ease-of-use improvements over
the first generation, these products continue to be based on architectures that
primarily emphasize the layout and design aspects of individual pages.
The Company believes that a compelling Web site consists of a robust and
growing collection of interrelated pages and links. As a result, the Company
believes that effective software tools for creating and managing Web sites must
not only simplify initial content creation but enable site authors to easily
update, maintain, expand and manage their sites on an ongoing basis, regardless
of whether the sites consist of five pages or 5,000 pages. Further, the Company
believes that an open architecture is important to maintaining flexibility as
Internet standards emerge and evolve rapidly.
DELTAPOINT APPROACH
The Company offers a family of products that enables Web site creators to
easily and cost-effectively generate, manage and enhance Web content using a
structured approach. QuickSite and QuickSite Developer's Edition, the Company's
Web site creation and management products, utilize an advanced product design
featuring a database architecture and incorporate a series of query-based
"wizards" that guide the site developer through a "point and click" process that
results in a completed, fully linked Web site structure in minutes. The
Company's database design enables the automatic generation and maintenance of
links between Web pages, eliminating or reducing the need for any programmer or
technical intervention. Additionally, this approach enables all components of an
entire Web site to be captured, collected and easily managed as fully indexed
data objects within the database engine. The Company believes that its database
approach to Web site creation and management provides fundamental advantages
over existing page creation methodologies which will become increasingly
apparent as the volume and complexity of content contained in the Web sites
increases.
The Company's Web site creation and management tools are designed with full
client-side functionality to free the site designer from costly server
connection time during the site creation and testing process. Further, these
tools utilize an open architecture that provides browsers and server
independence. The Company intends to incorporate this level of flexibility into
all of its Internet software tools.
DELTAPOINT STRATEGY
DeltaPoint's objective is to be a leading provider of software products that
enable users of all experience levels to quickly and easily create and enhance
compelling sites on the World Wide Web. The Company's strategy for achieving
this objective includes the following elements:
CREATE BRAND AWARENESS. The Company intends to increase its brand awareness
through a coordinated strategy of building brand equity in the QuickSite product
name, emphasizing QuickSite's Web site management capabilities and database
architecture, and demonstrating its growing acceptance through a growing array
of relationships with industry leaders. Since March 1996, the Company has
entered into agreement with companies such as IBM, Borland International, Sony,
McGraw Hill, Earthlink, Compaq and Netcom Interactive. To build brand identity,
the Company also plans to increase and expand its print
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and online advertising efforts and to increase its participation in major
industry conferences and trade shows.
EXPAND DISTRIBUTION. The Company plans to expand distribution of its
Internet software tools by increasing its retail distribution relationships to
ensure wide commercial availability of its shrink-wrapped products and by
partnering with alternative channel and vertical segment leaders, including
distribution and co-marketing relationships with key PC manufacturers and
Internet Service Providers (ISP's) that can increase market penetration and that
offer revenue sharing business models.
BROADEN PRODUCT OFFERING. The Company intends to identify and develop,
license or acquire technologies or products to extend market position in two
areas: Web site creation and Web site management. In the area of Web site
creation, the Company intends to continue expanding the range of pre-designed
templates, graphics, forms and wizards contained within the QuickSite product.
The Company also plans to develop and market complementary content enhancement
products, such as WebAnimator, which allow Web site creators to improve content
through special effects. In the area of Web site management, the Company expects
to continue to update and enhance the management features of QuickSite.
DEVELOP PRODUCTS THAT SUPPORT OPEN ARCHITECTURE. The Company plans to
introduce Internet software tools based on an open, client-based architecture.
The Company intends to develop Web products which will support any widely used
Web browser, including Netscape Navigator and Microsoft Internet Explorer, as
well as any major server software environment, including Windows NT, Netscape
Commerce Server and Unix. Additionally, the Company plans to architect
additional products that will enable the entire Web site creation process to
occur on a client-side desktop personal computer.
TARGET CORPORATE INTRANET MARKET. The design of the Company's Internet
software tools enable them to be used with little or no modification in the
corporate Intranet environment. The Company plans to develop and implement a
focused effort to target the Intranet marketplace. Specifically, the Company
plans to create a dedicated market development and sales team with specialized
expertise in providing corporate solutions.
DELTAPOINT PRODUCTS
The Company introduced five Internet software tools in 1996. QuickSite is
designed as a low cost, easy to use Web site creation and management tool that
is designed to enable novice and experienced site publishers to rapidly create,
maintain and grow a robust Web site. QuickSite Developer's Edition offers
additional functionality and is targeted for software programmers, Webmasters,
commercial Web site developers and corporate Web site managers. WebTools has
been designed to enable developers, VAR's and corporate MIS directors to add Web
publishing capabilities to existing applications. WebAnimator is designed to
allow a broad range of Web users to easily add multimedia and interactive
animation to a Web site.
The Company's charting and graphics software products currently include
DeltaGraph, a cross platform application which is used to transform numerical
data into charts and graphs.
QUICKSITE.
In December 1995, the Company acquired an exclusive license to core
technologies which serves as the basis for a family of Web site creation and
management software tools. QuickSite, the first of these tools, which began
shipping to retail distributors on March 28, 1996, is designed to enable
non-technical individuals and organizational users to rapidly create and
efficiently manage a Web site. The following are the key attributes of the
DeltaPoint solution:
EASE OF SITE CREATION. The Company has designed a collection of site
creation wizards aimed at eliminating the initial stumbling blocks encountered
by novice Web site authors. These wizards guide the
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user through a point-and-click process that designs and builds an entire Web
site, complete with page links, table of contents, and other important site
creation elements such as e-mail return addresses, copyright notices, consistent
menu designs and flags for pages containing special content. The Company
believes that QuickSite can significantly shorten the time required to design
and build a Web site. Wizards also enable users to select and modify the
stylistic elements of a site such as the colors and textures of backgrounds,
graphics, headers and footers. By masking the complexities of HTML, Java and
other site creation conventions, these wizards eliminate the requirement for Web
site authors to develop specialized technical expertise before they can become
productive.
EASILY UPDATABLE CONTENT. The Company's product architecture passively
enforces a Web structure such that as the author populates the site, content
components are captured as data objects which are automatically indexed and
stored within the product's database engine. As a result, content can be more
quickly updated and global changes can be reflected through an entire Web site
with a few simple keystrokes. Further, any content element, including text,
graphics, data files, and images, can be stored and re-used, saving users time
as they build additional sites or add to existing sites.
EXTENSIBLE ARCHITECTURE. By employing a componentized architecture, the
Company provides an extensible platform that can adept as new technical
innovations evolve. Tables, forms, and other new extensions to HTML, as well as
user-definable functions, are supported through a point-and-click component
library management system.
BROWSER AND SERVER INDEPENDENCE. QuickSite supports most Web browsers,
including Netscape Navigator and Microsoft Internet Explorer, which together are
estimated to account for over 90% of the current marketplace. Additionally,
QuickSite is architected to enable all the entire Web site creation process to
occur on a client-side desktop personal computer. The Company believes that this
client-biased approach provides several key advantages, including: (i)
elimination of dependencies on any single third-party Internet or network-server
technology; (ii) lower overall cost by eliminating the need to connect to a
server for interim testing of an in-progress site; and (iii) reduced risk of
investing in the "wrong" server environment.
QUICKSITE DEVELOPER'S EDITION
QuickSite Developer's Edition is designed for Internet Web site developers
and corporate Intranet developers. The QuickSite Developer's Edition gives
professional Web site developers significantly enhanced control over the web
site creation and management process. Among the new features included in
QuickSite Developer's Edition are: (i) support for the emerging WWW Consortium
web style sheets standard; (ii) 3D Web Site Builder, a visual VRML (virtual
reality mark-up language) creation tool from Virtus included with the product;
(iii) advanced web site automation, including the QuickScript scripting
language, powerful page macros and unique caret technology that automate
repetitive tasks that bog down large-scale projects; (iv) embedded "graphics
factory" technology, elements on-the-fly, and also helps to enforce stylistic
consistency throughout a site; and (v) sophisticated project reporting
capabilities that help the developer track and document the ongoing status of
their work.
WEBTOOLS
WebTools is designed to allow database developers to add Web-enabling
features to existing database applications. DeltaPoint will license WebTools to
software development companies including Borland International in return for a
licensee fee or royalty agreement. Currently WebTools is available for Visual
dBASE for Windows and for CA Clipper.
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WEBANIMATOR
In November 1995, the Company acquired core technologies which serves as the
basis for WebAnimator, a multimedia authoring tool for the Web from Richard
Blum, d.b.a. Knowledge Vision ("Knowledge Vision"). WebAnimator is designed to
enable a broad range of Web users to easily add multimedia and interactive
animation to a Web site. The Company believes that WebAnimator represents an
advance over currently commercially available products by offering the following
key attributes: (i) extensive use of predefined templates that enable users to
combine text, graphics and sound to produce multimedia rich content components;
(ii) content components created in WebAnimator's native format are vector based
and therefore are compressed to small files that can be quickly downloaded and
played from within a Web browser; (iii) graphic objects in WebAnimator act as
interactive buttons that enable users to branch to different Web site locations;
and (iv) advanced digital sound and motion synchronization tools enable users to
easily and accurately add sound and motion to an animated content component.
GRAPHICS PRODUCTS
The Company's charting and graphics software product, DeltaGraph, can be
used as either a stand-alone product or as a complement to software programs
such as spreadsheets, databases and presentation graphics. DeltaGraph offers a
broad range of business, scientific and technical charts with flexible
formatting features that enables charts to be fine tuned with high resolution
output. Presentation tools such as slide show managers and outliners enhance
DeltaGraph's functionality. DeltaGraph is primarily used by chemists,
biologists, geologists, pharmacists, and professionals in the financial
services, aerospace and publishing industries.
PRODUCTS UNDER DEVELOPMENT
The Company believes that its future success depends in part on its ability
to maintain and improve its core technologies, enhance and expand its products
and develop new products that meet evolving customer requirements and industry
standards. The Company's current efforts are focused on the development of
products that further enhance development capabilities in the areas of Web site
creation and Web site management.
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
("Microsoft"), Software Publishing Corporation, Lotus, Corel and Computer
Associates International, Inc. In the structured drawing market, the Company
has, to date, encountered competition primarily from larger vendors such as
Corel, Visio and Micrografx Incorporated. In the Internet add-in market, the
Company has encountered competition primarily from Netscape Communications
Corporation, Macromedia, Inc., Adobe Systems Incorporated, Microsoft, NetObjects
Inc. and Quarterdeck, Inc. In addition, the Company expects that existing
vendors and new market entrants will develop products that will compete directly
with the Company's products and that competition will increase significantly to
the extent that markets for the Company's products grow. Increased competition
is likely to result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Most of
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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.
MARKETING AND SALES
The Company markets and sells its products through the coordinated efforts
of its corporate marketing department and its direct sales organization. For
retail, the Company uses a two-tier distribution model with product sold through
Ingram Micro, Techdata, Merisel and other distribution to more than 500 retail
outlets such as Best Buy, Comp USA, Egghead, Fry's and others. The Company
intends to expand the number of U.S. retail locations in 1997 and will seek to
selectively add major new distributors.
Internationally, the Company's strategy is to work with highly-motivated
publishers who can invest in a full array of local services including marketing
and localization support as well as provide access to distribution. The Company
will continue to localize its products first for the Japanese market, which
accounted for 21% revenues in 1996 and 35% of revenue in 1995. Furthermore, the
Company intends to pursue the expansion of its international presence by
establishing new partnerships in key European markets such as the U.K. and
Germany.
The Company also allows fully functional versions of many of its products to
be downloaded from its secure Web site server (Deltapoint.com). The downloadable
versions enable worldwide access to the products 24-hours a day and allow people
to become productive with and reliant on the product functionality. Users are
prompted to purchase a license to the product with a 30-day grace period after
which encrypted technology within the downloadable versions automatically
disables the product. The Company will promote and encourage the availability of
its downloadable products.
The Company pursues relationships and alliances with a broad spectrum of
industry leaders. Distribution alliances in the PC manufacturing area have been
announced with Compaq and Sony, and in the ISP marketplace with Netcom
Interactive, Earthlink, and more than half a dozen regional ISP's. In addition,
the Company has entered into an agreement with IBM to develop and license a
customized version of QuickSite for inclusion in IBM's recently announced World
Distributor electronic service and announced a relationship with McGraw Hill
which will offer site licenses of QuickSite to school districts and State Boards
of Education. To address the developers market, the Company has established an
alliance with Borland International, a leading provider of language tools for
software programmers. Under the agreement, Borland licensed the Company's
WebTools product and bundled a version of QuickSite with all Borland products
through the end of 1996. The Company also has announced relationships with
technology partners such as DigitalStyle, a leading maker of on-the-fly graphics
generation tools, and Virtus, a leading developer of Virtual Reality Modeling
language technology for creating 3D Web sites.
Historically, a significant portion of the Company's revenues have been
derived from sales of upgrades of its DeltaGraph charting product to its user
base through direct mail campaigns. Presently the Company is focusing on
strengthening its distribution network by adding distributors and retailers, and
entering into additional partner relationships that will enhance the
distribution of the Company's Internet products. In addition, the Company
intends to continue to implement its OEM strategy by pursuing other major PC
manufacturers of the Sony and Compaq caliber.
In support of its sales organization, the Company conducts a number of
marketing programs intended to promote and market the Company's Internet
products. These efforts include product advertising, public
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relations and press tours, trade show participation, direct mail and
telemarketing campaigns, preparation of marketing collateral and participation
in industry programs, user groups and forums. The Company also maintains a
QuickSite Web site on the World Wide Web that contains information on its
products, distribution channels, awards, personnel and other information
relation to the Company.
As of December 31, 1996, the Company had 12 employees in marketing and
sales. For the year ended December 31, 1996, the Company spent $4.7 million or
94.6% of revenue for sales and marketing expenses compared to $1.9 million and
47.5% of revenue in the year ended December 31, 1995.
STRATEGIC ALLIANCES
A key element of the Company's strategy is the continued creation and
development of strategic alliances with key participants. The Company's goals in
establishing these relationships are to create marketing alliances that will
endorse and promote the Company's products to a larger potential customer base
than can be reached through the Company's direct marketing efforts. To date the
Company has entered into strategic alliances with companies such as IBM, Borland
International, Sony, McGraw Hill, Earthlink, Compaq and Netcom Interactive.
IBM. The Company entered into an agreement with IBM to develop and license
to IBM a customized version of QuickSite for inclusion in IBM's recently
announced World Distributor, an on-line interactive electronic commerce service.
The agreement requires the Company to develop a customized version of QuickSite
and requires IBM, to the extent it sublicenses or otherwise provides QuickSite
on a revenue-bearing basis as part of its electronic commerce service, to pay
the Company a royalty based on the number of copies of QuickSite so sublicensed
or provided. The agreement may be terminated by IBM on 60 days' advance notice.
BORLAND INTERNATIONAL. The Company entered into an agreement with Borland
International in May 1996 under which Borland may bundle and distribute
QuickSite with its programming tools through December 1996 in consideration for
license fees, brand promotion activities and certain marketing services.
SONY. The Company entered into an agreement in June 1996 whereby Sony
pre-installs a custom version of the Company's QuickSite product on its new line
of Vaio personal computer systems. This version of the product incorporates an
encrypted algorithm that allows the Sony customers to use the full functionality
of the product for a 30-day trial period after which the user is required to
purchase the product electronically from DeltaPoint for continued use. In
December 1996, an addendum to the contract was done. The agreement allows for
Sony to pre-install and ship an unencrypted version of QuickSite on the Vaio
personal computers. A royalty will be paid for each unit sold.
MCGRAW-HILL SCHOOL SYSTEMS. In June 1996, the Company entered into an
agreement under which McGraw-Hill will market and distribute QuickSite products
and site licenses to the education sector, including school districts and the
state board of education.
EARTHLINK. The Company entered into an agreement in June 1996 with
Earthlink, a leading Internet Service Provider, under which the companies will
perform mutually beneficial cross-bundling and cross merchandising. Earthlink
has agreed to purchase a minimum number of QuickSite licenses.
COMPAQ. In July 1996, the Company entered into an agreement under which
Compaq will offer QuickSite as part of an optional software bundle on one of its
Presario systems and has rights to bundle on other platforms for a per unit
license fee.
NETCOM INTERACTIVE. The Company entered into an agreement with Netcom
Interactive in July 1996 under which the companies intend to cooperate on a
custom developed, jointly marketed integrated offering.
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Many of these relationships are in the early stages of development and have
not yet resulted in material revenue for the Company. Generally, existing
agreements outlining the Company's alliances do not impose significant financial
obligations or liabilities on either party and have terms no longer than one
year. There can be no assurances these relationships will successfully develop
to the extent that they will contribute materially to the Company's financial
results in the future.
RESEARCH AND DEVELOPMENT
Historically, the Company has licensed or acquired core technologies and has
expended its development expertise on transforming these technologies into
commercially viable, easy-to-use products. In November 1995, the Company
acquired core technology including source code and related documentation,
required to develop WebAnimator from Knowledge Vision. The purchase price for
the technology was $250,000, payable in installments. The Company will also pay
a royalty based on net revenue from sales of WebAnimator, subject to a maximum.
Under the terms of the acquisition agreement, the individual will work as a
consultant to the Company to assist in developing WebAnimator.
In December 1995, the Company acquired core technology, including source
code and related documentation, required to develop QuickSite, from Global
Technologies and from certain individuals. The purchase price for the technology
was (i) $800,000 in cash, payable in installments and (ii) the issuance of
100,000 shares of Common Stock. The Company will also pay a royalty during the
first two years of commercial shipments of QuickSite based on net revenues from
sales of QuickSite, subject to a maximum and subject to the right of the Company
to pay a portion of the royalty in its Common Stock. Pursuant to the agreement,
the individual became an employee of the Company to assist in the development of
QuickSite.
The Company has made substantial investments in research and development
through both internal development and technology acquisition. The Company
believes its future performance will depend in large part on its ability to
maintain and improve its current product line, develop new products, maintain
technological competitiveness and meet an expanding range of customer
requirements.
As of December 31, 1996, the Company had 19 employees in its research and
development organization. The Company's research and development expenses for
the years ended December 31, 1996 and 1995 were $2.6 million and $2.0 million,
respectively. The Company plans to continue to make significant investments in
research and development. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PROPRIETARY RIGHTS AND LICENSES
The Company relies on a combination of copyright, trademark, trade secret
laws, confidentiality procedures and other intellectual property protection
methods to protect its proprietary rights. The Company owns certain registered
trademarks in the United States and abroad. Although the Company relies to a
great extent on trade secret protection for much of its technology, and
generally obtains written confidentiality agreements from its employees, there
can be no assurance that third parties will not either independently develop the
same or similar technology, obtain unauthorized access to the Company's
proprietary technology or misuse the technology to which the Company has granted
access. The Company believes that, due to the rapid proliferation of new
technology in the industry, legal protection through means such as the patent
and copyright laws will be less influential on the Company's ability to compete
than such factors as the creativity of its development staff and its ability to
develop new markets and to service its customers. The Company licenses its
products to individual end users primarily under "shrink wrap" license
agreements that are included in products shipped by the Company and that are not
signed by the licensees and therefore may be unenforceable under the laws of
certain jurisdictions. These agreements provide that by breaking the "shrink
wrap" a software purchaser agrees to be bound by the terms and conditions of the
license agreement.
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There has been substantial industry litigation regarding patent, trademark
and other intellectual property rights involving technology companies. In the
future, litigation may be necessary to enforce any patents issued to the
Company, to protect trade secrets, trademarks and other intellectual property
rights owned by the Company, to defend the Company against claimed infringement
of the rights of others and to determine the scope and validity of the
proprietary rights of others. Any such litigation could be costly and result in
a diversion of management's attention, which could have material adverse effects
on the Company's business, financial condition and results of operations.
Adverse determinations in such litigation could result in the loss of the
Company's proprietary rights, subject the Company to significant liabilities,
require the Company to seek licenses from third parties or prevent the Company
from manufacturing or selling its products, any of which could have material
adverse effect on the Company's business, financial condition and results of
operations.
The laws of certain foreign countries treat the protection of proprietary
rights of the Company in its products differently from those in the United
States, and in many cases the protection afforded by such foreign laws is weaker
than in the United States. The Company believes that its products and their use
do not infringe the proprietary rights of third parties. There can be no
assurance, however, that infringement claims will not successfully be made.
The Company has received and will continue to receive from time to time
communications from third parties asserting infringement upon intellectual
property rights of such parties as a result of either features or content of its
software products. 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 for which the ultimate resolution could have
a material adverse effect on the Company's business financial condition and
results of operations.
In March 1996 the Company entered into an agreement with Unisys Corporation
("Unisys"). The Company has licensed a patent which will require the Company to
pay Unisys a license fee of 0.45% of the Company's revenues from the sale of
each product covered by such license agreement, subject to a minimum license fee
of ten cents ($0.10) for each such product.
In June 1992, the Company entered into an agreement (the "Halcyon License
Agreement") with Halcyon Software, Inc. ("Halcyon") pursuant to which Halcyon
granted the Company a non-exclusive, perpetual, sub-licensable license to
prepare, make, reproduce, use, perform, modify, adapt, sell or otherwise dispose
of or distribute the following programs and derivative works thereof, whether or
not in combination with or incorporated into any other product: Snap, Thumbnail,
Viewer, Conversion, Trace and Paint (the "Products"). The Company pays Halcyon a
royalty equal to two to five percent of the Company's net revenues received from
sales of the Products, depending on the extent to which the Products incorporate
technology not provided by Halcyon. To date, the Company has paid Halcyon non-
refundable license fees in the amount of $150,000. No further royalty payments
are payable until accrued royalty payments exceed $150,000. Pursuant to the
Halcyon License Agreement, in November 1992 the Company granted Don Hsi an
option to purchase 18,867 shares of Common Stock at an exercise price of $6.63
per share. The option lapsed on February 20, 1996 without being exercised. The
Halcyon License Agreement has an indefinite term, but is terminable at the
Company's option upon written notice if the Company determines in good faith
that it is not technically and commercially advantageous to continue with a
Product.
The Company has also licensed from Altura Software Inc. ("Altura") the
Mac2Win Software for use in creating Windows platform version of DeltaGraph and
WebAnimator. The Company was granted a non-exclusive license to copy, distribute
and sublicense the Mac2Win Software only when packaged with, and as part of,
DeltaGraph and WebAnimator ported to run on the Windows platforms. The Company
has made a series of payments to Altura in the total amount of $72,000. License
fees of $6,000 per month are payable by the Company in advance during each month
the agreement remains in effect. The Company also pays a
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royalty equal to three percent of net revenues received from sales of DeltaGraph
and WebAnimator ported for the Windows platform with a first year minimum of
$36,000 and a minimum of $48,000 for the next two years. The license agreement
is terminable by the Company upon 30 days prior written notice and the payment
of all amounts owed to Altura.
In November 1995, the Company acquired core technology, including source
code and related documentation, required to develop WebAnimator. The purchase
price for the technology was $250,000, payable in installments. The Company will
also pay a royalty based on net revenues from sales of WebAnimator, if any,
subject to a maximum. Under the terms of the acquisition agreement, the
individual will work as a consultant to the Company to assist in developing
WebAnimator.
In December 1995, the Company acquired core technology, including source
code and related documentation, required to develop QuickSite, from Global
Technologies Corporation, and an individual. The purchase price for the
technology was (i) $800,000 in cash, payable in installments, and (ii) the
issuance of 100,000 shares of the Company's Common Stock. The Company will also
pay a royalty during the first two years of commercial shipments of QuickSite
based on net revenues from sales of QuickSite, if any, subject to a maximum and
subject to the right of the Company to pay a portion of the royalty in Common
Stock. Pursuant to the agreement, the individual became an employee of the
Company to assist in developing QuickSite.
EMPLOYEES
As of December 31, 1996, DeltaPoint had 45 full-time employees located
throughout the United States. This number includes 24 persons in Research and
Development and Technical Support, 12 persons in Marketing, Sales and Sales
Support and 9 persons in Operations and Finance. None of the Company's employees
is represented by a labor union or is subject to a collective bargaining
agreement. DeltaPoint believes that its relations with its employees are good.
RISK FACTORS
RECENT AND EXPECTED LOSSES; ACCUMULATED DEFICIT; GOING CONCERN ASSUMPTION;
QUARTERLY FLUCTUATIONS IN PERFORMANCE
The Company incurred a net loss of $4,848,000 for the year ended December
31, 1996 and had an accumulated deficit of $13,666,000 as of December 31, 1996.
The Company expects to incur losses for at least the next 12 months, and perhaps
longer. 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 independent accountants' report on its financial statements as
of and for the years ended December 31, 1996 and 1995 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. Although the financial statements have been prepared assuming the
Company will continue as a going concern, additional equity or debt financing
may be required to enable the Company to continue its operations and achieve its
plans for 1997 and beyond. Management is currently pursuing additional capital
financing, although recent attempts to secure such financing on acceptable terms
have not been successful. If the Company is unable to obtain such financing, it
will be required to reduce discretionary spending in order to maintain
operations at a reduced level. Management believes that it will be able to
reduce discretionary spending if required. The accompanying financial statements
do not include any adjustments that may result from the outcome of these
uncertainties. See Notes 1 and 11 of Notes to Financial Statements.
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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 continue 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 such 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Financial Statements.
CRITICAL NEED FOR ADDITIONAL CAPITAL; NO ASSURANCE OF FUTURE FINANCING
As of December 31, 1996, the Company's cash and cash equivalents was
approximately $3,142,000, including approximately $1,949,000 in net proceeds
from a convertible debt financing (the "Debt Financing"). In the Debt Financing,
the Company issued $2,150,000 principal amount of 6% convertible subordinated
notes (the "Convertible Notes") that are convertible at the option of the
holders thereof into shares of Common Stock in three (3) separate tranches
beginning 60, 90 and 120 days after the date of issuance of such Convertible
Notes (the "Debt Financing Closing"), at a conversion price ("the Conversion
Price") equal to the lower of (i) 80% of the average closing bid price of the
Common Stock, as reported by the Nasdaq SmallCap Market, for the five business
days prior to the business day on which notice of conversion is transmitted by
the note holder (or, in the event of automatic conversion as described below,
five business days prior to the business day on which the conversion is deemed
to take place) or (ii) the average closing offer price of the Common Stock, as
reported by the Nasdaq SmallCap Market, for the five business days prior to the
Debt Financing Closing. All unconverted Convertible Notes will convert
automatically into Common Stock at the Conversion Price on the second
anniversary of the Debt Financing Closing, or in the event of a merger of the
Company into another entity, a change in control of the Company or a sale of all
or substantially all the Company's assets. The Conversion Price is subject to
adjustment in certain circumstances. In addition, the Conversion Price is
subject to reduction as specified in the Convertible Notes if the Company does
not fulfill certain obligations to file a registration statement in a timely
manner for the shares of Common Stock issuable upon conversion of the
Convertible Notes. The Convertible Notes may be redeemed by the Company at 120%
of the principal amount being redeemed, plus accrued interest, at the Company's
sole election if the average closing price for the Common Stock for any five-day
period is below $4.00. Moreover, no holder may convert any principal amount of
Convertible Notes, without the Company's prior written consent, if such
conversion would cause such holder's aggregate ownership of the Company's
capital stock to exceed 4.9% of the Company's then
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issued and outstanding capital stock. Although the Company believes that its
existing and available cash resources should be sufficient to meet its operating
requirements through 1997, there can be no assurance that such cash resources
will be sufficient to satisfy the Company's operating requirements. The
Company's actual capital needs, however, will depend upon numerous factors,
including the progress of the Company's software development activities, the
cost of increasing the Company's sales and marketing activities and the amount
of revenues generated from operations, none of which can be predicted with
certainty. There can be no assurance that the Company will not require
additional capital sooner than currently anticipated. There can be no assurance
that any additional required financing will be available to the Company on
acceptable terms, or at all. The inability to obtain required financing would
have a material adverse effect on the Company's business, financial condition
and results of operation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Financial Statements.
SUBSTANTIAL DEPENDENCE ON RECENTLY INTRODUCED INTERNET SOFTWARE TOOLS
Prior to 1996, DeltaPoint 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 continue to depend
largely on the successful development, introduction and commercial acceptance of
its Internet software tools. These consist of: QuickSite, its web 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 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 new versions 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. See "Business--Strategy,"
"--Products" and "--Marketing and Distribution."
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 continues to be 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 benefit derived from the Company's Internet software tools would
be materially adversely effected. See "Business--Products" and "--Marketing and
Distribution."
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 Kabushiki Kaisha, the Company's Japanese distributor, constituted
approximately 21% and 35% of the Company's net revenues for the years ended
December 31, 1996 and 1995, respectively. Sales to Ingram Micro Inc. constituted
approximately 30% and 13% of the Company's net revenues for the years ended
December 31, 1996 and 1995, respectively. Any termination or significant
disruption of DeltaPoint's relationship with any major distributor or retailer,
or a
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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. See "Business--Marketing and Distribution."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company's revenues from international operations accounted for
approximately 26% and 40% of the Company's net revenues in 1996 and 1995,
respectively, of which approximately 79% and 87%, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business--Strategy"
and "--Marketing and Distribution."
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. See
"Business--Marketing and Distribution" and "--Research and Development."
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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 market 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, 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 Corporation, Visio
Corporation and Micrografx Incorporated. In the Internet software tools market,
the Company has encountered competition primarily from Netscape Communications
Corporation, Microsoft, Adobe Systems Incorporated, Macromedia, Inc., 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 a material adverse effect on the Company's
business, financial condition and results of operation. 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 price pressures. There can be no
assurance that the Company will be able to maintain its historic pricing
structure, and an inability to do so would have a material adverse effect on 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. See "Business--Competition."
RELIANCE ON MICROSOFT
Microsoft Windows has gained widespread market acceptance as the dominant
computer operating system. Accordingly, the Company has developed and/or is
developing advanced charting and structured drawing and diagramming software
products that function in the Microsoft Windows, Windows '95 or Windows NT
environments, and anticipates future products will also be designed for use in
these Microsoft environments. Because the Company expects that its
Microsoft-based applications will account for a significant portion of new
license revenue for the foreseeable future, sales of the Company's new products
would be materially and adversely affected by market developments adverse to
Microsoft Windows, Windows '95 and Windows NT. The Company's ability to develop
products using the Microsoft Windows, Windows '95 and NT environments is
substantially dependent on its ability to gain timely access to, and to develop
expertise in, current and future developments by Microsoft, of which there can
be no assurance. Moreover, the abandonment by Microsoft of its current operating
system, product line or strategy, or the decision by Microsoft to develop and
market products that directly or indirectly compete with the Company's products
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Strategy" and
"--Competition."
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
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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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RELIANCE ON SOLE PRODUCT ASSEMBLER
All of the Company's software products are currently assembled (i.e., the
disk media, operating manual and other documentation are inserted in shrink wrap
packaging) by a related third party assembler that beneficially owns
approximately 1.5% of the Company's Common Stock as of December 31, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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
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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. See "Business--Proprietary Rights and Licenses."
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, it at all. See "Business--Property
Rights and Licenses."
VOLATILITY OF STOCK PRICE; ILLIQUIDITY OF TRADING MARKET; DE-LISTING FROM NASDAQ
SMALLCAP 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 industries
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 were quoted on the Nasdaq SmallCap Market from
December 1995 until March 18, 1997 and are traded on 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 failed to maintain certain requirements
for continued listing. As a result, an investor would find it more difficult to
dispose of, or to obtain accurate quotations as to the price of, the Company's
Common Stock. In addition, because the Company's Common Stock was removed from
the Nasdaq SmallCap Market it may be subject to so-called "penny stock" rules
that impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. Consequently,
removal from the Nasdaq SmallCap Market could affect the ability or willingness
of broker-dealers to sell and/or make a market in the Company's Common Stock and
the ability of purchasers of the Company's Common Stock to sell their securities
in the secondary market. In addition, if the market price of the Company's
Common Stock is less than $5.00 per share, the Company may become subject to
certain penny stock rules which may further limit the market liquidity of the
Common Stock and the ability of purchasers of the Common Stock to sell such
securities in the secondary market.
The Company has not previously paid any dividends on its Common Stock and
for the foreseeable future intends to continue its policy of retaining any
earnings to finance the development and expansion of its business.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases an approximately 12,000 square foot office
suite located at 22 Lower Ragsdale Drive, Monterey, California under a lease
that expires in October 1998 with a monthly rental of approximately $16,200. The
Company holds an option to renew such lease at the end of the initial term for
an additional three year term. The Company believes that these new facilities
will be adequate to meet its requirements for the near term and that additional
space will be available on commercially reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock was quoted on the Nasdaq SmallCap Market from
December 20, 1995 through March 18, 1997 under the symbol "DTPT" and has been
traded on the Pacific Stock Exchange since December 1995 through the present,
under the symbol "DTP.P." The Common Stock is traded over-the-counter and is
quoted on the OTC Bulletin Board under the symbol "DTPT" and on the "pink
sheets" and remains on the Pacific Stock Exchange.
The table below sets forth the high and low closing sale price of the Common
Stock for the periods indicated, as reported by the Nasdaq SmallCap Market
through March 18, 1997 and the OTC Bulletin Board thereafter. Prior to the
offering in December 1995, no established public trading market for the
Company's Common Stock existed.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Fourth quarter (from December 20, 1995)................................... $ 8.75 $ 8.00
YEAR ENDED DECEMBER 31, 1996
First quarter............................................................. $ 9.75 $ 6.50
Second quarter............................................................ $ 17.25 $ 9.50
Third quarter............................................................. $ 13.75 $ 5.88
Fourth quarter............................................................ $ 11.75 $ 6.00
YEAR ENDING DECEMBER 31, 1997
First quarter (through March 25, 1997).................................... $ 8.25 $ 1.25
</TABLE>
The Company's Common Stock was delisted from the Nasdaq SmallCap Market
effective March 19, 1997 because of Nasdaq's determination that the Company
failed to maintain certain requirements for continued listing. On March 25,
1997, the closing bid price for a share of the Company's Common Stock, as
reported by the OTC Bulletin Board, was $2.37.
The number of record holders of the Company's common stock as of March 25,
1997 was 46.
The Company has not declared or paid a dividend with respect to its common
stock nor does the Company anticipate paying dividends in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS" AND "BUSINESS."
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
November 1995, the Company acquired technology required to develop WebAnimator,
a multimedia authoring tool for the Web. In December 1995, the Company acquired
technology to develop QuickSite, a Web site creation and management tool which
was released in February 1996. The Company introduced WebTools in March 1996,
WebAnimator in July 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
20
<PAGE>
desktop applications, the Company's strategy is to realize a significant and
growing percentage of future revenues from the sale of Internet software tools.
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 and packaging 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, and a smaller
percentage of aggregate revenues in the form of packaging fees, which are paid
to the Company based on the manufacturing cost of products that the Company
packages and ships for the customer over the life of the agreement. As a result,
these agreements can lead to quarterly fluctuations in revenues and gross
profit.
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 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.
Net revenues increased to $4,950,000 in 1996 from $4,043,000 in 1995. The
increase of net revenues was primarily attributable to a refocusing of the
Company's business into the Internet market. The Company believes that net
revenues may remain flat until it has realized significant revenues from its
Internet software tools released in 1996, such as QuickSite, QuickSite
Developer's Edition, WebTools and WebAnimator, and from products that the
Company develops or acquires in the future.
The Company's gross profit has historically fluctuated from quarter to
quarter based on the mix of revenues derived from software product sales, and,
for reasons discussed above, royalty fees and packaging fees. The Company
obtains higher than average gross profit on revenues derived from royalty fees
because of the negligible costs associated with generating such revenues, and
lower than average gross profit on packaging fees from these products, because
packaging is sold at a price based on the manufacturing cost of the finished
software product. The Company's gross profit has also fluctuated based on the
mix of product revenues derived from sales of the Company's higher-margin
DeltaGraph product and sales of lower-margin graphics utilities and Internet
products where the Company must pay royalties to third parties. The Company
believes these factors may impact its gross profit in the future. See "Risk
Factors-- Substantial Dependence on Recent and Anticipated Product
Introductions."
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 the demand for the Company's products, the mix of
revenues derived 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 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.
The Company incurred a loss for the year ended December 31, 1995, in part
due to a charge to operations recorded in the fourth quarter of approximately
$1,240,000 resulting from the acquisition of certain Internet technologies for
the portion of the purchase price determined to be in-process research and
development and a decline in revenues from traditional products. In addition,
the Company incurred a loss of $4,848,000 for the year ended December 31, 1996,
in part due to the Company's investment in
21
<PAGE>
marketing and research for its Internet product line. The Company expects to
incur losses from operations for at least the next 12 months, and perhaps
longer, particularly if revenues do not increase significantly above current
levels. There can be no assurance that the Company will not incur significant
additional losses until it successfully develops or acquires new products or
enhancements to existing products that generate significant revenues and
profits.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, certain statement
of operations data as a percentage of net revenues.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1996 1995
----- -----
<S> <C> <C>
Net revenues.......................................................... 100.0% 100.0%
Cost of revenues...................................................... 23.9 33.1
----- -----
Gross profit...................................................... 76.1 66.9
Operating expenses:
Sales and marketing................................................. 94.6 47.5
Research and development............................................ 52.9 50.4
General and administrative.......................................... 28.0 30.5
----- -----
Total operating expenses.......................................... 175.5 128.4
----- -----
Loss from operations.................................................. (99.4) (61.5)
Interest income (expense)............................................. 1.5 (3.6)
----- -----
Net loss.......................................................... (97.9)% (65.1)%
----- -----
----- -----
</TABLE>
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET REVENUES. Net revenues increased by 22.4% from $4,043,000 for 1995 to
$4,950,000 for 1996. The increase in revenue was primarily attributable to the
introduction of Internet products, especially of QuickSite, DeltaPoint's
award-winning Web site creation and management tool. International sales
accounted for 39.8% of net revenues during 1995 and 26.3% for 1996. The decrease
in international revenues was due to fewer Japanese license agreements offset
partially 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 customer support 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 increased from 66.9% of
net revenues in 1995 to 76.1% of net revenues in 1996, primarily as a result of
lower inventory write-offs and an absence of packaging fees in 1996. The
Company's gross profit has varied quarter to quarter as a result of changes in
customer and product mix, inventory write-offs due to new product releases,
third party royalty obligations for the Company's 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 cost of
promotional activities. Sales and marketing expenses increased to $4,685,000 or
94.6% of revenues for 1996 compared to $1,922,000 or 47.5% of in 1995. The
increase in sales and marketing expenses was primarily due to a increase in
headcount and an increase in the use of
22
<PAGE>
direct mail, telemarketing, consultants, print advertising, tradeshows and
channel promotions used to promote the Company's Internet software tools which
were released in 1996. The Company expects that sales and marketing costs 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 include
personnel, consultants and amortization of purchased software. Research and
development expenses increased to $2,618,000 or 52.9% of revenues for 1996
compared to $2,036,000 or 50.4% of revenues in 1995. The increase in research
and development expenses was primarily due to a staffing increase for the
development of QuickSite, QuickSite Developer's Edition, WebAnimator and
DeltaGraph. In addition, the Company retained several consultants to aid in the
development process. In 1995, the Company has a charge to operations of
$1,240,000 resulting from the acquisition of certain Internet technologies for
the portion of the purchase price determined to be in-process technology as such
technology had not reached technological feasibility and had no alternative
future use. The Company expects that research and development costs will
increase 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 increased
to $1,388,000 or 28.0% of revenues for 1996 compared to $1,234,000 or 30.5% of
revenues in 1995. The increase in general and administrative expenses was
primarily attributable to a severance expense charge of $505,000 relating to the
departure of the Company's former Chief Executive Officer offset by a decrease
in bad debt expense of $176,000. 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.
PROVISION FOR INCOME TAXES. There was no provision for taxes in 1995 or
1996 due to net operating losses. At December 31, 1996, the Company had
approximately $7,000,000 of federal net operating loss carryforwards which
expire in varying amounts through 2011. Due to certain changes in the ownership
of the Company, approximately $1,700,000 and $1,200,000 of these losses are
subject to annual limitations of approximately $142,000 and $301,000,
respectively. If certain additional changes in the Company's ownership occur,
the Company's use of net operating loss carryforwards may be subject to a lower
annual limitation.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31 1996, the Company had a working capital balance of
$431,000 and shareholders' equity of $1,041,000. 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 $15 million in proceeds from
private sales of preferred stock and convertible debt and from the Company's
initial public offering of common stock.
The Company used net cash in operations of $1,646,000 in 1995 and $4,618,000
in 1996. Net cash used in 1995 consisted primarily of a net loss of $2,632,000,
an increase in accounts receivable of $642,000, largely because of significant
sales of the Company's products in the last 30 days of the third quarter of 1995
with extended payment terms, a decrease in accounts payable of $751,000,
partially offset by a $1,240,000 charge to operations from the acquisition of
certain Internet technologies for the portion of the purchase price determined
to be in-process technology and an increase in accrued liabilities of $670,000.
Net cash used in 1996 consisted primarily of a net loss of $4,848,000.
The Company obtained net cash from financing activities of $6,499,000 in
1995 and $3,474,000 in 1996. Net cash obtained in 1995 consisted primarily of
$5,143,000 in net proceeds from the Company's initial public offering of common
stock and other equity financing. Net cash from financing activities in 1996
consisted primarily of $831,000 in net proceeds from the exercise of the
overallotment from the initial
23
<PAGE>
public offering of common stock, proceeds resulting from the exercise of stock
options and warrants of $1,609,000 and the issuance of Convertible Notes with
net proceeds of $1,949,000 offset by the payment of $865,000 for prior notes
payable.
For the year ended December 31, 1996, the Company's capital expenditures
totaled approximately $343,000 and were attributable to acquisitions of personal
computers and computer workstation equipment used to support the Company's
development efforts.
In November and December of 1995, the Company acquired technology required
to develop WebAnimator , QuickSite, and WebTools. The Company acquired the
technologies for an aggregate purchase price of $1,690,000 of which $1,090,000
was to be paid in cash. As of December 31, 1996, $1,090,000 of these aggregate
cash payments had been made. The Company recorded a charge of $1,240,000 to
operations in 1995 from the acquisition of these technologies for the portion of
the purchase price determined to be in-process technology.
As of December 31, 1996, the Company's cash and cash equivalents was
$3,142,000 including approximately $1,949,000 in net proceeds from the Debt
Financing in December 1996. Although the Company believes that its existing and
available cash resources should be sufficient to meet its operating requirements
through 1997, there can be no assurance that such cash resources will be
sufficient to satisfy the Company's operating requirements. To the extent the
Company continues to incur losses or grows in the future, its operating 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 software development activities, the cost of
increasing 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 any additional
required financing will be available to the Company on acceptable terms, or at
all. The inability to obtain required financing would have a material adverse
effect on the Company's business, financial condition and result of operation.
See "Risk Factors--Recent and Expected Losses; Accumulated Deficit; Going
Concern Assumption; Quarterly Fluctuations and Performance; and Critical Need
for Additional Capital; No Assurance of Future Financing."
24
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
DELTAPOINT, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 26
Balance Sheet as of December 31, 1996 and 1995............................................................. 27
Statement of Operations for the Years Ended December 31, 1996 and 1995..................................... 28
Statement of Shareholders' Equity (Deficit) for the Years ended December 31, 1996 and 1995................. 29
Statement of Cash Flows for the Years Ended December 31, 1996 and 1995..................................... 30
Notes to Financial Statements.............................................................................. 31
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of DeltaPoint, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of DeltaPoint, Inc. at December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has an accumulated deficit of $13,666,000 and
has incurred recent significant losses that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
PRICE WATERHOUSE LLP
San Jose, California
January 27, 1997, except for the first paragraph
of Note 11, which is as of February 26, 1997
and the second paragraphs of Note 1 and
Note 11 which are as of March 25, 1997
26
<PAGE>
DELTAPOINT, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 3,142 $ 4,629
Accounts receivable, net of allowance for doubtful accounts of $118 and $259............. 1,904 1,225
Inventories.............................................................................. 133 182
Prepaid expenses and other current assets................................................ 557 194
---------- ---------
Total current assets................................................................... 5,736 6,230
Property and equipment, net................................................................ 277 49
Purchased software, net.................................................................... 299 438
Deposits and other assets.................................................................. 34 47
---------- ---------
$ 6,346 $ 6,764
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 1,238 $ 665
Accrued liabilities...................................................................... 1,146 1,337
Reserve for returns...................................................................... 771 398
Notes payable............................................................................ 2,150 865
Current portion of capital lease obligations............................................. -- 50
---------- ---------
Total current liabilities.............................................................. 5,305 3,315
Commitments and contingencies (Note 6).....................................................
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 2,485,540 and 2,025,243 shares
were issued and outstanding............................................................ 14,707 12,267
Accumulated deficit...................................................................... (13,666) (8,818)
---------- ---------
Total shareholders' equity............................................................. 1,041 3,449
---------- ---------
$ 6,346 $ 6,764
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integeral part of these financial statements.
27
<PAGE>
DELTAPOINT, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Net revenues................................................................................. $ 4,950 $ 4,043
Cost of revenues............................................................................. 1,181 1,337
--------- ---------
Gross profit............................................................................... 3,769 2,706
--------- ---------
Operating expenses:
Sales and marketing........................................................................ 4,685 1,922
Research and development................................................................... 2,618 2,036
General and administrative................................................................. 1,388 1,234
--------- ---------
8,691 5,192
--------- ---------
Loss from operations......................................................................... (4,922) (2,486)
Interest income (expense).................................................................... 74 (146)
--------- ---------
Net loss..................................................................................... $ (4,848) $ (2,632)
--------- ---------
--------- ---------
Net lossper share............................................................................ $ (2.17) $ (2.42)
--------- ---------
--------- ---------
Shares and share equivalents used in per share calculations.................................. 2,231 1,086
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
DELTAPOINT, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
---------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994..................................... 182,717 $ 145 $ (6,186) $ (6,041)
Exercise of stock options...................................... 382 1 -- 1
Issuance of warrants........................................... -- 6 -- 6
Sale of common stock........................................... 1,100,000 5,143 -- 5,143
Issuance of common stock for acquisition of purchased
technology................................................... 100,000 600 -- 600
Conversion ofmandatorily redeemable convertible preferred
stock........................................................ 578,810 5,992 -- 5,992
Conversion of notes payable and accrued interest............... 63,334 380 -- 380
Net loss....................................................... -- -- (2,632) (2,632)
---------- --------- ------------ ---------
Balance at December 31, 1995..................................... 2,025,243 12,267 (8,818) 3,449
Issuance of common stock....................................... 379,297 1,797 -- 1,797
Exercise of stock options...................................... 81,000 643 -- 643
Net loss....................................................... -- -- (4,848) (4,848)
---------- --------- ------------ ---------
Balance at December 31, 1996..................................... 2,485,540 $ 14,707 $ (13,666) $ 1,041
---------- --------- ------------ ---------
---------- --------- ------------ ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
DELTAPOINT, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................................... $ (4,848) $ (2,632)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................................ 254 163
In process research and development...................................................... -- 1,240
Other.................................................................................... -- 40
Change in assets and liabilities:
Accounts receivable.................................................................... (679) (642)
Inventories............................................................................ 49 44
Prepaid expenses and other current assets.............................................. (162) (113)
Accounts payable....................................................................... 573 (751)
Accrued liabilities.................................................................... (191) 670
Reserve for returns.................................................................... 373 326
Deposits and other assets.............................................................. 13 9
--------- ---------
Net cash used in operating activities................................................ (4,618) (1,646)
--------- ---------
Cash flows used in investing activities:
Acquisition of property and equipment...................................................... (340) (29)
Acquisition of purchased software.......................................................... (3) (225)
--------- ---------
Net cash used in investing activities................................................ (343) (254)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net............................................. -- 1,815
Proceeds from issuance of common stock and warrants, net................................... 2,440 5,150
Proceeds from issuance of notes payable, net............................................... 1,949 --
Repayment of note payable.................................................................. (865) (289)
Repayment of capitalized lease obligations................................................. (50) (177)
--------- ---------
Net cash provided by financing activities............................................ 3,474 6,499
--------- ---------
(Decrease) increase in cash and cash equivalents............................................. (1,487) 4,599
Cash and cash equivalents at beginning of year............................................... 4,629 30
--------- ---------
Cash and cash equivalents at end of year..................................................... $ 3,142 $ 4,629
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Founded in 1989, DeltaPoint, Inc. (the Company), 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, the Company provides
visualization software products that are designed to facilitate the collection,
interpretation and management of business and technical information across
multiple computing environments.
At December 31, 1996, the Company has an accumulated deficit of $13,666,000
and has incurred significant recent losses from operations. The Company plans to
continue to develop and introduce updated versions of its existing products and
to continue to promote its Web tools software products. There can be no
assurance that the Company will not incur additional losses until its planned
and existing products generate significant revenues. The accompanying financial
statements have been prepared assuming the Company will continue as a going
concern. Additional equity or debt financing may be required to enable the
Company to continue its operations and achieve its plans for 1997 and beyond.
Management is currently pursuing additional capital financing although recent
attempts to secure such financing on acceptable terms have been unsuccessful
(see Note 11). If the Company is unable to obtain such financing, it will be
required to reduce discretionary spending in order to maintain operations at a
reduced level. Management believes that it will be able to reduce discretionary
spending if required. The accompanying financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
The following is a summary of the Company's significant accounting policies:
USE OF ESTIMATES
The preparation of financial statements in conformity with a generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' Statement of Position 91-1 on Software Revenue
Recognition.
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 agreements, any amounts paid are nonrefundable and collection
is probable. 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, credits for price protection
and stock rotation rights are accrued upon shipment based upon historical
experience.
The Company provides a limited amount of free telephone technical support to
customers. These activities are generally considered insignificant post contract
customer support obligations. Estimated costs of these activities are accrued at
the time of product shipment.
31
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Revenue from international customers, primarily in Japan accounted for 26%
and 40% of net revenues in 1996 and 1995, respectively. Sales to customers in
excess of 10% of net revenues is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Customer A..................................................................... 21% 35%
Customer B..................................................................... 30% 13%
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Included in the cash
equivalent balance at December 31, 1996, were $1,000,000 in certificates of
deposit. The Company did not have any short-term investments outstanding at
December 31, 1996 and 1995.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans, as permitted by the Financial Accounting
Standards Board's Statement No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation." FAS 123 defines a "fair value" based method of accounting for an
employee stock option or similar equity instrument and encourages, but does no
require, entities to adopt that method of accounting for their employee stock
compensation plans. The pro forma disclosures of the difference between
compensation cost included in net loss and the related cost measured by the fair
value method are presented in Note 9.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method based upon the estimated useful life of the assets
ranging from three to five years. Leasehold improvements are amortized over the
shorter of the remaining term of the lease or the estimated useful life of the
asset.
PURCHASED SOFTWARE
Purchased software is recorded at cost and amortized using the straight line
method over the three-year estimated life of the asset.
SOFTWARE DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Statement of
Financial Accounting Standards No. 86 ("FAS 86") requires the capitalization of
certain software development costs once
32
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
technological feasibility is established. The capitalized costs are then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater. Based upon the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred by
the Company between completion of the working model and the point at which the
product is ready for general release have been insignificant and accordingly
have not been capitalized
CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Company to significant
concentrations of credit risks consist principally of cash and accounts
receivable. The Company places its cash in interest bearing accounts and
certificates of deposit in high quality financial institutions. The Company
sells its products primarily to end-users, distributors and resellers in a
variety of industries located primarily in the United States and Japan. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral from its customers. The Company
maintains an allowance for uncollectible accounts receivable based upon the
expected collectibility of all accounts receivable. To date, the Company has not
experienced any material credit losses.
At December 31, 1996 three customers accounted for 83% of accounts
receivable. At December 31, 1995 five customers accounted for 86% of accounts
receivable.
NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of common
shares outstanding during the period. Common equivalent shares (consisting of
warrants and stock options) are excluded from the computation if their effect is
anti-dilutive except that, pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, common and common equivalent shares issued during
the period from November 1994 to November 1995 have been included in the
calculation as if they were outstanding for all periods through November 1995
(using the treasury stock method for the options and warrants at the initial
public offering price).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including
accounts receivable and notes payable, approximates fair values.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes and
accordingly, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of the Company's assets and liabilities.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements in
order to conform to the 1996 presentation.
33
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BALANCE SHEET DETAILS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Inventories:
Raw materials.......................................................... $ 84 $ 119
Finished goods......................................................... 49 63
--------- ---------
$ 133 $ 182
--------- ---------
--------- ---------
Purchased software:
Purchased software..................................................... $ 453 $ 450
Less: accumulated amortization......................................... (154) (12)
--------- ---------
$ 299 $ 438
--------- ---------
--------- ---------
Property and equipment:
Computer equipment and software........................................ $ 1,160 $ 936
Furniture and fixtures................................................. 139 139
Leasehold improvements................................................. 31 --
--------- ---------
1,330 1,075
Less: accumulated depreciation......................................... (1,053) (1,026)
--------- ---------
$ 277 $ 49
--------- ---------
--------- ---------
Accrued liabilities:
Accrued royalties...................................................... $ 315 $ 351
Accrued compensation................................................... 369 303
Other.................................................................. 462 683
--------- ---------
$ 1,146 $ 1,337
--------- ---------
--------- ---------
</TABLE>
Included in the December 31, 1996 and 1995 balances of computer equipment
and software are $531,000 of assets acquired under capital leases. Accumulated
depreciation associated with these leases approximates $531,000 and $481,000 at
December 31, 1996 and December 31, 1995, respectively.
In 1995, the Company acquired certain Internet technologies, including the
source code and related documentation. The aggregate purchase price of these
technologies was $1,690,000, which was comprised of (i) $1,090,000 in cash,
payable in installments through August 1996 and (ii) the issuance of 100,000
shares of the Company's common stock. The Company is also required to pay
royalties on sales of the products developed from these technologies. The
Company made installment payments for the technology of $865,000 and $225,000
for the years ended December 31, 1996 and 1995, respectively. Cash paid during
the year for royalties on sales of the product totaled and $33,000 in 1996 and
$0 in 1995. Amounts due to these suppliers for royalties are included in accrued
liabilities at December 31, 1996 and totaled $205,000.
Approximately $1,240,000 of the purchase price was allocated to in-process
technology. In connection with these acquisitions, the Company determined that
the majority of the purchase price represented in-process technology and because
such technology had not reached the stage of technological feasibility and had
no alternative future use, the amount was immediately charged to operations.
34
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
In December 1995, upon the closing of the Company's initial public offering,
all outstanding shares Mandatorily Redeemable Convertible Preferred Stock where
converted into common stock. In addition, the Company converted related party
notes payable totaling $300,000 and accrued interest on the notes totaling
$80,000 into 63,334 shares of common stock.
In November and December 1995, the Company acquired intellectual property
for a total purchase price of $1,690,000 which was comprised of the (i) issuance
of 100,000 shares of common stock at $6.00 per share, (ii) a cash payment of
$225,000 and (iii) $865,000 which was paid in installments through August 1996.
Cash paid during the year for interest totaled $28,000 and $146,000 for 1996
and 1995 respectively.
NOTE 4--RELATED PARTY TRANSACTIONS:
The Company purchases goods and services from a supplier who is a
shareholder of the Company. Purchases from this supplier totaled $271,000 and
$354,000 for the years ended December 31, 1996 and 1995, respectively. Amounts
due to this supplier are included in accounts payable at December 31, 1996 and
1995 and totaled $72,000 and $55,000, respectively.
NOTE 5--NOTES PAYABLE:
On December 31, 1996, the Company issued $2,150,000 of convertible
promissory notes payable. The notes bear interest at 6% payable semi-annually
over their two year term. The notes are convertible into common stock at the
option of the holder with 33%, 67%, and 100% of the principal value of the notes
convertible on March 1, March 31, and April 30, 1997, respectively. The notes
automatically convert upon a change in control of the Company or December 31,
1998. The conversion price of the notes is calculated as the lower of (a) 80% of
the average closing bid price of the Company's common stock, as reported by the
Nasdaq Small Cap Market, for the five business days prior to a written notice of
conversion by the holder or (b) the average closing offer price of the Company's
common stock, as reported by the Nasdaq Small Cap Market, for the five business
days prior to the notes' issuance. The notes are convertible into 105,392,
210,784 and 316,176 shares of common stock on March 1, March 31, and April 30,
1997, respectively based upon the average closing price of the Company's common
stock for the five business days prior to the notes' issuance date. The Company
may call all or part of the outstanding notes' balance within a ten day period
of the average closing offer price of the Company's common stock, as determined
by the Nasdaq Small Cap Market, being less than $4.00 for any five day period.
The call price is equal to 120% of the principal called.
The Company has deferred and included in other current assets $230,000 of
debt issuance costs related to the notes and will be amortized over the two year
term using the interest method. In connection with the issuance of the notes,
the Company granted the underwriters 16,538 warrants at an exercise price of
$6.50 and exercisable through December 2001. Included in the deferred debt
issuance costs is $29,000 representing the value of the warrants on the date of
grant.
The Company has reserved 316,176 shares of common stock for issuance under
the conversion of the notes.
35
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases its facilities under noncancellable operating leases.
Rent expense was $194,000 and $262,000 for the years ended December 31, 1996 and
1995, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1997............................................................................... 206
1998............................................................................... 155
-----
Total minimum lease payments....................................................... $ 361
-----
-----
</TABLE>
CONTINGENCIES
In the normal course of business, the Company from time to time receives
inquiries with regards to possible patent infringement. Management believes that
it is unlikely that the outcome of these inquiries will have a material adverse
effect on the Company's financial position or results of operations or
liquidity.
NOTE 7--INCOME TAXES:
No provision for income taxes has been recorded for any periods presented
due to net operating losses. At December 31, 1996, the Company had approximately
$7,000,000 of federal net operating loss carryforwards which expire in varying
amounts through 2011. Due to certain changes in the ownership of the Company,
approximately $1,700,000 and $1,200,000 of these losses are subject to annual
limitations of approximately $142,000 and $301,000, respectively.
A reconciliation of the Company's effective tax rate to the U.S. federal
statutory rate follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
U.S. federal statutory rate.......................................................... (34.0)% (34.0)%
State and local taxes, net of U.S. federal benefit................................... (8.8) (9.1)
Reserved net deferred tax assets and others.......................................... 42.8 43.1
--------- ---------
--% --%
--------- ---------
--------- ---------
</TABLE>
36
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES: (CONTINUED)
The components of the net deferred tax assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating losses............................................................... $ 2,788 $ 940
Reserves, accruals and depreciation................................................ 767 885
Tax credit carryforwards........................................................... -- 10
--------- ---------
3,555 1,835
Deferred tax: valuation allowance.................................................. (3,555) (1,835)
--------- ---------
Net deferred tax asset............................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
The Company has determined that, under FAS 109, it is more likely than not
that the deferred tax assets at December 31, 1996 and 1995 would not be realized
and, accordingly, a full valuation reserve has been established. Management's
assessment is based on the Company's history of net operating losses.
NOTE 8--COMMON STOCK AND WARRANTS:
COMMON STOCK:
In December 1995, the Company completed its initial public offering of
1,100,000 shares of its common stock at a per share price of $6.00 and realized
net proceeds of $5,143,000. In addition, common stock as of December 31, 1996
reflects the January 1996 sale of 165,000 shares of common stock issued in the
overallotment of the Company's initial public offering. Net proceeds to the
Company resulting from the overallotment were $831,000. Common stock also
reflects net proceeds resulting from the exercise of warrants totaling $966,000
and the exercise of stock options from the 1995 Stock Option Plan of $643,000.
WARRANTS:
The following warrants were outstanding and exercisable at December 31,
1996:
<TABLE>
<CAPTION>
ISSUED IN
WARRANTS OUTSTANDING CONNECTION WITH ISSUANCE DATE EXPIRATION DATE WARRANT EXERCISE PRICE
- -------------------- -------------------- ------------- --------------- -----------------------
<S> <C> <C> <C> <C>
71,875 Equity Nov. 1995 Nov. 2000 $ 7.20
110,000 Equity Dec. 1995 Dec. 2000 $ 7.20
16,538 Convertible Notes Dec. 1996 Dec. 2002 $ 6.50
-------
198,413
-------
-------
</TABLE>
The 71,875 outstanding warrants issued in November 1995 have an exercise
price of $7.20 per share for the first thirty (30) months of the warrant term
and $8.40 per share for the remaining warrant term. The Company has reserved
198,413 shares of common stock for issuance upon the exercise of the outstanding
warrants.
37
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION PLAN:
The Company has three Stock Option Plans (the Plans) which provide for the
issuance of stock options to employees of the Company. The Company has reserved
an aggregate of 885,462 shares of Common Stock for issuance upon the exercise of
options granted under these plans, including 200,000 shares approved by the
Company's shareholders at the annual meeting in June 1996. Options to purchase
171,804 and 41,588 shares were vested and exercisable at December 31, 1996 and
1995 respectively. Options granted under the Plans are for periods not to exceed
10 years. Non-employee members of the Board of Directors are eligible for
automatic option grants under the 1995 Stock Option Plan (the 1995 Plan). All
options granted under the Plans must be at prices not less that fair market
value at the date of grant, except for the 1995 Plan for which options can be
granted at prices not less than 85% of the fair market value at the date of
grant. The Board of Directors may amend, modify or terminate the Plans at their
discretion.
The following table summarizes activity under the Company's Stock Option
Plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES -------------------------------
AVAILABLE WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------- ---------- -------------------
<S> <C> <C> <C>
Balance at December 31, 1994.................................. 27,230 38,127 6.63
Additional shares reserved.................................... 620,000 -- --
Options granted............................................... (525,000) 525,000 4.08
Options exercised............................................. -- (382) 6.63
---------- ---------- ---
Options canceled.............................................. 3,321 (3,321) 6.63
Balance at December 31, 1995.................................. 125,551 559,424 3.89
Additional shares reserved.................................... 200,000 -- --
Options granted............................................... (433,677) 433,677 8.54
Options exercised............................................. -- (81,000) 3.64
Options canceled.............................................. 171,593 (171,593) 4.85
---------- ---------- ---
Balance at December 31, 1996.................................. 63,467 740,508 6.68
---------- ---------- ---
---------- ---------- ---
</TABLE>
The following table summarized information about employee stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT EXERCISE PRICE AT
RANGE OF EXERCISE PRICE DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 DECEMBER 31, 1996
- ------------------------- ----------------- ------------------- --------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C>
$3.50.................... 236,611 8.9 3.50 92,998 3.50
$4.80-6.63............... 75,759 9.0 5.95 37,834 5.89
$7.50.................... 140,000 9.9 7.50 2,222 7.00
$7.75-7.83............... 99,788 9.3 7.82 -- --
$9.50-11.50.............. 188,350 9.4 9.78 38,750 9.50
------- -------
Total.................. 740,508 9.3 6.68 171,804 5.43
------- -------
------- -------
</TABLE>
38
<PAGE>
DELTAPOINT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION PLAN: (CONTINUED)
FAIR VALUE DISCLOSURES
Had compensation cost for the Plans been determined based on the fair value
of each stock option grant on its grant date, as prescribed in FAS 123, the
Company's net loss and net loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Net loss:
As reported...................................................................... $ (4,848) $ (2,632)
Pro forma........................................................................ $ (5,450) $ (2,704)
Net loss per share:
As reported...................................................................... $ (2.17) $ (2.42)
Pro forma........................................................................ $ (2.44) $ (2.49)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the applicable period: dividend yields of 0%
for both periods; expected volatility of 80.6%; risk-free interest rate of 6.07%
for 1996 and 5.57% for 1995 for options granted; and a weighted average expected
option term of 3.9 years for 1996 and 4.3 years for 1995.
The above pro forma amounts include compensation expense based on the fair
value of options granted and vesting during the years ended December 31, 1996
and 1995 and exclude the effects of options granted prior to January 1, 1995.
Accordingly, the above pro forma net loss and net loss per share are not
representative of the effects of computing stock option compensation expense
using the fair value method for future periods.
NOTE 10--401(K) PLAN:
During 1992, the Company established a deferred compensation plan (the
401(k) Plan) pursuant to Section 401(k) of the Internal Revenue Code (the
"Code"), whereby substantially all employees are eligible to contribute up to
20% of their pre-tax earnings, not to exceed amounts allowed under the Code. The
Company may make contributions to the 401(k) Plan at the discretion of the Board
of Directors. No employer contributions have been made to the 401(k) Plan by the
Company.
NOTE 11--SUBSEQUENT EVENT:
On February 26, 1997, the Company reached an agreement with a third party to
issue and sell to such party an aggregate of 1,000 shares of Series A Preferred
Stock, for cash in the aggregate amount of $1,000,000. Each share of Series A
Preferred Stock would have been convertible at any time, at the option of the
holder, into shares of Common Stock.
For various reasons, the closing conditions to this agreement did not occur
and the financing was subsequently terminated. The Company is seeking additional
financing (see Note 1).
39
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's Proxy Statement for the Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's Proxy Statement for Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
3.1* Registrant's Amended and Restated Articles of Incorporation
3.2(1) Registrant's Bylaws
3.3* Certificate of Determination of Series A Preferred Stock.
4.1(1) Specimen Certificate of Registrant's Common Stock
4.2(1) Form of Warrant
4.3(1) Form of H.J. Meyers & Co.'s Warrant
4.4(1) Loan and Warrant Agreement between Registrant and certain investors dated as of March 29, 1993
4.5(1) Amended and Restated Investor Rights Agreement between Registrant and the investors specified
therein dated as of November 6, 1995
10.1(1) Real Property Lease between Registrant and Owens Mortgage Investment Fund dated as of August 18,
1995
10.2(1) 1990 Stock Option Plan
10.3(1) 1992 Stock Option Plan
10.4(1)(3) 1995 Stock Option Plan
10.5(1) Form of Indemnification Agreement
10.6(1)(2) License Agreement between Registrant and Smart Draw Software, Inc. Dated as of April 19, 1995
10.7(1) License Agreement between Registrant and Halcyon Software, Inc. dated as of June 30, 1992
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------------
<S> <C>
10.8.1(1)(2) Distribution Agreement between Registrant and Nippon Polaroid Kabushiki Kaishi dated as of November
12, 1991
10.8.2(1)(2) Distributor Software License Agreement between Registrant and Nippon Polaroid K.K. Supplements
dated as of December 24, 1993, June 6, 1994 and two supplements dated as of June 28, 1995
10.9(1) Series C Preferred Stock Purchase Agreement dated April 6, 1994 among the Registrant and the
investors named therein
10.10(1) Series D Preferred Stock and Warrant Purchase Agreement dated May 24, 1995 among Registrant and the
investors named therein
10.11(1) Series E Preferred Stock and Warrant Purchase Agreement dated November 6, 1995 among Registrant and
the investors named therein
10.12(1) Employment Agreement dated as of November 1, 1995 between Registrant and Donald B. Witmer
10.13.1(1) Business Loan Agreement between Registrant and Silicon Valley Bank dated as of August 24, 1994
10.13.2(1) Promissory Note between Registrant and Silicon Valley Bank dated as of August 24, 1994
10.14(1) Conversion of Promissory Notes and Exchange of Warrants Agreement dated as of November 8, 1995
among Registrant, Hummer Winblad Venture Partners, Hummer Winblad Technology Fund, Oak Investment
Partners V, Limited Partnership and Oak V Affiliates Fund, Limited Partnership.
10.15(1) License Agreement between Registrant and Altura Software, Inc. dated June 7, 1994
10.16(1) Employment Agreement dated November 8, 1995 between Registrant and Raymond R. Kingman, Jr.
10.17(1) Employment Agreement dated November 8, 1995 between Registrant and William G. Pryor
10.18(1) Offer letter dated December 5, 1995 between the Registrant and Spencer A. Leyton
10.19(1)(2) Letter of Intent dated November 21, 1995 between DeltaPoint and Richard Blum
10.20(1)(2) Agreement dated December 15, 1995 among Registrant, Global Technologies Corporation and William
French
10.21(1) Termination Agreement dated as of November 8, 1995 among the Company and certain shareholders of
the Company named therein
10.22(1) Amendment Agreement dated as of December, 1995 among the Company and certain shareholders of the
Company named therein
10.23(3) Employment Agreement dated December 26, 1995 between Registrant and William A. French
10.24(4) Separation Agreement and Release between Registrant and Raymond R. Kingman, Jr. dated April 5, 1996
10.25(4) Offer letter dated March 29, 1996 between Registrant and John J. Ambrose
10.26(5) Form of 6% Convertible Subordinated Debentures issued by Registrant on December 31, 1996 to High
Risk Opportunities Hub Fund Ltd. and American High Growth Equities Retirement Trust
10.27(5) Form of Subscription Agreement governing issuance of 6% Convertible Subordinated Debentures
23.1* Consent of Price Waterhouse LLP
24.1* Power of Attorney
</TABLE>
- ------------------------
(1) Incorporated by reference to Registrant's Registration Statement on Form
SB-2, filed December 19, 1995 (File No. 33-99300).
(2) Confidential treatment requested as to certain portions of this exhibit.
41
<PAGE>
(3) Incorporated by reference to Registrant's Registration Statement on Form S-8
filed March 6, 1996 (File No. 333-2192).
(4) Incorporated by reference to Registrant's Registration Statement on Form
SB-2, filed April 17, 1996 (File No. 333-3784).
(5) Incorporated by reference to Registrant's Post-Effective Amendment No. 1 to
Registration Statement on Form SB-2 filed February 28, 1997 (File No.
333-17733).
* Filed herewith.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by registrant during the fourth quarter of
the fiscal year ended December 31, 1996.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 27, 1997 By: /s/ DONALD B. WITMER
-----------------------------------------
Donald B. Witmer
CHIEF FINANCIAL OFFICER, CHIEF OPERATING
OFFICER AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald B. Witmer, his attorney-in-fact with the
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-KSB, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact, or his substitute or substitutes, may do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chief Financial Officer,
/s/ DONALD B. WITMER and (Principal Financial
- ------------------------------ and Accounting Officer), March 27, 1997
Donald B. Witmer Chief Operating Officer
and Director
/s/ JOHN HUMMER
- ------------------------------ Director March 27, 1997
John Hummer
/s/ PATRICK GRADY
- ------------------------------ Director March 27, 1997
Patrick Grady
43
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBITS NUMBERED PAGE
- ----------- ------------------------------------------------------------------------------------------- -----------------
<S> <C> <C>
23.1 Consent of Price Waterhouse L.L.P., Independent Accountants
3.1 Registrant's Amended and Restated Articles of Incorporation
3.3 Certificate of Determination of Series A Preferred Stock
</TABLE>
44
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF DELTAPOINT, INC.,
a California Corporation
The undersigned John J. Ambrose and Donald B. Witmer hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
TWO: The Articles of Incorporation of said corporation shall be amended and
restated to read in full as follows:
ARTICLE I
The name of this corporation is DeltaPoint, Inc.
ARTICLE II
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. CLASSES OF STOCK. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the corporation is authorized to issue
Twenty-Nine Million (29,000,000) shares. Twenty-Five Million (25,000,000) shares
shall be Common Stock, and Four Million (4,000,000) shares shall be Preferred
Stock.
B. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred
Stock may be issued from time to time in one or more series. The Board of
Directors is hereby authorized, to fix or alter the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), redemption price or prices, and the
liquidation preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the designation thereof,
or any of them; and to increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status that they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
C. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all classes
of stock at the time outstanding having prior rights as to dividends, the
holders of the Common Stock shall be entitled to receive, when and as declared
by the Board of Directors, out of any assets of the corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the corporation, after distribution in
full of any preferential amounts to be distributed to the holders of shares of
the Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive all of the remaining assets of the corporation available for
distribution to its shareholders, ratably in proportion to the number of share
of Common Stock held by them.
3. REDEMPTION. The Common Stock is not redeemable.
<PAGE>
4. VOTING RIGHTS. The holder of each share of Common Stock shall have the
right to one vote, and shall be entitled to notice of any shareholders' meeting
in accordance with the bylaws of this corporation, and shall be entitled to vote
upon such matters and in such manner as may be provided by law.
ARTICLE IV
Section 1. LIMITATION OF DIRECTORS' LIABILITY. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. INDEMNIFICATION OF CORPORATE AGENTS. This corporation is
authorized to provide indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions, agreements with the
agents, vote of shareholders or disinterested directors, or otherwise in excess
of the indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to applicable limits set forth in Section 204 of
the California Corporations Code with respect to actions for breach of duty to
the corporation and its shareholders.
Section 3. REPEAL OR MODIFICATION. Any repeal or modification of the
foregoing Sections 1 or 2 of this Article IV by the shareholders of this
corporation shall not adversely affect any right or protection of any agent of
the corporation existing at the time of such repeal or modification.
THREE The foregoing amendment has been approved by the Board of Directors of
said corporation in accordance with the applicable provisions of Section 910(b)
of the California General Corporation Law.
FOUR The amendments and restatement have been duly approved by the required
vote of the shareholders in accordance with sections 902 and 903 of the
California Corporations Code. The total outstanding shares of the Corporation
which were entitled to vote with respect to the amendments and restatement are
182,800 shares of Common Stock, 55,341 shares of Series A Preferred Stock,
83,018 shares of Series B Preferred Stock, 77,894 shares of Series C Preferred
Stock, 112,564 shares of Series D Preferred Stock and 47,169 shares of Series E
Preferred Stock. The number of shares voting in favor of the amendments and
restatement equaled or exceeded the vote required, such required vote being
66(2/3)% of the outstanding shares of Common Stock, 50% of the outstanding
shares of each series of Preferred Stock voting as a separate series, and
66(2/3)% of the outstanding shares of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock voting
together as a class. Subsequent to such shareholder vote, all shares of
Preferred Stock were converted to Common Stock and no shares of Preferred Stock
remain outstanding.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this certificate on March
11, 1997.
/s/ JOHN J. AMBROSE
------------------------------------------
John J. Ambrose, Chief Executive Officer
/s/ DONALD B. WITMER
------------------------------------------
Donald B. Witmer, Secretary
The undersigned certify under penalty of perjury that they have read the
foregoing Amended and Restated Articles of Incorporation and know the contents
thereof, and that the statements therein are true.
Executed at Monterey, California, on March 11, 1997.
/s/ JOHN J. AMBROSE
------------------------------------------
John J. Ambrose, Chief Executive Officer
/s/ DONALD B. WITMER
------------------------------------------
Donald B. Witmer, Secretary
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF DETERMINATION
OF
SERIES A PREFERRED STOCK
OF
DELTAPOINT, INC.
(Pursuant to Section 401 of the
California Corporations Code)
John J. Ambrose and Donald B. Witmer certify that:
A. They are the President and Secretary, respectively, of DeltaPoint, Inc.,
a California corporation.
B. The number of shares of Series A Preferred Stock is two thousand five
hundred (2,500), none of which has been issued.
C. The board of directors duly adopted the following resolutions:
WHEREAS, the Amended and Restated Articles of Incorporation authorize the
Preferred Stock (the "Preferred Stock") of this corporation to be issued in
series and authorize the board of directors (the "Board") to determine the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and to fix the number of shares and
designation of any such series;
RESOLVED, that the initial series of Preferred Stock shall be designated
Series A Preferred Stock (the "Series A Preferred");
RESOLVED FURTHER, that the number of shares constituting Series A Preferred
shall be two thousand five hundred (2,500); and
RESOLVED FURTHER, that the Board hereby fixes and determines the rights,
preferences, privileges and restrictions relating to the Series A Preferred as
follows:
1. DIVIDEND RIGHTS OF SERIES A PREFERRED. Subject to the rights of
additional series of Preferred Stock that may be designated by the Board from
time to time, the holder of each share of Series A Preferred shall be entitled
to receive, out of funds legally available for the purpose, cumulative dividends
at an annual rate of $85.72 per share, as adjusted to reflect stock dividends,
stock splits, combinations, recapitalizations or the like after the date upon
which shares of Series A Preferred were first issued (the "Initial Series A
Issue Date"). Such dividends shall be paid in cash in semi-annual installments
on each of the dates six months, one year, eighteen months and two years after
the Initial Series A Issue Date. The holder of each share of Series A Preferred
shall be entitled to receive the dividend prior and in preference to any
declaration and payment of any dividend (payable other than in stock of this
corporation) on this corporation's Common Stock (the "Common Stock").
2. LIQUIDATION PREFERENCE.
(a) Subject to the rights of additional series of Preferred Stock that may
be designated by the Board from time to time, in the event of any liquidation,
dissolution or winding up of this corporation, either voluntarily or
involuntarily, the holders of the Series A Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets of
this corporation to the holders of the Common Stock, an amount per share equal
to $1,000 plus any accrued but unpaid dividends for each share of Series A
Preferred then held by them, such amounts being adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like after the
Initial Series A Issue Date. After payment to the holders of the Series A
Preferred of the amounts set forth in this Section 2, the entire remaining
assets and funds of this corporation legally available for distribution, if any,
shall be distributed among the holders of the Common Stock in proportion to the
shares of Common Stock then held by them. If, upon the
<PAGE>
occurrence of such event, the assets thus distributed among the holders of the
Series A Preferred shall be insufficient to permit the payment to such holders
of the full aforesaid preferential amount, then the entire assets and funds of
this corporation legally available for distribution shall be distributed among
the holders of the Series A Preferred in proportion to the number of shares of
Series A Preferred then held by them.
(b) (i) For purposes of this Section 2, a liquidation, dissolution or
winding up of this corporation shall, unless holders of a majority of the then
outstanding shares of Preferred Stock elect otherwise, be deemed to be
occasioned by, or to include, (A) the acquisition of this corporation by another
entity by means of any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation but, excluding
any merger effected exclusively for the purpose of changing the domicile of this
corporation) that results in the transfer of fifty percent (50%) or more of the
outstanding voting power of this corporation; or (B) a sale of all or
substantially all of the assets of this corporation.
(ii) In any of such event, if the consideration received by this
corporation is other than cash, its value will be deemed its fair market
value. Any securities to be delivered to the holders of the Series A
Preferred or Common Stock, as the case may be, shall be valued as follows:
(1) If traded on a securities exchange or through the Nasdaq National
Market, the value shall be deemed to be the average of the closing prices
of the securities on such exchange over the thirty-day period ending
three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value shall be deemed to
be the average of the closing bid or sale prices (whichever is
applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by this corporation and the
holders of at least a majority of the then outstanding shares of Series A
Preferred.
(iii) In the event the requirements of this Subsection 2(b) are not
complied with, this corporation shall forthwith either:
(1) cause such closing to be postponed until such time as the
requirements of this Section 2 have been complied with; or
(2) cancel such transaction, in which event the respective rights,
preferences and privileges of the holders of the Series A Preferred shall
revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
Subsection 2(b)(iv) below.
(iv) This corporation shall give each holder of record of Series A
Preferred written notice of such impending transaction not later than twenty
(20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the
final approval of such transaction. The first of such notices shall describe
the material terms and conditions of the impending transaction and the
provisions of this Section 2, and this corporation shall thereafter give
such holders prompt notice of any material changes. The transaction shall in
no event take place sooner than twenty (20) days after this corporation has
given the first notice provided for herein or sooner than ten (10) days
after this corporation has given notice of any material changes provided for
herein; provided, however, that such periods may be shortened upon this
corporation's receipt of written consent of the holders of at least a
majority of the then outstanding shares of Series A Preferred entitled to
such notice rights or similar notice rights.
<PAGE>
3. CONVERSION. The holders of the Series A Preferred shall have conversion
rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
(i) Each share of Series A Preferred shall be convertible at the option
of the holder thereof, at any time after the date of issuance of such share,
at the office of this corporation or any transfer agent for the Series A
Preferred, into the number of fully paid and nonassessable shares of Common
Stock as is determined by dividing $1,000 by the Conversion Price,
determined as hereinafter provided, in effect at the time of conversion. The
"Conversion Price" shall be equal to the lower of (i) 80% (as adjusted
pursuant to this Subsection 3(a)(i), the "Discount Percentage") of the Fair
Market Value of a share of the Common Stock for the five business days prior
to the business day (A) if conversion occurs pursuant to this Subsection
3(a), on which a holder of shares of Series A Preferred gives written notice
to convert such shares pursuant to Subsection 3(c)(i) or (B) if conversion
occurs pursuant to Subsection 3(b), on which such conversion is effective;
or (ii) the average closing offer price of the Common Stock, as reported by
the Nasdaq Small Cap Market (or, if not traded on the Nasdaq SmallCap
Market, the market on which the Common Stock is most actively traded, as
determined by this corporation and holders of a majority of the then
outstanding shares of Series A Preferred), for the five business days prior
to the Original Series A Issue Date. Notwithstanding the foregoing, if the
Company has not prepared and filed a registration statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") to register under the Securities Act of 1933, as amended (the "Act"),
the shares of Common Stock issuable upon conversion of the Series A
Preferred before the date that is 60 days after the Original Series A Issue
Date (the "Penalty Date"), the Discount Percentage shall be reduced by 2%
for each 30-day period or portion thereof after the Penalty Date until the
Company has filed such Registration Statement. For example, if the Company
files the Registration Statement after the 60th day after the Original
Series A Issue Date but before the 91st day after the Original Series A
Issue Date, the Discount Percentage shall be 78%; if the Company files the
Registration Statement after the 90th day after the Original Series A Issue
Date but before the 121st day after the Original Series A Issue Date, the
Discount Percentage shall be 76%; and so on. The number of shares of Common
Stock included in the Registration Statement shall not be less than the
number of shares of Common Stock issuable upon conversion of the Series A
Preferred issued on the Original Series A Issue Date using a Conversion
Price of $4.00 per share.
(ii) The Fair Market Value of the Company's Common Stock shall be
determined as follows:
(1) If traded on a securities exchange or through the Nasdaq National
Market, the closing sale price of the securities on such exchange (or, if
the Common Stock is traded on the Nasdaq National Market, the closing
sale price as reported by such market);
(2) If traded on the Nasdaq SmallCap Market, the closing bid price as
reported by such market;
(3) If actively traded over-the-counter, the value shall be deemed to
be the closing bid or sale prices (whichever is applicable); and
(4) If there is no active public market, the value shall be the fair
market value thereof, as mutually determined by this corporation and the
holders of at least a majority of the then outstanding shares of Series A
Preferred.
(b) AUTOMATIC CONVERSION. Each share of Series A Preferred shall be
automatically converted into shares of Common Stock at the Conversion Price in
effect at the time upon the earlier to occur of: (i) the acquisition of this
corporation by another entity by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation but, excluding any merger effected exclusively for the purpose of
changing the domicile of this corporation) that results in the transfer of fifty
percent (50%) or more of the outstanding voting power of this corporation, or a
sale of all or substantially all of the assets of this corporation; or (ii) the
second anniversary of the Original Series A Issue Date.
<PAGE>
(c) MECHANICS OF CONVERSION.
(i) CONVERSION PURSUANT TO SECTION 3(A). Before any holder of Series A
Preferred shall be entitled to convert the same into shares of Common Stock,
such holder shall surrender the certificate or certificates therefor, duly
endorsed, at the office of this corporation or of any transfer agent for the
Series A Preferred, and shall give written notice to this corporation at
such office that he elects to convert the same, and shall state therein the
name or names which he wishes the certificate or certificates for shares of
Common Stock to be issued. This corporation shall, as soon as practicable
thereafter, issue and deliver at such office to each holder of Series A
Preferred, or to his nominee or nominees, a certificate or certificates for
the number of shares of Common Stock to which he shall be entitled. Such
conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A
Preferred to be converted, and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock
on such date.
(ii) CONVERSION PURSUANT TO SECTION 3(B). If shares of Series A
Preferred are automatically converted, written notice shall be delivered to
the holder of such shares of Series A Preferred at the address last shown on
the records of this corporation for such holder or given by such holder to
this corporation for the purpose of notice or, if no such address appears or
is given, at the place where the principal executive office of this
corporation is located, notifying such holder of the conversion to be
effected, specifying the date on which such conversion is expected to occur,
the number of shares of Series A Preferred to be converted and calling upon
such holder to surrender to Company, in the manner and at the place
designated, the certificate or certificates therefor. Upon such conversion
of the shares of Series A Preferred, holders shall surrender the certificate
or certificates therefor, duly endorsed, at the office of this corporation
or of any transfer agent for the Series A Preferred, and shall state therein
the name or names which he wishes the certificate or certificates for shares
of Common Stock to be issued. This corporation shall, as soon as practicable
thereafter, issue and deliver at such office to each holder of Series A
Preferred, or to his nominee or nominees, a certificate or certificates for
the number of shares of Common Stock to which he shall be entitled. Any
conversion of Series A Preferred pursuant to Section 3(b) shall be deemed to
have been made immediately prior to the closing of the issuance and sale of
shares as described in Section 3(b).
(iii) FRACTIONAL SHARES. No fractional shares shall be issued upon
conversion of the Series A Preferred. In lieu of Company issuing any
fractional shares to holders upon the conversion of the Series A Preferred,
Company shall pay to such holders an amount equal to the product obtained by
multiplying the Conversion Price by the fraction of a share not issued
pursuant to the previous sentence.
(d) ADJUSTMENT OF CONVERSION RATE. The number of shares of Common Stock
into which the Series A Preferred may be converted shall be subject to
adjustment from time to time as follows:
(i) ADJUSTMENTS FOR STOCK SPLITS AND SUBDIVISIONS. In the event Company
should at any time or from time to time after the date of issuance hereof
fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in
additional shares of Common Stock or other securities or rights convertible
into, or entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock (hereinafter referred to as "Common Stock
Equivalents") without payment of any consideration by such holder for the
additional shares of Common Stock or the Common Stock Equivalents (including
the additional shares of Common Stock issuable upon conversion or exercise
thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the
Conversion Price shall be appropriately decreased so that the number of
shares of Common Stock issuable upon conversion of the Series A Preferred
shall be increased in proportion to such increase of outstanding shares.
(ii) ADJUSTMENTS FOR REVERSE STOCK SPLITS. If the number of shares of
Common Stock outstanding at any time after the date hereof is decreased by a
combination of the outstanding shares of Common
<PAGE>
Stock, then, following the record date of such combination, the Conversion
Price shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion hereof shall be decreased in proportion
to such decrease in outstanding shares.
(e) NO IMPAIRMENT. Except for taking the actions contemplated by Section 6
below upon obtaining the vote or consent set forth therein, this corporation
will not, by amendment of its Amended and Restated Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by this corporation, but it will at all times in good
faith assist in the carrying out of all of the provisions of this Section 3 and
in the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A Preferred against
impairment.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment
or readjustment of the Conversion Price of the Series A Preferred pursuant to
this Section 3, this corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of such Series A Preferred a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. This corporation shall, upon the written
request at any time of any holder of Series A Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price at the time in effect, and (C) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of a share of Series A
Preferred.
(g) NOTICES OF RECORD DATE. In the event of any taking by this corporation
of the record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, this corporation shall mail to each
holder of Series A Preferred, at least twenty (20) days prior to the date
specified herein, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend or distribution.
(h) RESERVATION OF STOCK. This corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock solely
for the purpose of effecting the conversion of the shares of the Series A
Preferred such number of its shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series A
Preferred; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all the then
outstanding shares of the Series A Preferred, this corporation will take such
corporate action as may be necessary, in the opinion of its counsel, to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose.
(i) NOTICES. Any notice required by the provisions of this Section 3 to be
given to the holders of shares of Series A Preferred shall be deemed given if
deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his or her address appearing on the books of this
corporation.
4. REDEMPTION. If the average Fair Market Value of the Common Stock as
determined pursuant to Subsection 3(a)(ii) above is below $4.00 per share for
any five day period, the Board of Directors of the Company may, at its option,
within ten business days thereafter, redeem all or part of the Series A
Preferred at a redemption price of $1,200 plus any accrued but unpaid dividends
for each share of Series A Preferred (such amounts being adjusted to reflect
stock dividends, stock splits, combinations, recapitalizations or the like after
the Initial Series A Issue Date). If less than all of the Series A Preferred is
to be redeemed, the amount of shares to be redeemed from the holders shall be at
the discretion of the Board of Directors.
5. VOTING MATTERS. Except as otherwise required by law, each share of
Series A Preferred issued and outstanding shall have the number of votes equal
to the number of shares of Common Stock into which the Series A Preferred is
convertible pursuant to Section 3 hereof. The holder of each share of Series A
Preferred shall be entitled to notice of any shareholders' meeting in accordance
with the bylaws of this
<PAGE>
corporation, and shall vote with the holders of the Common Stock upon any matter
submitted to a vote of shareholders, except those matters required by law to be
submitted to a class vote.
6. COVENANT. In addition to any other rights provided by law, so long as
any Series A Preferred shall be outstanding, this corporation shall not, without
first obtaining the affirmative vote or written consent of the holders of not
less than a majority of the then outstanding shares of all series of Preferred
Stock voting together as a single class:
(a) alter or change the rights, preferences or privileges of the shares
of the Series A Preferred;
(b) increase or decrease the authorized number of shares of the Series A
Preferred; or
(c) authorize or create any new class of shares or additional series of
Preferred Stock having rights, preferences or privileges prior to shares of
the Series A Preferred.
7. RESIDUAL RIGHTS. All rights accruing to the outstanding shares of this
corporation not expressly provided for to the contrary herein shall be vested in
the Common Stock.
8. CONSENT FOR CERTAIN REPURCHASES OF COMMON STOCK DEEMED TO BE
DISTRIBUTIONS. Each holder of Series A Preferred shall be deemed to have
consented, for purposes of Section 502, 503 and 506 of the California
Corporations Code, to distributions made by this corporation in connection with
the repurchase of shares of Common Stock issued to or held by employees or
consultants upon termination of their employment or services or pursuant to
agreements providing for the right of said repurchase between this corporation
and such persons.
IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Determination as of March 5, 1997.
/s/ JOHN J. AMBROSE
------------------------------------------
John J. Ambrose, Chief Executive Officer
/s/ DONALD B. WITMER
------------------------------------------
Donald B. Witmer, Secretary
The undersigned further declare under penalty of perjury under the laws of
the State of California that the undersigned has read the foregoing certificate
and knows the contents thereof and that the same is true of the undersigned's
own knowledge.
Dated: March 5, 1997
/s/ JOHN J. AMBROSE
------------------------------------------
John J. Ambrose, Chief Executive Officer
/s/ DONALD B. WITMER
------------------------------------------
Donald B. Witmer, Secretary
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-07461 and No. 333-22243) of DeltaPoint, Inc. of
our report dated January 27, 1997, except for the first paragraph of Note 11
which is as of February 26, 1997 and the second paragraphs of Note 1 and Note 11
which are as of March 25, 1997, which appears on page 26 in this Annual Report
on Form 10-KSB.
PRICE WATERHOUSE LLP
San Jose, California
March 25, 1997
<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-KSB 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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,142
<SECURITIES> 0
<RECEIVABLES> 2,022
<ALLOWANCES> 118
<INVENTORY> 133
<CURRENT-ASSETS> 5,736
<PP&E> 1,130
<DEPRECIATION> 1,053
<TOTAL-ASSETS> 6,346
<CURRENT-LIABILITIES> 5,305
<BONDS> 0
0
0
<COMMON> 14,707
<OTHER-SE> (13,666)
<TOTAL-LIABILITY-AND-EQUITY> 6,346
<SALES> 4,950
<TOTAL-REVENUES> 4,950
<CGS> 1,181
<TOTAL-COSTS> 1,181
<OTHER-EXPENSES> 8,691
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,848)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,848)
<EPS-PRIMARY> (2.17)
<EPS-DILUTED> (2.17)
</TABLE>
